Freight broker contracts, business structure, protect against losses

Freight brokers are like the travel agents of the trucking industry – connecting shippers and carriers in exchange for a piece of the revenue.

The contracts that govern such relationships, as well as the way such businesses are structured, will determine if they also end up with a share of any courtroom losses.

“There will always be accidents on I-75 or maybe the 401 involving a truck. And the plaintiffs’ personal injury interests – whether it’s an estate attorney or a personal injury lawyer – invariably will go up the supply chain looking for the so-called deep pockets,” warned Gordon Hearn, a partner in the Gardiner Roberts law firm that offered a seminar on the issue.

Brokerage operations could find themselves exposed to losses associated with damaged cargo or unpaid bills as well. (“The more parties involved, the greater likelihood that somebody isn’t going to pay the next person in the chain,” he said.)

Bills of lading and liability

But the extent of the threats can vary in part because of different rules that apply in Canada and the U.S.

Uniform bills of lading used in Canada, for example, can limit cargo losses to $2 per pound unless a shipper declares a load’s actual value. Then again, shippers might also produce their own bill of lading – and it might be one based on U.S. rules.

“Increasingly, freight brokers and carriers in Canada – even in respect of inter-Canada moves – are agreeing to be liable for full value,” Hearn said.

“Maybe the parties don’t rely on a bill of lading. Maybe it’s dray carriage, or the last leg of multimodal carriage where the carrier is picking up freight from Pearson [International Airport] and bringing it to a Toronto destination. The shipper won’t have a representative at Pearson there to receive the bill of lading to declare value,” he added.

Brokers in the U.S. are generally not held liable for freight losses, damages or delays unless they assumed such liability in the contract language. But shippers there are increasingly requiring such contract language as table stakes to secure their business.

Shippers and liability

“Limits of liability are something that any motor carrier has to be sensitive to [in the U.S.] because you don’t have the automatic protection of the $2 a pound limit of liability that you might have up here,” said Marc Blubaugh, a partner in Benesch, Friedlander, Coplan and Aronoff.

“There are some shippers that are so bold as to say, ‘Not only will you indemnify me for your negligence and your carrier’s negligence, but I want you to indemnify me for my own negligence as a shipper if I screw up in the loading,” he added.

Most states have anti-indemnity statutes that protect motor carriers in such situations, but brokers are not protected by such statutes outside of Arkansas. “So you’re stuck in the middle, holding the bag, and this has happened.”

The various threats support the need for different layers of protection.

“Think about a contingent auto policy that will kick in if you get sucked into one of these catastrophic highway accidents,” Blubaugh suggested. Errors and omissions insurance can also offer protection if a staff member makes an error when recording a load’s required temperatures.

Don’t look like a carrier

Brokers will also want to take care to ensure they aren’t identified as a “carrier” on a bill of lading, exposing themselves to further liability. Even the language used by sales teams or marketing material on a website can lead to trouble here.

In contrast, brokers can help clarify the nature of the business by working with dispatchers rather than communicating directly with drivers. And detailed contracts can help avoid the “double brokering” that might hand loads to carriers that represent bigger risks.

Threats don’t even end when a freight broker goes out of business. A ruling by the Ontario Court of Appeal has also shown that the officers and directors behind a failed freight brokerage could be personally liable for carriers who come looking for unpaid money, Hearn said.

Establishing a brokerage

Further confusing matters are the rules for establishing a brokerage that can vary from one jurisdiction to the next.

Quebec, for example, requires “transportation intermediaries” to be registered. “We have a number of freight brokers – both American and Canadian – asking us, ‘If we’re engaged in servicing a Quebec-based shipper, if we’re engaging a Quebec-plated fleet, do we have to register?” Hearn said. Here, an annual filing is a small way to ensure compliance.

In the U.S. a brokerage can be set up by paying $300, filling out a form, and posting a surety bond, Blubaugh said. It’s not a huge barrier of entry, but there are “significant” consequences for failing to secure that authority – such as a $10,000 penalty for running an unlicensed freight brokerage. More significant, a competitor might sue for damages if the business didn’t complete the paperwork – and company directors can be liable for such losses.

“If you’re playing in a grey space in the U.S. and you think, ‘Maybe what I’m doing is brokerage in the U.S.’, get yourself a licence. It’s just an insurance policy almost against this personal liability,” he said.

Perhaps the most effective form of insurance will come in the form of contract language.

“Any freight broker agreement with a shipper on the one side and with a carrier on the other side … will provide a carrier as an independent contractor. That’s magic language that we lawyers love,” Hearn said. “That essentially says to any reader down the road, ‘We, the broker, do not control you the carrier. You’re responsible for your fleet, your drivers, your operations.”