August 28, 2008 3 p.m. to 4 p.m. EDT

1. The Dirty Bakers Dozen: 13 controversial contract provisions that divide shippers, brokers and carriers August 28, 2008 3 p.m. to 4 p.m. EDT Presenter: Henry Seaton Partner Seaton & Husk Vienna, Va.

3. THE DIRTY BAKERS DOZEN 1. Waiver of statutes and regulations 2. Special and consequential damages 3. Indemnification clauses 4. “Additional insured” language 5. The right of setoff 6. Salvage / no duty to mitigate 7. Shipper load and count / concealed damage waivers 8. No penalties for nonpayment 9. Homer provision / arbitration 10. Integration clauses 11. No recourse provisions; and 12. No back solicitation agreements 13. Shipper contracts making a broker into a “carrier” or “service provider”

4. Let’s pause to poll the audience

5. 1. Waiver of Statutesand Regulations

6. What is a Waiver? Answer: Pursuant to 49 U.S.C. 14101(b): “If the shipper and carrier, in writing, expressly waive any or all rights and remedies … for transportation covered by contract, the [services] provided under the contract shall not be subject to the waived rights and remedies and may not be subsequently challenged on the grounds that it violates the waived rights and remedies.”

7. What are the consequences of waiving federal “rights and remedies” and standard bill of lading terms and conditions? Answer: 1. It takes 10 to 20 pages of fine print to address the issues you just excluded and in the details the carrier often loses. 2. Uniformity, recourse to federal court and established case law lost for resolving cargo claims

8. Waiver Under §14101 (b) Objectionable Language Acceptable Language “General principles of Federal Transportation Law, Statutes and Regulations shall apply to the extent not expressly waived herein.” “The parties expressly waive all rights, duties and obligations permitted under § 14101 (b)" Partial List of Affected Items • Preemption • Claims rules and salvage §370 • 9 month rule • Reasonable dispatch • Section 7 recourse • Carmack common law exception • Federal Court Jurisdiction • Credit Regulations §377 • Broker Accounting and Segregation • 180 Day Rule for auditing bills • Released liability

9. 2. Special and Consequential Damages

10. Carmack – is “full actual value” • No special or consequential damages • Shipper has duty to mitigate • By contract shippers seek • Payment of penalties for late deliveries • Waiting crane fees, missed market fees • What can result • Crushed new cars because of bent bumpers • $30,000 charter plane bill to replace $500 delayed shipment • Imposition of penalties for delay beyond driver’s control which exceed guarantees of expediters like FedEx, DHL or UPS

11. Objectionable Language Acceptable Language “Carrier shall be liable for all loss resulting from loss, damage, or delay to cargo including but not limited to lost profits and sales, the cost of cover, the cost of expedited replacement, lost down time, additional handling and shipping costs, and restocking fees.” “Carrier shall be liable for cargo loss and damage in accordance with federal law (49 U.S.C. §14706) with respect to all shipments. Carrier shall not be liable for special or consequential damages. Carrier’s liability for cargo loss and damage shall be limited to the shipper’s actual cost of the articles, lost, damaged or destroyed and shall not exceed $___per truckload or $___per pound per article, whichever is less.” What’s the Difference? • Do you pay for plant shut downs, air freight replacements, waiting cranes, etc.? • The Carmack Amendment limits liability – no state law remedy (emotional distress, punitives) • Reasonable dispatch only as per Bill of Lading • Don’t admit “foreseeability” • Time sensitive/JIT freight

12. Risk Transfer Provisions in Contracts • Contractual risk transfer involves an attempt to allocate potential legal liabilities which would arise in connection with the performance of a contract between the parties to the contract. These liability risks are often allocated in a manner that would not have occurred under common law or in the absence of contract.

13. Types of Contractual Provisions • Two types of contractual provisions are typically used to effect non-insurance risk transfer from shippers and brokers to carriers. The are: (1) Hold harmless or indemnity provisions; and (2) Additional insured and related insurance provisions

14. Two-Handed Pick Pocket The “two handed pick pocket” is the name given to the combination of overreaching indemnification provisions coupled with “additional insurance” requirements.

15. Let’s pause to poll the audience

16. 3. Indemnity

17. What is a Hold Harmless and Indemnity Provision? • An agreement whereby one party (the indemnitor), assumes the other party’s (the indemnitee) legal liability to whatever extent delineated in the provisions. • Typically used by shipper to extend carrier liability to include: • The negligent acts or omissions of third parties; • The contributory negligence of the indemnitee, if not indemnification for the sole negligence of the indemnitee (if prevented by state anti-indemnity statute)

18. Shippers demand and think they are getting more • They seek: • Coverage for their own act of negligence (i.e. no contributory or comparative negligence). If motor carrier is 1% negligent it is responsible. • Protection from third party torts (i.e. if lumper runs over their dockhand while loading the carrier’s truck the want protection under “arising out of” language. • Waiver of subrogation and protection against suit by carrier’s driver or owner-operator and their estates if carrier’s driver or agent is injured by shipper.

19. Objectionable Language Acceptable Language “It is the express intent of the parties to this agreement that carrier will indemnify the shipper for all loss, damage and claim of any kind arising out of this contract except for shipper’s sole gross negligence.” “Except with respect to cargo damage claims as set forth herein, each party will indemnify and hold harmless the other from all loss, liability or claims to the extent same is caused by a negligent or willful act or omission of their respective employees, agents or subcontractors in the performance of this contract.” What’s the Difference? • “Arising out of” language is broader than coverage afforded by additional insured language in new standard ISO endorsement • Comparative Negligence • Can Carrier can pay for shipper negligence? • See anti-indemnity statutes of CA, IN, KS, MD, NC, NE, SC, TN, TX, VA and WV

20. A Caveat • A motor carrier cannot assume that a broadly worded indemnity will be automatically covered by its commercial liability policy without a detailed analysis of the exclusions. • Even if the policy extends coverage to cover the shipper’s risk of loss by contract, indemnification beyond legal liability dilutes coverage and can increase loss runs.

21. 4. Additional Insurance

22. Motor Carriers Maintain: • BI & PD • In an amount of $1 million which goes to pay injured third parties/ MCS-90 endorsement and BMC 91X gives shipper assurance of payment for primary liability for carrier • Cargo • Policy loopholes exist • Carmack is best that can be expected • “Loss payee” status is of no help in extending coverage • General Liability • Covers “non-auto” BI & PD (i.e. excludes coverage for truck wrecks) • Shipper is automatically insured under contractual liability language • New ISO form limits “automatic contractual coverage” to “to the extent caused by”

23. Additional insured status is a second contractual risk transfer device intended to achieve a similar end without relying on the terms of the indemnity clause. • It makes the shipper or broker an insured in the carrier’s general liability policy and in the carrier’s auto liability policy subject to the terms and conditions of the policy and the additional insured endorsement.

24. Objectionable Language Acceptable Language “Carrier warrants that it maintains personal injury and property damage insurance ($1Mil per occurrence and cargo insurance as required by the Fed. Motor Carrier Safety Admin. (Form BMC-91X and BMC-34 on file). In addition Carrier warrants that it maintains workman’s compensation insurance as required by state law and all risk cargo insurance in the amount of not less than ___ per occurrence. “Shipper shall be included as an additional insured, with respect to the insurance policies required above. All insurance required and provided by Carrier shall be primary and any insurance maintained by Shipper shall be excess and not contributing with Carrier’s insurance.” Problems Note: • If shipper insists on “additional insured” for 3rd party liability, you should exercise extreme caution, providing policy and insurers written endorsement warranting nothing about what is covered • Watch cargo loopholes and Accord exclusions Most shippers think you are buying them indemnity covering their own negligence; most insurers don’t agree. Shippers can outsmart themselves and lose their own coverage.

25. Carrier agreed to indemnify shipper and to acquire insurance protecting the shipper against injured driver suit (Quaker v. Condor) • Shipper’s negligence injures driver (SL&C dog food) • Indemnity found against public policy under state law • Carrier required to pay because it did not procure insurance for shipper • Carrier declares bankruptcy • (insurance obligation broader than indemnity)

26. Chicago Drayman • Chicago drayman checks out container and chassis and gives load to another carrier • Subcontractor hit a bridge • Indemnitee (chassis owner) sues drayman’s insurer for indemnity • Insurer denies coverage (brokerage excluded from auto liability; auto coverage was excluded from general liability) • $10 million verdict against drayman • (Indemnity obligation broader than insurance)

27. Indemnity Trumps Carmack and Bill of Lading Limitation • Air waybill limits liability to $100,000. • Forwarder pays $692,000 claim and turns to carrier under shipper/carrier contract for “indemnity” • No contract limitation found, no Carmack or bill of lading limitation applied • Carrier has to pay $692,000 • (Indemnity trumps cargo liability limitation.)

28. Groping for Solutions • Limit indemnity to “to the extent caused by” • Work with your insurer to meet shipper’s needs • Be sure “waiver of subrogation” request is acceptable and does not vitiate worker’s comp • Examine use of broadly worded CG2026 or CG2010 which should meet shipper’s needs for general liability coverage. It can dilute carrier coverage, but no gaps in coverage if 2 handed pick pocket is otherwise limited. • “Additional insured” status may give shipper assurances of representation in vicarious liability BI-PD auto case but won’t necessarily “extend” coverage to shipper for its acts of negligence. (Carrier spills diesel/shipper’s employee lights a match and throws it on the spill.) • Know your insurance and offer the shipper only what you have!

29. Let’s pause to poll the audience

30. 5. Offset

31. What is Offset? • When shipper deducts a contested cargo claim from a carrier; OR • When a broker pays a contested cargo claim and deducts from carrier • Why do shippers and brokers offset? • Carriers and their insurer do not settle claims; OR • Because the carrier’s insurance contains loopholes which allow denial of coverage and the carrier factors its bills • What is the result? • Cargo claims are not adjusted in accordance with 49 CFR 370 • Insurers will not pay carrier without claims adjustment • Carrier is deprived of needed revenue

32. Objectionable Language Acceptable Language “Shipper/broker shall pay freight charges within 30 days without offset” OR “Freight charges shall be paid in accordance with the terms of carrier’s Service Conditions. See www._____________.com” “Compensation paid to Carriers may be withheld to satisfy claims or shortages, or any debt owed by carrier to shipper/broker at shipper/broker’s sole discretion.” Reasons to Reject Offset • Spiral of death to carrier a) Insurer won’t pay b) Factoring terms are violated c) Cash flow interrupted • No mitigation of loss – broker or carrier takes full unadjusted amount of loss • Rules circular deal with important collection issues • Brokers who have no cargo liability take advantage of carrier to keep shippers happy

33. 6. Duty to Mitigate

34. Under common law, a the consignee must accept goods unless “practically worthless” • Consignee cannot reject 20 pallets because 2 are damaged – the mitigation test is one of reasonableness • By contract, shippers seek waiver of duty to mitigate using “sole discretion” language, dumping edible goods without determining fitness.

35. Examples of Duty to Mitigate Abuse • Crushing new cars because of bumper damage (not justified by Carmack) • Dumping of good foodstuff without inspection due to broken seals • Pickles • Orange Juice • Coca-Cola

36. The shipper (McDonald's) required in its shipper-broker agreement that the broker accept the shipper's determination with respect to salvage. Broker-carrier agreement did not include waiver of duty of mitigation and was based on Carmack only. • Seal was broken in transit and part of 1 skid was stolen. Broker paid McDonald's in full and entire load was destroyed without inspection. • Case went to trial. Neither broker nor McDonald's could prove that destroyed merchandise was not fit for human consumption. Jury ruled that carrier's liability was limited to 1 skid ($1,900) not value of entire load ($32,000) D&M Carriers, Inc. v Bruce Alan Reed d/b/a Reed Transportation and Great West Casualty Co. (United States District Court for the Western District of Oklahoma; Case No. 07-Civ-877-R)

37. Salvage/No Duty to Mitigate Objectionable Language Acceptable Language “Neither shipper nor its customers shall have a duty to mitigate damages. In the event of damaged, branded or labeled goods, shipper’s customer may determine, within its sole discretion, whether all or part of the shipment may be salvaged and the value of such salvage.” Delete and incorporate Service Conditions which contain salvage rules – Bill of Lading also includes the shipper and consignee common law duty to mitigate unless agreed to the contrary. Reasons for Objection • Objectionable language makes “wrongful rejection” legal • Consignor has duty to accept shipment unless its “effectively worthless” • Don’t let one broken pallet cost you a truckload • “Distress sale” of rejected shipment will produce losses a consignee can avoid by using undamaged product in stream of commerce • Issue on-hand notice and get an expert

38. Let’s pause to poll the audience

39. 7. Shipper Load and Count

40. New HOS rules have proliferated use of spotted trailers • Carrier’s drivers are not there to count freight on or off trucks • Bill of Lading Act contemplates “SL&C” and says carrier is not liable for count or upset due to loading when: • Loaded by shipper, unloaded by consignee • Phrase “Shipper Load and Count” or similar is on bill • Carrier should not be responsible absent negligence for delivery of spotted trailer with seal intact • Many shipper contracts make carrier responsible for count and warehouse shortage resulting from short counts

41. Shipper Load and Count/Concealed Damages Objectionable Language Acceptable Language “Carrier shall not be responsible for shortage on shipments loaded and counted by consignor where the trailer is received at destination with seals intact. Failure to indicate “SL+C”, “Subject to shipper load and count” or like notations on shipping documents shall not be a conclusive determination of carrier liability when driver is not present during the loading or unloading of shipment.” “Carrier will provide spotted trailers for shipper’s convenience in loading and unloading. Notwithstanding the use of spotted equipment carrier will accept responsibility for the loading and counting of each shipment.” Note: • Carrier rules circular will address this issue • Accept pallet count not individual piece count

42. 8. Freight Payment Terms

43. Freight Payment Terms • Carriers are general unsecured creditors • Bankruptcy is rampant • Goody’s • Dan River • Rust Belt • 3PL won’t guarantee payments • Cost of fuel must be paid immediately • Shipper increasingly want 45 to 60 day credit terms/no interest or penalty • Most small carriers must factor paying 1.5% to 3% per month - cost on many exceeds profit margin • Carriers must get paid early and on time to avoid “preferences” • Factors can and will pull the sting if a major shipper goes down • Carriers are the last to get paid by failing shipper

44. No Penalties for Non-Payment of Freight Charges Objectionable Language Acceptable Language “Payment will be made within 60 days receipt of carrier’s invoice including the original delivery receipt to which no exception is noted – Carrier waives any lien it may have on shipments for freight charges.” “Freight charges are due within 30 days of receipt of invoice and certified copy of the delivery receipt (via fax, mail or EDI). Freight charges not paid within 45 days are subject to interest and collection fees (see Carrier’s Rules Circular).” Note • Carrier can ill afford to provide interest free loans • Collection remedies must be incorporated into contract or by reference in Rules Circular and be referenced on each invoice (49 CFR 377) • The value of contractual liens in the bankruptcy context

45. 9. Carrier Recourse to Consignor

46. The majority rules is the broker is agent of shipper and carrier has bill of lading recourse to shipper if (1) carrier is not paid and (2) carrier has not surrendered recourse for signing Section 7 or waiving recourse. • See Contship Container Lines, Inc. v. Howard Industries, Inc., 309 F.3d 910 (6th Cir. 2002); Hawkspere Shipping Company, Ltd. v. Intamex, S.A., 330 F.3d 225 (4th Cir. 2003); National Shipping Co. Of Saudi Arabia v. Omni Lines, 106 F.3d 1544 (11th Cir. 1997); Exel Transp. Servs. v. CSX Lines L.L.C., 280 F. Supp. 2d 617 (D. Tex. 2003); Oak Harbor Freight Lines, Inc. v. Sears Roebuck & Co., 513 F.3d 949 (9th Cir. 2008) • 75% of collection cases involve broker non-payment • Scourge of double brokerage to be covered in August • Major fault line between carrier and broker industry

47. Nonrecourse Provision (in Broker Contracts) The Major Issue – Separating Carriers and Brokers Objectionable Language Acceptable Language “Carrier authorizes Broker to invoice shipper for freight charges as agent on behalf of carrier. Payment of freight charges to broker shall relieve shipper of any liability to the Carrier for non-payment of charges…Broker shall be agent for Carrier for collection of freight charges.” “As agent for its customer, broker shall transmit freight charges to Carriers in accordance with the federal regulations applicable to property brokers (49 CFR 371). Carrier will abstain from invoicing shipper for payment until all methods of collection from broker have been exhausted.” The Differences • Objectionable provision cuts off Carrier’s recourse to shipper and consignee under Bill of Lading in the event of non-payment • Acceptable provisions makes broker the agent of the shipper who hires it, preserves recourse • Note: More helpful language is incorporated by reference into the Carrier’s Service Conditions MAJOR UNRESOLVED ISSUE – AFFECTS CONSTRUCTIVE TRUST

48. Let’s pause to poll the audience

49. 10. Homer Provisions/Arbitration

50. Objectionable Language Acceptable Language “Carrier consents to exclusive jurisdiction and venue in shipper’s/broker’s hometown of Hilo, HI. The laws of the State of HI will apply. All disputes will be subject to binding arbitration at shipper’s election before the arbiter of its choice at its home town.” “General principles of federal transportation law, jurisdiction and venue state apply. Subject to the approval of carrier’s cargo insurer, cargo claims not paid within 120 days may be subject to binding arbitration initiated by either party before the arbitration services of the Trans. Lawyers Assoc.” Note: • Federal law not state law should apply • Shippers choice of venue is often irrelevant to dispute, just a difficult place to sue • Arbitration or ADR (Alternative Dispute Resolution) is in both parties’ interest and expedited arbitration or mediation is to be preferred.