What is a Broker-Shipper Agreement?
A broker-shipper agreement is a contract between a freight broker and an exporter that identifies the services to be performed by the broker on behalf of the exporter. The broker will arrange for carriers to transport the freight and will pay the carriers to do so. Subsequently, the exporter will reimburse the broker (or forwarder) for the freight charges, which usually includes the broker’s fee. The exporter is sometimes referred to as the "shipper" in this relationship.
The broker will enter into contracts with the carriers (also referred to as "motor carriers," "freight carriers," or simply "carriers") it hires to provide the transportation services. In some cases, the exporter may have its own contractual relationship with the carriers. In such instances, the parties will either: (i) decide that the broker will arrange for the carriers’ services through the exporters existing contract, or (ii) create a new contract between the exporter and the carriers.
In order to enter into a broker-shipper agreement , the broker must be licensed as a "broker of motor carriers" by the Federal Motor Carrier Safety Administration (FMCSA). Broker is defined under federal law as a company that arranges for the transport of cargo that it does not own by hiring carriers to transport freight and charge the shippers for transporting the freight. A freight forwarding company can also be identified as a broker of motor carriers.
The difference between a freight broker and freight forwarder ("forwarder") is an important distinction, though the terms are often used interchangeably.
A freight forwarder will contract with both the shipper and the carrier. The forwarder will enter into its own contract to provide transportation services with the carriers, and the forwarder will arrange for and handle the physical transportation of the goods. If a forwarder encounters a problem during delivery, the forwarder will attempt to resolve it directly with the carrier because the forwarder has a contractual relationship with the carrier. On the other hand, brokers arrange for and handle most details of the transportation process (such as rate negotiation, scheduling pick up and delivery dates, and selecting the best carrier based on the shipper’s needs). Brokers do not take possession of the cargo. Any problems that arise between the shipper and carrier are primarily for the shipper to resolve with the carrier.
Key Components of a Broker-Shipper Agreement
The basic components of a broker-shipper agreement are typically recommended to include the following:
- (1) Terms and Conditions. These provisions should define the parameters of the relationship between the broker and shipper, and include the duration of the broker-shipper relationship, preservation of non-disclosure rights, force majeure, and indemnification.
- (2) Rate Provisions. The rate provisions section should include the method by which rates will be calculated and adjusted. This language is important in that if a set rate is agreed upon and business diminishes, the broker may find itself with a severely diminished revenue stream.
- (3) Services. A comprehensive services section should clearly spell out the parties’ expectations with regard to scheduling and cancellation of pick-ups and deliveries, as well as the process should either party wish to terminate the relationship. Should the broker-shipper relationship be terminated, any remaining shipments that are scheduled for a future date should be addressed.
- (4) Other Rights and Responsibilities. This section should address the parties’ responsibilities as it relates to cargo loss and damage, and delay, as well as routing instructions, liability issues, insurance coverage and payments and reporting.
These are the essential components of broker-shipper agreements. When representing shippers, we view broker-served transactions as an integral part of our transportation and logistics practice. We have experience addressing and reaching solutions in this ever-changing regulatory environment.
Legal Considerations and Compliance
Among the fundamental legal issues stemming from a broker-shipper agreement are the parties’ respective responsibilities regarding cargo loss or damage. A broker is generally not liable for a cargo loss or damage unless the broker specifically agreed to be responsible or the broker was negligent in choosing the carrier that caused the loss or damage. If a carrier commits an act of negligence, both the carrier and the shipper may share liability in accordance with the shipper’s bill of lading terms. The ease of determining which party is liable is dependent on the type of contract used by the shipper to initiate the shipping arrangement.
If the parties agree to a "shipper’s agent" bill of lading, the responsibility for all liability is on the shipper if a carrier with limited liability is used. If the shipment involves a "through bill of lading" issued by the broker and governed by Middle District of Florida law, then the carrier may be liable even if damage is caused by the negligence of another carrier. If the shipment is subject to a "through bill of lading" and is governed by the law at the point of shipment, then liability will be determined by that jurisdiction’s laws.
For domestic freight shipments which move via interstate transportation, the Carmack Amendment governs the liability between the shipper and carrier. Under the Carmack Amendment, carriers are strictly liable for certain categories of damage to cargo, including "the total actual loss or injury to property" sustained under a through bill of lading. 49 U.S.C. § 14706(a)(1). The Carmack Amendment also preempts state common law to the extent that state law imposes liability which the Carmack Amendment does not provide. Id. at § 14706(d). Consequently, a shipper who seeks to hold a broker liable for lost or damaged cargo must do so under the Carmack Amendment, and not under state law. Id.
Even if a shipper and carrier (or broker) agree that the shipper’s bill of lading shall control over the broker’s bill of lading, the courts have held that the 48 U.S.C. § 11707(e) governs. That section’s preemption of all state law, except when a state law is "necessary to carry out the requirements of [that section]," makes the Carmack Amendment applicable even when the terms of a bill of lading otherwise create contractual liability clearly and unambiguously. See Star Logistics Group, Inc. v. J.B. Hunt Transp., Inc., 2006 WL 2465154 (M.D. Fla. 2006).
Advantages of Broker-Shipper Agreements
The practice of contracting with a qualified freight broker can reduce costs and enhance efficiency in a variety of scenarios. In general, it is a useful tool for improving productivity and lowering overhead for brokers and shippers. From the point of view of brokers, entering into broker-shipper contracts may result in higher demand for their services. This can lead to an increase in profit margins if the post-contract level of business remains stable. For parties who act as brokers while serving as carriers in other transactions, relying on other brokers may alleviate the need to recruit and maintain a staff of drivers. Forgoing this process of acquisition can reduce overhead costs and increase profitability. Still further, relying on brokers may ensure that parties are able to avoid the problem of having trucks and equipment sitting idle or otherwise have excess capacity.
For shippers, establishing contractual relationships with brokers requires a degree of investment, but it can increase productivity and revenue. Allowing brokers to perform services transfers some of the risk from the shipper onto the broker. A shipper increases its shipping cost predictability and consistency for customers. Further, the obligation to pay the broker for transportation services creates a legally binding requirement to transport freight. This can be beneficial in the event of a shipper’s own inability to transport freight due to a lack of drivers.
Essentially, entering into broker-shipper contracts is beneficial for its potential to increase efficiency for both brokers and shippers through the reduction of costs, improved productivity and enhanced efficiency.
Common Issues and How to Address Them
Broker-shipper relationships can sometimes be challenging. Frequent communication between the parties can often prevent problems or solve them before they escalate. Recently, broker representatives cited the number one complaint they receive from transportation companies is a lack of communication. Below are some of the more frequent issues that brokers and shippers need to work together to solve.
Capacity or Rate Issues. Many brokers have conditions that trigger a carrier with which they have an agreement (e.g., carrier’s truck broken down or carrier has a safety rating). If a carrier fails to notify a broker of a condition that would allow the broker to terminate the Broker- Shipper Agreement, a broker may be held liable for a shipper’s freight claim if the carrier has a claim filed against the broker for the shipper’s loss. The Brokers’ Standard Carrier Agreement may state that a broker will dispatch to a motor carrier only if the motor carrier agrees to pay the freight charge by an agreed payment method. Often, a shipper desires to have a motor carrier pay freight on several loads at once by a single check. For example, if a shipper has agreed to pay its freight in 30-45 days, but a company has a policy not to extend credit to motor carriers, shippers will often agree to pay the fee to satisfy the terms of the Broker- Shipper Agreement. Otherwise, a broker will be in violation of the Broker- Shipper Agreement and its agreement with the motor carrier.
Inconsistent Rates. If rates become inconsistent over time , the carrier may claim that the rates are underpaid. A broker must provide shipper with a copy of the rate confirmation for carrier in the event of a claim. The carrier should also keep a copy of the confirmation that includes the name of the broker, delivery instructions, and requested load information. The load information should include shipper’s name, consignee, address, pickup, delivery and appointment times; weight and type of load, special instructions and requested freight charge. If the carrier’s records do not mirror the broker’s, and the broker cannot produce the rate confirmation to the shipper in response to a claim, the shipper can look to the broker. Furthermore, courts have found the shipper is entitled to rely upon the email confirmation to the broker.
Co-Broker Liability. Some shippers would like to contract directly with a carrier, but would like to pay the broker as intermediary. However, under an agency theory, the carrier may still claim a broker was negligent or that agent liability precludes a broker from claiming the broker is a separate entity and not a shared broker. Cooperation prevails in the transportation industry, especially when there is a slight change in personnel in the shipper’s office. If a shipper has a problem with its carrier, it should ensure the carrier contacts the right person or spot-checks the load as often as possible.
Creating an Effective Broker-Shipper Agreement
When drafting a broker-shipper agreement, the parties should consider the following issues: (1) dispute resolution, including choice of law and forum; (2) termination rights; (3) liabilities and indemnities (brokers need to take particular care with indemnification issues); (4) scope of services; (5) commissions (the contract should state the specific percentage commission for each customer); (6) customer information provisions; (7) confidentiality considerations; (8) compliance and audit rights; and (9) intellectual property considerations.
As to dispute resolution, legal counsel should always advise including an arbitration clause rather than litigation in the courts. No one ever wins when the taxpayer gets involved in such disputes, and, increasingly, as provided by the Federal Arbitration Act, arbitration is coming to dominate the field. With respect to choice of law/control of the goods: the laws of the State of California (or other state in which the broker-shipper agreement will be performed) should govern, and the laws of the different states involved between the parties need not apply. Choice of forum can be any convenient forum as long as the other party consents, since the parties are entering into a contractual agreement. The Federal Arbitration Act should be included.
One of the first disputes that a shipper-broker needs to avoid is limiting its right to terminate. If a term is included, it should be a minimum term, and should state that the shipper-broker can terminate at any time without cause prior to that date. If limits on termination are included, they should not restrict the right to terminate for cause. Terms that restrict the right to terminate create problems in various contexts including auction sales.
Liabilities and indemnities: brokers need to be mindful of indemnities and liability issues. Unless brokers work solely on a commission basis, they may be deemed common carriers and subject to the loss and damage provisions of the Carmack Amendment to the Interstate Commerce Act. Brokers and insurance agents attempting to limit their liability in their contracts should be aware the courts will not enforce anti-round-trip cargo policies. Shipper-contract terms limiting liability to brokers and including broad indemnities will be unenforceable. However, an indemnity provision of reasonable scope may be acceptable.
Examples from the Real World
Understanding Broker-Shipper Agreements: Key Aspects and Best Practices
To better understand the nuances of broker-shipper agreements, it is helpful to examine real-world scenarios. In these examples, we will explore the experiences of both shippers and brokers, as well as the lessons learned and best practices that can be derived from their agreements.
Case Study 1: The Long-Term Partnership
Company A, a regional carrier, entered into a broker-shipper agreement with Company B, a manufacturing firm, to move its freight nationwide. Over the course of the agreement, Company A became Company B’s primary carrier for several product lines. After two years of operations, the partnership was thriving. Co-mingling of freight was not an issue because the trucking was being done on a load-to-load and lane basis. In other words, there was no co-mingling of freight from the carrier on behalf of the broker for other than one shipper.
Lesson Learned:
Case Study 2: The Safety Net
A small broker, Company C, specializing in transporting specialized heavy equipment, established an agreement with Company D, a manufacturer of construction machinery. Company C decided to add a third-party transportation provider to the list of acceptable carriers. To ensure that safety standards were being met, Company C contracted with a third-party carrier that had a strong safety record, to audit each of its transport carriers and provide twice annual updates.
Lesson Learned:
Case Study 3: When Things Go Wrong
In our final example, Company E, a non-asset based broker, began working with Company F, a retailer. Without specifying in the agreement, Company E began using asset-based carriers to transport Company F’s products. In doing so, the relationship between the two companies suffered immensely. There was significant co-mingling of both companies’ freight, leading to commingling issues. The two companies withdrew from their agreement, and their relationship has yet to be repaired as of the time of this writing.
Lesson Learned:
These case studies highlight how broker-shipper agreements can create long-lasting and mutually beneficial relationships for both brokers and shippers. They can also serve as a warning to others to include important provisions that will serve to minimize the potential for liability and damages.
Emerging Trends in Broker-Shipper Agreements
The future will see continued growth and sophistication in broker-shipper relationships. The growth of online freight matching platforms and freight exchanges such as FTX, C.H. Robinson’s Navisphere, and Uber Freight are just a few examples of the many ways technology is impacting and creative transforming the industry. These marketplaces are seeking to foster long-term relationships that result in the evolution of those relationships into contracts. The development of Artificial Intelligence technologies and Machine Learning are providing for unprecedented advantages for large public brokers to anticipate market movements and deliver on-demand services for shipper clients.
We expect to the rise of "Uber for consumer freight" to result in, not surprisingly, less service requirements and contracts (for example, rates and modes) administered by the broker to help keep costs low and margins high to the detriment of the carrier. The consumer of freight is likely to be more interested in the lowest cost and timeliness; carriers are more interested in balancing their assets and liabilities in lieu of pricing. The challenge will continue to be whether the marketplace can efficiently align rates and capacity to meet shipper demand. To the extent a shipper is able to do this itself through technology and increasingly lower costs, the broker will only be as valuable as the least valuable service it can provide .
In addition, we believe there have been practical consequences of the commonly applied CH Robinson "Standard Terms and Conditions for Services". First, the terms are sufficiently vague that breach of those terms can be made an allegation for virtually any complaint. Second, C.H. Robinson has been able to use these terms as a sword to extract concessions from broker relationships to allow them to charge more while still maintaining (by referring back to those terms) a reputation for low-cost service delivery. To the extent these types of practices are permitted in broker-shipper agreements or RFPs, shippers should take heed so they understand those risks before signing on the dotted line, and seek to take these practices into account during any future RFP or agreement negotiations. There are better practices reflected in smaller, lessopoly private brokers’ agreements.
Ultimately, we see an increased sophistication in the industry surrounding the relationships between brokers and shippers. That is, large public brokers will serve those shippers requiring essentially an absence of services, and smaller, more sophisticated brokers will provide those shippers the services necessary for enhanced customer service, supply chain risk management, integration and data analysis.
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