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Nov.14, 2016

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Q&A 60 THE JOURNAL OF COMMERCE NOVEMBER 14.2016 By Colin Barrett DESIGNATED PAYOR Q: WE DISPATCH ALL of our domes- tic shipments (within the United States) freight prepaid. We also routinely sign Section 7 of the bill of lading. My ques- tion is, suppose we go out of business, or go bankrupt, or for some other rea- son we don't pay the carrier. Does the fact that we signed Section 7 protect our customer, or can the carrier legally go after the customer for the unpaid freight charges? A: SECTION 7 IS FOR YOUR pro- tection as shipper, and not the consignee's. As such, your execu- tion of it is basically meaningless on a prepaid shipment. This should be apparent if you read the language of Section 7 on the standard-form B/L: "The carrier shall not make delivery of this ship- ment without payment of freight and all other lawful charges." Now, why would you thus direct the carrier if you're assuming the obligation of pay- ing its charges? You'd be telling it not to extend any credit to you, but rather to insist that you pay up front, which is certainly more than a little unusual. So you execute Section 7 only if somebody else is supposed to pay the freight — that is, the shipment is moving freight collect or some third party is to be billed. In the latter case, most carriers won't accept B/Ls with Section 7 executed, and/or have tariff rules invalidating the effect of Section 7 if executed, on third-party-pay shipments, so effec- tively Section 7 will be relevant only to collect shipments. A s t he foregoing sug gests, though, Section 7 won't serve to pro- tect your customers, the consignees, from demands that they pony up the carriers' freight charges if, for one reason or another, you default on your commitment to pay. The rule of law is that, by accepting delivery of a shipment, the consignee also accepts and becomes de facto party to, the contract under which it was trans- ported — the B/L — and assumes obligations thereunder, most spe- cifically the obligation to pay the charges assessed by the carrier. Section 7 doesn't abrogate that obligation, which is certainly pretty reasonable, given that the consignee clearly was a beneficiary of the car- rier's services in getting the goods to it. So your consignees could well be compelled to pay freight charges in the circumstances you describe. However, they won't necessarily be defenseless should this situation occur. Because you're selling to them on a freight-prepaid basis, it's pretty reasonable to assume that you're passing on the cost of transporta- tion to them in one way or another. Perhaps you're adding the carriers' freight charges on your invoices to your customers as a separate line item. Or you may have that cost ele- ment built into your base pricing. Whichever it is, clearly your customer is incorporating some reimbursement of the "prepaid" freight charges when it makes its payment to you. Which means, of course, that if your customer also is required to pay the carrier directly, it in effect will be paying the freight charges twice over — once to it and a second time to you. That's unfair, and courts recognize that. So there's a legal doctrine called equitable estoppel that's invoked to prevent this. If, at the time the carrier makes its demand for payment to your customer, the customer already has paid your bill for the goods you shipped to it (the usual case), the carrier is estopped — precluded — from enforcing its payment demand against your customer. See Grif- fin Grocery Co. v. Penn. R. Co., 92 S.E.2d 854; C.F. Arrowhead Services Inc. v. AMCEC Corp., 614 F.Supp. 1384; Inman Freight Systems Inc. v. Olin Corp., 807 F.2d 117 (U.S.C.A.8, 1986); Southern Auto Sound Inc. v. Consolidated Freightways Inc., 510 So.2d 1085; and In re Penn-Dixie Steel Corp., 6 B.R. 817, aff'd 10 B.R. 878, among many others. The idea is that the carrier incor- rectly advised the consignee at the time of delivery that it already had its payment from the shipper. The B/L said "freight prepaid," it didn't specify that this really meant instead that it had extended credit to the shipper and merely expected that the shipper would later make payment. So the courts rule that your customer can't be held respon- sible for what turned out to have been the carrier's ill-advised deci- sion to extend you credit instead of more prudently demanding its money before delivering the goods. So your customers are in a sense legally protected from belated carrier demands for freight bill payment in the eventuality you pos- tulate. But it has nothing to do with whether Section 7 of the B/L was or wasn't executed. JOC Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at 5201 Whippoorwill Lane, Johns Island, S.C. 29455; phone, 843 559 1277; email, Contact him to order the most recent 351-page compiled edition of past Q&A columns, published in 2010. Because you're selling to them on a freight-prepaid basis, it's pretty reasonable to assume that you're passing on the cost of transportation to them.

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