Understanding Broker Contract Carrier Agreements
A broker contract carrier agreement is an agreement between a freight broker and a carrier, whereby a carrier (contract carrier) typically agrees to pay a percentage of its gross revenue to the broker unless the carrier has engaged the services of a freight dispatcher, where in the contract may provide for the contract carrier to pay a flat or hourly rate to the freight dispatcher for referred loads. In the absence of such agreement, under 49 U.S.C. ยง 14101(b) the contract carrier may contract with the broker for operating the DOT legal business (transportation of goods), but the contract carrier must retain all discretion and control of the means and methods of carrying our the transportation operations. Such broker contract carrier agreements are useful to outline the terms of the relationship between the parties, and to rectify the issues that plague the relationship between brokers and truck drivers/brokers and carriers . Each year, brokers complain that carriers have violated the agreement by diverting or stealing loads, competing with the broker against the market rates, double brokering, taking longer to carry out the assigned work than agreed, failing to deliver loads to their destination at agreed times, and various other non-deliverables as outlined in the agreement. Each year, carriers complain that brokers have violated the agreement by offering them freight at double their broker rate or market rate, falsely representing loads as having already been paid, attempting to divest them of the agreement by encouraging the carrier to take the load as a single job instead of longer term agreement, and various other violations as outlined in the contract and that were upheld through work acceptance after the contract was signed.
Key Components of a Broker Contract
One of the key components is payment term. This allows the broker to require payment to the broker within a set number of days of receipt of the freight bill and in some cases receipt of proof of delivery. It also allows the broker to make payment to the subcontracted motor carrier within a set number of days of receipt of freight bill and proof. Upon execution of the broker-carrier contract, the broker should be responsible for payment for its load.
Of course, payment terms are not as easy to enforce as it seems when there are unforeseen issues such as claims, disputes, and lengthy collection processes. In these cases, a brokers’ right to withhold payment and/or to set-off payment against a claim can be very valuable.
Another critical element is indemnification and contribution. Carriers are required to indemnify and hold harmless brokers from any claims that arise from the carriers’ performance of the transportation services. Carriers also often agree to take over some or all risk for damages to carriers cargo for which the carrier would be legally liable. Carriers will be responsible for any loss of, or damage to, such freight or property for which it is found liable. Depending on the situation, motor carriers may limit their liability through contracts which can be evidenced by a Bill of Lading containing appropriate exemptions or within the broker’s contract with the carriers.
Service Levels are critical as well. Service expectations for load assignments, appointment windows, equipment, and other important details are critical. Empty trailer moves and/or layover expenses, detention, and layover penalties must be negotiated and included. This will help broker set its service standards to its shipper customers expectations or preferences.
A clause regarding exclusive jurisdiction and proper venue is important to limit disputes over where a claim against either party must be brought. The clause should clearly list the proper jurisdiction and venue, and require that all parties submit to the personal jurisdiction of the listed courts. The clause should also include other language that would more easily allow a broker to assert personal jurisdiction over a motor carrier – such as "the Carrier agrees …", "the Carrier does at this time …", etc. As discussed later, Brokers should also consider the importance of including a choice of law clause in its contract with carriers.
Legal Implications and Compliance
When dealing with a broker contract carrier agreement, brokering freight always will involve issues such as liability, indemnification, insurance, payment and collection of freight charges, claims and resolution of disputes. But as soon as the broker signs the broker contract carrier agreement, there are federal regulations and standards that apply directly to the relationship between the broker and the contract carrier. The biggest risks that the broker can run into are exposure to liability and possible prosecution for violations of Federal Motor Carrier Safety Administration (FMCSA) regulations.
FMCSA regulations require that brokers have written contracts with motor carriers allowing the motor carriers to haul freight exclusively for the broker. These contract carrier agreements may have consequences for the parties, especially if the contract carrier is an illicit scheme to operate in violation of FMCSA regulations. The penalties for improperly using the broker contract carrier agreements are severe, with the most serious being the criminal and civil penalties for helping non-MCS-150 carriers evade compliance with the FMCSR. Given the severe nature of the FMCSR penalties, it is essential that anyone brokering freight through a contract carrier agreement know and understand how to use them properly.
The FMCSRs require that all carriers obtain operating authority from the FMCSA unless they are excluded or exempted by statute or regulation. The FMCSR include compliance requirements for obtaining the certificate and compliance requirements for holding the certificate after one has been issued. While the FMCSRs allow brokers or freight forwarders to use contract carriers, the contract carriers must meet all of the same requirements, including obtaining operating authority from the FMCSA. Brokers who use contract carriers should be careful to ensure that the contract carriers have the proper authority before allowing them to haul freight. The FMCSRs also require brokers and contract carriers to do business under their own registered name(s). FMCSR 366.1(b) prohibits a carrier from doing business under the operating authority of another carrier.
Other FMCSR penalties can be imposed if the FMCSRs are violated. For example, FMCSR 392.3 requires all commercial motor vehicle (CMV) drivers to exercise caution. A company can be liable for damages that are caused by its violation of the FMCSRs under the court-created doctrine of respondeat superior. Respondeat superior allows courts to hold employers responsible for wrongs committed by their employees in the course and scope of their employment. In the Federal Torts Claims Act (FTCA) context, which is specifically designed to waive sovereign immunity, respondeat superior allows plaintiffs to proceed against the government for the torts of its employees acting in the course and scope of employment. Other legal doctrines similar to respondeat superior may apply. For example, the negligent hiring doctrine holds an employer liable for the actions of an employee hired negligently, such as where the employer hires someone knowing or having reason to know he or she is unfit for the position. Similar doctrines such as negligent supervision, negligent retention, negligent entrustment and vicarious liability can result in serious liability for employers.
Negotiating Terms Effectively
Negotiating terms within a broker contract carrier agreement requires clear communication and a focus on the mutual interests of both parties. Successful negotiation begins with open dialogue and a willingness to understand the other party’s position. Any successful relationship is predicated on finding common ground and identifying areas of concern, which you as a broker or carrier can address.
The most productive negotiations occur when each party focuses on the long-term health of the relationship, instead of immediately focusing on the most pressing concerns at that moment in time. Regardless of your position, invariably the issue of delayed payment or insurance requirements will be raised. Addressing these concerns may require additional discussion, but it is important to remember that the relationship is built upon the foundation that each of the parties will perform the services expected. If that foundation is shaky due to nothing more than an ill-timed carrier payment or an overly zealous carrier audit, then the relationship may always be faced with challenges. Therefore, every attempt should be made to find the middle ground that will allow the relationship to move forward.
While tractor and trailer safety and maintenance will likely be the most expensive and time-consuming provisions to address, there is usually some latitude in the insurance requirements. Those provisions are the cost of doing business, and attempting to minimize them may come at the expense of safety. It is worth repeating that no contract carrier should be willing to enter into a broker-carrier contract where the carrier is required to have lower insurance coverage than the law requires of the broker’s motor carriers . Similarly, considering the small percentage of motor carriers who are able to successfully complete an audit, particularly by the Department of Defense, the bar needs to be set lower in that regard as well.
The manner in which disputes are resolved should be clearly stated in the agreement. The parties should attempt to resolve their differences through meaningful dialogue or negotiation before resorting to litigation. Likewise, if necessary, disputes may be mediated or arbitrated. If mediation is necessary, the parties should jointly agree upon the location. While it may not be critical, the cost of the mediator’s travel will be considered in context of the potential savings from the resolution of the dispute. Likewise, arbitrating in the headquarters city of one of the companies involved will be viewed much differently than if the arbitrator is required to travel to the city where the arbitration is to occur.
As noted above, the health of the relationship is of paramount concern. From the perspective of a carrier negotiating an agreement with a broker, one key point to keep in mind is that brokers have a difficult time maintaining relationships with constantly late payers. The broker ensures that he is paid before the carrier, so if the broker cannot collect, the chances of late payments to the carrier are high. While every broker wants to be paid on time, it is even more important to the carrier. Therefore, if late payment will not be acceptable, make sure the provision is included in the contract. Moreover, it is not uncommon for brokers to police their carriers; if there are sufficient problems with the carrier, the broker will notify shippers, thus potentially damaging the carrier’s reputation.
Common Challenges and Solutions
As with any commercial contract, the potential for disputes in the broker-carrier context must always be anticipated. In addition to the potential for disputes regarding performance, billing issues often arise in connection with payments for services rendered, payment collection practices and related issues. The "Vicarious Liability" doctrine, which has recently been analyzed by a special task force appointed by the Federal Motor Carrier Safety Administration (FMCSA), is an issue that warrants consideration as well.
The most common issue in this area concerns the degree of control exercised by the intended recipient of services over the carrier providing those services. In general, the more control that is exercised over the manner in which the work is undertaken, the more likely it is that the relationship will be deemed that of employer-employee. That of course is to be avoided in the broker-carrier context.
There are numerous other potential pitfalls and disputes that should be considered and addressed at the outset. These include the following:
We welcome any comments or suggestions related to the above list.
Future Trends in Broker Agreements
Innovation will be a central theme in the future of contract carrier arrangements. The role of technology in the freight transportation sector will continue to grow, and with this growth will come an increased reliance on technological sophistication in each segment of the transportation process, including the relationship between brokers and their carriers. The contract carrier arrangement between a broker and a carrier will evolve. The vehicle for that evolution will be technology.
Under today’s model, most forms of broker consent agreements contain language regarding the obligation of the broker to provide shipment information to its contract carriers "in a manner reasonably consistent with the manner in which similar information is provided to all of the broker’s other motor carrier service providers." This is a means by which brokers often try to prevent contract carriers from accessing, and sharing within their affiliated companies, the information they acquire from their broker arrangements. However, as technology evolves, it may become increasingly difficult for brokers to carry out their obligations, not only under the written contracts they have with their contract carriers, but also the duties of good faith and fair dealing that they owe to those carriers.
In the future , we can anticipate that carriers will demand more and different shipments of information from their brokers. Carriers will demand that they be included in the broker’s database; that they have access 24/7 to the broker’s load board to allow them to monitor available shipments of freight; that they have automatic alerts of new loads; that they have the ability to view their current status ranking on the carrier roster, read the broker’s policies, performance analysis and analytics, and individual broker-agent assignments; and that they have the capability of viewing pending invoices and uploading supporting paperwork in real-time, including, for example, proof of delivery documents and carrier freight bills. There will be little tolerance or patience for any perceived failure of a broker to live up to its promises.
This future paradigm will fall into place because of the enhanced ability of brokers and carriers to communicate with one another through very sophisticated systems. It remains to be seen whether existing contract carrier agreements will require amendments to reflect these changing dynamics, or whether the parties will simply proceed with their current relationships with the understanding that the rules of the game have changed. Either way, as brokers and carriers get more sophisticated and as the freight transportation business moves forward, parties to these important arrangements will want to keep their agreements current to the evolving operating environment.