Third party logistics ("3PL") services, which are brokered transportation and other supply chain management services, are a rapidly growing sector of the logistics industry. Clients looking to buy transportation services through a 3PL provider must be aware of the risks associated with such relationships. In particular, transportation buyers must carefully prepare their 3PL contracts to avoid paying twice for transportation services if their 3PL provider fails to pay for services rendered by a carrier on behalf of the transportation buyer.
When a 3PL intermediary fails to compensate downstream transportation providers for services rendered, such providers may look to beneficial owners (consignees) or shippers of the goods (i.e., the ultimate transport purchaser) for payment of those services. The courts have accepted that a carrier has the right, under certain circumstances, to seek compensation from a transportation buyer who has already paid an intermediary. In Southern Pacific Transportation Co. v. Commercial Metals Co., the U.S. Supreme Court determined that a carrier has "not only the right, but the duty to recover its proper charges for services rendered." That can mean recovery under existing case law and statutory law from a transport purchaser who has already paid a 3PL provider. While acknowledging that this liability may be transferred to a third party, the Court concluded that such transfer must be "clearly established by the agreement between the parties, or the circumstances surrounding the receipt and transportation of goods." Subsequent cases have split on this issue, some reaching the conclusion that due to circumstantial evidence or failure to transfer liability in the contract, a transport purchaser must pay the transporter of goods even though it had already paid the 3PL provider for such services.
Consequently, to properly safeguard the 3PL relationship against double payment, a transport purchaser should (1) delineate the 3PL provider's responsibilities, and (2) clearly allocate liability to the 3PL provider for a failure to perform such responsibilities. How can a transport purchaser accomplish these objectives contractually? A 3PL provider is a third party to the traditional two-party (shipper and carrier) transportation contract. Generally, such contract's terms and conditions were set forth in the bill of lading. The bill of lading would specify the shipper/beneficial owner (usually the consignee) and transportation provider, and the duties and responsibilities of each, including payment obligations. When the shipper is represented by a 3PL provider, it is important to modify these duties and responsibilities. Even where the 3PL provider contracts directly with the carrier, the shipper may be secondarily liable by the terms and conditions of the bill of lading, particularly if the bill of lading identifies the shipper as the responsible party. Therefore, under such circumstances, the shipper should require documentation that the 3PL provider has entered into a contract with the carrier specifying that the carrier may look solely to the 3PL provider for payment. In addition, the shipper's contract with its 3PL provider should state the 3PL provider's (1) duty to pay carriers, (2) indemnification of the shipper for a failure to perform its contractual duties, and (3) warranty that appropriate shipper release language is included in its contracts with transportation providers.
Finally, several courts have concluded that transportation buyers wanting to avoid liability must use appropriate due diligence to ensure they are dealing with "reputable" 3PL providers. Such due diligence should include finding a well-established 3PL provider that has a strong balance sheet and maintains adequate insurance coverage with well-rated insurers.