What is a Freight Broker Agreement?
Freight broker agreements are contracts used by brokers who arrange for the transportation of freight on behalf of shippers by for-hire motor carriers or railroads. In freight broker agreements, brokers typically guarantee prompt pickup and delivery of a shipper’s goods, billing and payment services, and careful handling of the goods. Shippers sometimes also assign a carrier to the broker to use for providing the services under the freight brokerage agreement.
The freight brokerage agreement is the contractual foundation upon which the commercial relationship between the parties is built. It costs money , time and effort to craft a clear, concise and enforceable agreement. These obligations and rights need to be properly spelled out to avoid misunderstandings between the parties. Well-drafted freight broker agreements define what parties expect from each other, such as performance responsibilities and how bills will be processed and paid. Freight broker agreements can also help resolve disputes if, and when, they arise. Properly crafted freight broker agreements act as a road map for moving goods from a point of origin to a destination. A poorly drafted freight broker agreement can have disastrous consequences.
Essential Elements of a Freight Broker Agreement
Each freight broker agreement, also known as a broker-carrier agreement, will differ depending on the personalities of the parties that negotiate the agreement. That being said, there are some common elements that typically exist within a freight broker agreement.
Payment Terms
As these agreements can often be the subject of disputes, it is important to clearly set forth the payment terms. This is oftentimes the most-negotiated part of a broker-carrier agreement. The broker typically wants to include language memorializing that it is to be paid before the carrier in the event of delayed payment by the shipper. A similar provision should be included setting forth that the carrier is to receive its payment prior to the broker in the event of a dispute. A well-drafted agreement will include language so that if the carrier has not yet been paid, then neither party is to receive payment from the shipper until the carrier has received payment. There can be several ways for such a provision to be worded. The point is that the issue needs to be addressed one way or another. In addition, the agreement should set forth a time period for payment to the broker by the carrier, and from the shipper to the broker.
Liability Clauses
There should also be fairly lengthy liability clauses to address issues such as loss, damage, delay, overage, shortage, etc. As an example, the broker may want to include language stating that it is not responsible for acts or negligent acts of the carrier, acts beyond the control of the broker, weather conditions, acts of God, etc. The broker may also want to include language stating that the broker will not be liable for the acts of, or damages caused by, the shipper. On the other side, the carrier may want to include language that places the onus on the broker to provide accurate information (or at the very least lists the broker’s errors as a potential cause of damage under the carrier’s coverage). Other provisions that are discussed between the parties may include timeliness of delivery, bills of lading and freight bills, inclusion of demurrage language, and dispute resolution.
What’s Next?
Part II of this blog will discuss additional considerations that may need to be addressed in a freight broker agreement.
Legal Requirements for Freight Brokers
A freight broker must be either a registered freight broker or an individual with a Freight Broker Authority. Either way, before a freight broker starts operating, arranged for delivery trucks to deliver any shipments or arranged for truck deliveries a freight broker must be in compliance with federal trucking regulations. Federal law requires that freight brokers are licensed and if you run operations and are not licensed, you may be penalized by the federal government.
There are many benefits to being a licensed broker. Federal law requires all freight brokers to make sure that the carrier they are using is FMCSA or state certified. A freight broker can’t operate without an active freight broker license, FMCSA. It is important that a freight broker maintains FMCSA certifications or there may be serious negative implications.
A freight broker typically has two legal obligations called a "freight broker agreement" and a "freight brokerage agreement".
A freight broker agreement is a quick legal contract that simply states that either a broker or carrier is now responsible for shipping equipment from one area to another. A good practice is to have both parties sign any freight broker agreement to avoid any potential legal complications down the road.
A freight brokerage agreement is a more detailed and longer legal document that covers different areas of the notification process and commercial terms when it is time for the actual sale of the shipment. This agreement is more in-depth than an actual sale and usually is counter-signed by both parties.
Common Issues with Freight Broker Agreements
A. Misunderstandings
Freight broker agreements often contain myriad provisions that, although standard, are nonetheless susceptible to misunderstanding. Ever-present issues include liability for cargo loss or damage; payment for freight, detention and demurrage; whether a broker can limit its liability for such claims; procedures for addressing claims; limits on available remedies for breach of the agreement; communications and information sharing; insurance requirements; assignment of rights and/or obligations; and renewal and termination obligations.
B. Disputes
Disputes between brokers and shippers have increased as freight market conditions continue to evolve. While strong current demand for U.S. trucking capacity has driven freight rates higher, electronic load boards have made it easy for shippers to shop around for lower-cost freight. In this environment, brokers and shippers have reached disputes over compensating drivers or drayage carriers to perform work, or over when, where and how loads are picked up or delivered. Disputes have also arisen over whether loads can be consolidated, where they are coming from or going to, and what equipment is required. The use of load boards for picking up and delivering loads has given rise to disputes with truckers over payment . Such disputes have even sparked litigation in some cases, where a broker believes that it has a right to seek recovery from a shipper.
In addition, the elimination of the surface transportation reauthorization law truck weight exemption for truckers may have resulted in disputes between brokers and truckers about how many pallets can fit in the truck, which could have resulted in brokers arguing that truckers need to find alternative means of transporting the excess pallets (such as by rail, for example).
C. Negotiation and Customization of Agreements
Given the potential for disputes, brokers and shippers need to understand key provisions of freight broker agreements and their effect, and carefully review proposed revisions to such agreements. If disputes arise, brokers and shippers should not assume that their forms or hand-shake deals will be enforceable, or even result in a successful settlement, due to disputes over contract interpretation. Business people often believe that once they sign such agreements, their obligations cannot be changed or altered. However, there is no precluded with regard to revising and customizing key provisions that ensure that disputes with brokers or shippers do not arise.
How to Draft an Effective Freight Broker Agreement
The discussion above regarding the fundamentals of freight broker agreements and the various liabilities and obligations thereunder is all well and good, but it begs the question, "What should I do when drafting an agreement to be sure it’s enforceable and provides the protections I am seeking?" There are some practical suggestions:
Where ever possible, use appropriate state law. This can be important to not only to help avoid automatic non-compete laws (see above), but also to increase the enforceability of certain provisions. In Pennsylvania, for example, our courts have held that a non-solicitation covenant is enforceable against a departing freight broker if (and only if) it is limited to a reasonable period of time (12 or 18 months have been upheld, 24 months have not), is limited in geographic scope, and further limited to only protecting information otherwise qualifying as trade secrets. Some states have statutes that further limit covenants or require them to meet additional requirements. The take away from this is that an otherwise permissible provision can be made unenforceable simply because it might not encompass certain aspects of a different state’s law, and as such, careful attention should be given to the particular state’s law in which a freight broker agreement will be interpreted.
Stay away from boilerplate. Few things make a freight broker agreement unenforceable more quickly than "canned" language lifted from the internet or from other documents. When drafting a freight broker agreement, pay particular attention to ensuring that the rights and obligations discussed above are actually included, and also be sure that they are tailored to the specific transaction being engaged in by the broker. Do not cut and paste. Be specific.
Don’t rely on certification for everything. Again, we suggest repeatedly re-reading and re-writing until the provisions of the contract really apply to the transaction being engaged, but brokers should not forget to include a blank certification for the carrier separately executed by each carrier to whom the agreement will apply. By this, we mean that the broker gets a certificate of insurance (also known as "certs") from the carriers it intends to use that sets forth all of the particulars that the broker needs (i.e., a $1,000,000 limit of liability, coverage scope, cancellation provisions, etc.) and request that those be revised to specifically reference the agreement with the blanks filled in (for example, "In favor of ________, as broker, and a copy to ________, as customer," etc.), when the carrier responds with a signed certification, then the broker should know that it can move forward, having been assured that the carrier understands its responsibilities under the agreement. Any refusal of a carrier to provide signed certifications should be viewed as a red flag that should be scrutinized.
Use your words and be as specific as possible when drafting the provisions of the agreement. Again, stay away from boilerplate or repackaged language. Be clear and concise in every paragraph.
And remember to have experienced and sophisticated legal counsel review and edit every written contract of independent contractors.
How Technology Can Help Manage Freight Broker Agreements
While the law and managing by exception will certainly occupy freight broker managers a good deal of their time, how can data generated from systems make managing a freight brokerage more efficient and streamlined? The one truth of a freight brokerage arrangement is that the number of moving pieces involved will likely far exceed the broker manager’s thought process. Brokers can already manage a good amount of information related to freight shipments with tools built into their TMS systems. Most modern-day TMS systems have the ability to manage freight contracts, tender documents, shipment status updates and communications among the broker manager and other relevant parties. Certain systems even allow for tracking costs related to a shipment that will lead to creating an invoice to the freight forwarder. From a technology perspective, brokers should consider three ways that they can use a TMS system to make their life easier. The first is that a TMS should have the ability to track all offers and counter offers. The second area in which brokers should invest is in documents management . A good program should be able to track, organize and store documents such as contracts, tenders and emails in an intuitive and easy to use way. Third, a broker should use a system that can track and utilize data from shipments, such as truckload or LTL shipments to help make informed decisions about route configurations and pricing. The goal of these TMS options is to alleviate the burden on an operator to create and maintain a series of Microsoft Excel spreadsheets or additional files on their computers. An additional benefit of using a TMS system is the ability to create a "points of obligation" which are effectively a road map of the contract. By tracking, for example, when a contract was entered into, when freight was loaded, and when freight was delivered, the broker will be able to track a timeline of events and perform analyses of how and when certain events operate during the course of a contract. This gives the broker powerful leverage over its carriers and customers when negotiating the next freight broker agreement.