Shipper Load and Count Broken Seals and Terrorist

Shipper Load and Count, Broken Seals and Terrorist Threats in the Foodstuff Supply Chain 2008 Refrigerated Division Annual Meeting July 9 -11, 2008 Hyatt Monterey Resort Monterey, California 1

Henry E. Seaton & Husk, LP 2240 Gallows Rd. Vienna, VA 22182 www. transportationlaw. net Henry E. Seaton is a graduate of Duke University (A. B. ’ 70) and Vanderbilt School of Law (J. D. ’ 73). He has practiced law for 30 years in the Washington D. C. area representing motor carriers of brokers. He is a member of the Vienna, VA based law firm of Seaton & Husk. The firm specializes in freight claims, freight charge collection, contracting issues, carrier representation before the FMCSA and bankruptcy issues. . Mr. Seaton writes a monthly column on transportation law for the Commercial Carrier Journal (CCJ) and is the author of Protecting Motor Carrier Interests in Contracts. He serves as commerce counsel for the National Association of Small Trucking Companies. He was the Delta Nu Alpha Transportation Professional of the Year in 2001 and is a frequent speaker and lecturer regarding cargo claims, freight charges, contracting and risk/insurance issues effecting carriers and brokers. Mr. Seaton can be reached at HESeaton@aol. com. For articles and other 2 information, please see www. transportationlaw. net.

Summary n n n n The shipper load and count statute The presumptions The effect of seal on presumption Hours of service and shipper load and count in the 21 st Century Use of shipper load and count and other limitations in rules tariffs Dealing with theft Acts of the public enemy TSA and shipper inspection issues 3

The Statute 49 U. S. C. § 80113 provides: A common carrier issuing a bill of lading is not liable for non-receipt, misdescription or improper loading and (1) the goods are loaded by the shipper; and (2) the bill contains the words “shipper’s weight, load, and count, ” or words of the same meaning indicating the shipper loaded the goods. SL&C or words of similar import must appear on bill. See Allied Tube & Conduit Corp. v. Southern Pac. Transp. Co. , 211 F. 3 d 367, 377 (7 th Cir. Ill. 2000) 4

n Two criteria: • the shipper must load the goods; and • the bill of lading must contain a notation to that effect. See Leigh Ellis & Co. v. Payne, 274 F. 443 (D. Ga. 1921), aff’d 260 U. S. 682 (U. S. 1923). 5

The Presumptions n Shipper load and count versus presumption of good order at time of pickup: • Under shipper load and count, carrier is liable for damage caused by improper loading only if defect in loading is patent. • If defect is not apparent to the ordinary observation of the carrier, carrier should not be held liable. Modern Tool Corp. v. Pennsylvania R. Co. , 100 F. Supp. 595 (D. N. J. 1951). • Carrier under “shipper load and count” bill of lading is not liable for damage due to improper loading, Robinson v. New York C. R. Co. , 282 N. Y. S. 877 (N. Y. App. Div. 1935), aff’d 270 N. Y. 659 (N. Y. 1936). 6

n n n When shipment moves as shipper load and count and is delivered to consignee in damaged condition, a shipper must submit adequate proof that the product was in good condition when delivered to carrier to overcome the presumption that damage occurred at origin. See Minat v. B&O Railroad, 558 F. 2 d 1277, 1280 (D. C. Cir. 1978). The ordinary presumption of good order at point of pickup is reversed and the shipper has the initial burden of establishing its prima facie case. See Frosty Land Foods International, Inc. v. Refrigerated Transport Co. , 613 F. 2 d 1344 (5 th Cir. Ala. 1980). Omission of the term “shipper load and count” does not impose liability as a matter of law on carrier for damage in transit, but does shift the burden to the carrier to show the damage was due to the fault of the shipper. Modern Tool Corp. v. Pennsylvania R. Co. , 100 F. Supp. 595 (D. N. J. 1951). 7

n In Cargill, Inc. v. Merit Distrib. Servs. , 2003 Tex. App. LEXIS 4598 (Tex. App. Austin May 30, 2003) the Court found: • Shipper held liable for metal shavings in poultry / load shift in transit on SLC load, improper packing and breaking or inherent vice was proximate cause 8

Security Ins. Co. v. Old Dominion Freight Line, Inc. , 391 F. 3 d 77 (2 d Cir. N. Y. 2004) n n Interesting Facts: SLC load of cigarettes, sealed before driver could inspect. Load stolen and only part recovered (or destroyed by shipper because of “quality concerns”) Court Found: • “…where the contents of a shipment are not visible or open for inspection, as may be the case when cargo is transferred to the carrier in a sealed container, a clean bill of lading is not sufficient to establish delivery of the goods in good condition. ” 9

n Ergo… • When a carrier is prevented from independently inspecting cargo, the plaintiff must present additional evidence, either direct or circumstantial, in order to establish the initial contents and condition of the cargo. See examples: n A. I. G. Uru. Compania de Seguros, S. A. v. AAA Cooper Transp. , 334 F. 3 d 997, 1004 (11 th Cir. Fla. 2003) n National Transp. , Inc. v. Inn Foods, Inc. , 827 F. 2 d 351, 354 (8 th Cir. Neb. 1987) n Summary Judgment for shipper’s insurer reversed for shipper’s failure of proof of good condition 10

The Effect of Seal on Presumption n Statute does not mention the term “under seal” yet the establishment of delivery with seal intact is important to the shipper load and count statute because: • Continuation of the shipment under seal makes it more difficult for the shipper to reverse the presumption and show that the carrier was negligent because: n n The possibility of pilferage, theft, or inadvertent shortage at cross-dock is eliminated; and The possibility of damage due to top loading, rehandling, or tampering with cargo is removed. • Where SLC is listed on bill of lading and shipment is delivered with seal intact, shipper is left to show upset in transit to overcome presumption that loss or damage was not result of: n n Inherent vice; or Act or omission of shipper in loading and counting shipment 11

Hours of Service and Shipper Load and Count in the 21 st Century n Increasingly, product is shrinkwrapped, making piece count impossible n Hours of service change has led to spotted trailers which are loaded without driver present and unloaded after delivery n Because of worker’s comp claim, many warehouses refuse to even allow driver to be present on freight dock when shipment is loaded n Loading of shipments by tow motor precludes accurate count or confirmation of loading practices n Shipper, not truck driver, is most familiar with fragility of product and best loading procedures n As a result, SL&C should be the norm for truckload shipments 12

Use of Shipper Load and Count and Other Limitations in Rules Tariffs n By contract and by tariff, truckload carriers should utilize the following provision or similar: SHIPPER LOAD AND COUNT All shipments shall be loaded by the consignor and unloaded by the consignee. Carrier’s drivers are instructed to sign bills of lading as shipper load and count or “SLC”. Inadvertent omission of this notation shall not result in a presumption of carrier liability for shortage or damage (in the absence of upset or accident) where the driver was either not present or not allowed to observe the loading and unloading. n n n Many carriers use “pallet count” rather than piece count specification, i. e. “ 22 pallets said to contain 1416 pieces” to conform with reality Truck driver should be instructed to place “SL&C” on every bill of lading in which he was denied the opportunity to count or observe the loading of freight Why? Because many warehousemen break warehouse shortage over carrier’s back 13

Dealing with Theft n The $80 billion elephant in the room • Theft of cargo heightens issue of seal integrity • Both “mysterious disappearance” and theft are included in carrier liability but excluded from many cargo policies • Possibility of risk of loss due to theft raises importance of SL&C and seal integrity 14

The Importance of Seal Integrity in the Post-9/11 World n n n Shippers have an absolute duty to accept a shipment unless “practically worthless” When 1 or 2 pallets have been pilfered, the shipper should accept the other 20 plus pallets, then file a claim only for those which are not delivered Yet, shippers involved in the foodstuff supply chain wrongfully believe the USDA requires destruction of an entire truckload of product when seal integrity is compromised due to “fear of terrorists” (e. g. One Fine Pickle) 15

n n n The Bioterrorism Act of 2002 contains no such limitation on the acceptability of foodstuffs There has been no precedent for concluding that the compromising of seal integrity is indicative of anything other than petty thieves who could not fence the foodstuffs they discovered In Security Ins. Co. v. Old Dominion Freight Line, Inc. , the Court held that destruction of recovered portion of shipment because of “consignee quality concerns” undercut shipper’s assertion that goods were in good order at origin. A shipper’s quandary: • “So what is wrong with the goods that require their destruction? • Who is responsible? ” 16

The Role of “Act of Public Enemy” in the Defense of Such Claims n President Bush declared “War on Terrorism. ” n Al Quaeda is a “Public Enemy. ” n n If product is destroyed solely because the seal was broken and shipped, it is because of “fear of act of terrorism. ” Doesn’t the common law defense become relevant? 17

Old El Paso n n n Shipment delayed in transit due to driver malfunction – seal intact, attempted delivery 10 days later, rejected by broker, shipment reconsigned Carrier’s insurer deserts the load Upon reconsignment entire product dumped although seal intact Shipper alleges delayed delivery “violates its quality control and production standards” No inspection Broker sues carrier in Ohio 18

Citrus World n n n n Shipment tendered to carrier under seal Thieves broke seal, took 2 cases, could not fence the rest Load put in warehouse, balance tendered to consignee, consignee claimed load would be rejected due to USDA regulations As counsel for insurer, I issued on-hand notice requiring consignee to accept load Consignee rejected shipment examined and certified as fit, balance of load in boxes, in tamper-proof containers Consignee required destruction Carrier made clear claim would be honored only for missing cases 19

Intermodal Loads/Pepperidge Farm n n Seal integrity damaged, consignee accepts load subject to inspection Carrier sends in USDA expert to inspect balance of load Carrier maintaining balance of load is fit for human consumption and should not be destroyed Case in progress 20

Effects of Forthcoming TSA Regulations n n 50% screening rule by next year will provide packing security measures, i. e. tamper-proof tape, locks, etc. If good enough for air freight, should be good enough for perishable and other commodities 21

Suggestions n n Insist on shipper load and count Establish supply chain/seal integrity procedures: • Photograph shipments at time of loading • Take pictures of all shipments delivered short • Establish seal integrity records including affidavits from drivers when seals are broken by police for inspection, etc. • Inspect wrongfully rejected product, including sampling, take pictures of undisturbed containers, cartons, bottles and jars n Use technology where appropriate: • Trailer tracking • RFID scanning to be encouraged 22

Avoid Shipper Drafted “Waiver of Mitigation Language” in Contracts Objectionable Language Acceptable Language “Neither shipper nor its Delete and incorporate customers shall have a duty to Service Conditions which mitigate damages. In the event contain salvage rules – Bill of damaged, branded or labeled of Lading also includes the goods, shipper’s customer may shipper and consignee determine, WITHIN ITS SOLE common law duty to DISCRETION, whether all or part mitigate unless agreed of the shipment may be to the contrary. salvaged and the value of such Reasons for Objection salvage. ” ØObjectionable language makes “wrongful rejection” legal ØConsignor has duty to accept shipment unless its “effectively worthless” ØDon’t let one broken pallet cost you a truckload Ø“Distress sale” of rejected shipment will produce losses a consignee can avoid by using undamaged product in stream of commerce 23 ØIssue on-hand notice and get an expert

Use Rules Tariff Provisions Effectively (1) (2) (3) (4) (5) Count and Pulp Provision Temperature Recorders as Evidence Duty to Mitigate Payment without Offset Disposition of Contested Cargo Claims 24

(1) Count and Pulp Provision n Where spotted trailers are loaded and sealed by the consignor at point of origin or where carrier’s employee is otherwise precluded from counting or, in the case of refrigerated product, pulping the cargo at time of load, there shall be no presumption of tender in good order. 25

(2) Temperature Recorders n Evidence of the temperature maintained during transit and the laws of thermodynamics shall be given probative effect in assessing inherent vice and alleged acts or omissions of the shipper 26

(3) Duty to Mitigate n Duty to Mitigate - Foodstuffs and Related Products. Consignors and consignees shall have the bill of lading and common law duty to mitigate carrier's loss including the obligation to accept partial shipments tendered in their original shipping containers, boxes or shrink-wrap notwithstanding the absence of trailer seal integrity unless otherwise agreed in writing. Any decision by a customer to require the destroying or dumping of product in the absence of proof of damage, unfitness for human consumption, or deterioration in quality shall be non-compensable by carrier. " 27

(4) No Offset Provisions n PAYMENT WITHOUT OFFSET • Consignor and/or Consignee shall pay all freight charges when due without offset for any cause, including but not limited to, cargo claims. All claims for loss or damage shall be governed by this Circular and following and neither consignor consignee shall deprive carrier of proper cargo insurance adjustment by unilateral deduction of claims from payment of freight charges due. 28

(5) Disposition of Contested Cargo Claims n Unless the parties agree to voluntary alternative dispute resolution, disputed claims will be subject to 49 U. S. C. § 14706 (the Carmack Amendment) subject to any applicable released evaluation. Claimant waives any right to setoff or offset of contested and unliquidated cargo claims against freight charges otherwise due to carrier as a precondition of service. Claimants agree to forfeiture of any contested claim asserted by it as a setoff after notice and demand for freight charges. 29