During times of economic slowdown, the need to understand the laws affecting transportation and the supply chain becomes even greater. When sales are down and profit margins are under pressure, there is no room for error as when the economy is booming.
Perhaps the best example of this involves late payment penalties. These penalties are to be found in a carrier’s tariffs, terms and conditions or service guide. As used here, the term refers to a penalty amount to be applied when a freight bill is delinquent or paid late. Moreover, these penalties are over and above the usual provisions for service charges, collection fees and attorney fees typically present in a business transaction.
The first step to avoid these penalties is to determine the definition of “late” with regard to each of the carriers you use. As a general proposition, the most common credit period in the transportation industry is 30 days; however, for a particular carrier, it could well be less. As a general proposition, air carriers may define and establish their credit terms as they choose. Regulated motor carriers are subject to the credit regulations administered by the Federal Motor Carrier Safety Administration (FMCSA) contained in the Code of Federal Regulations (49 CFR 377).
The most vicious trap for the unwary is the provisions in the tariffs of many LTL carriers for a loss of discount when payments are made after the expiration of the 30 days credit period. An example of such a late payment penalty is that of one major LTL carrier as posted on its public website. Under one provision, the discount is “removed” when payment is not made within 30 days. Thus, if a shipper had a 66 2/3% discount, a $1,000 freight bill becomes a $3,000 freight bill. Then, this particular carrier’s tariff has a further provision which calls for a 125% penalty to be applied to the amount due after the removal of the discount. Thus, the $3,000 amount grows to $6,750 ----- $5,750 or nearly 600% more than the original amount billed by the carrier!!!
It should be noted that at some point a court could find that the penalties that a carrier is attempting to impose are so high that they cannot legally do so. However, resolving the problems associated with late payment penalties through protracted litigation is obviously not the best approach for avoiding late payment penalties.
Here is “the trap:” For many reasons, it is very difficult for a shipper to get all of its freight bills paid within 30 days. When times are good, carriers seldom complain when receiving payment within 60 days or even 90 days. However, when times are tight the tendency to be lenient goes away. This is especially so if the shipper stops tendering business to the carrier or if the carrier closes its doors.
The best way to avoid exposure to late payment penalties is to negotiate a written agreement with your carrier specifically including credit terms. Such an agreement should include a provision for a longer credit period, e.g., 60 days, a reasonable interest or service charge, e.g., 1% per month, a commercially reasonable provision for collection and attorney’s fees in the event of default, AND a specific waiver by the carrier of any and all other consequences or penalties.
This is so because of the difficulty in getting all freight bills paid within 30 days and the fact that the shippers and carriers continue to express their pricing arrangements for LTL freight in terms of a higher, base rate less a discount. If the pricing formula did not include an application of a discount, there would be no discount to lose.
All for now!
Brent Wm. Primus, J.D., currently serves as the General Counsel for the Freight Transportation Consultants Association and is the CEO of transportlawtexts, inc. and Primus Law Office, P.A. Your questions are welcome at brent@transportlawtexts.com.
