The Undercharge Claim Threat

Michael Mattia is director of risk management for the Institute of Scrap Recycling Industries (Washington, D.C.).

Imagine that you enter a car dealership to purchase a new family car. You pick one you like, negotiate a deal less than the sticker price, and then drive off the lot with you new purchase. Several years later, however, you receive a bill for the difference between the sticker price and the price you paid. When you go to court to contest the bill, the court says you have to pay it.

This scenario may seem ludicrous, but it is an analogy of what scrap shippers can face when dealing with motor carriers thanks to a June 1990 U.S. Supreme Court decision,Maislin Industries Inc. vs. Primary Steel Inc.

From 1981 to 1983, Quinn Freight Lines, a motor common carrier and a subsidiary of Maislin Industries, move 1,081 interstate shipments of steel for Primary Steel. Quinn negotiated freight rates with Primary that were lower than the tariff rates filed with the Interstate Commerce Commission (ICC). When Maislin filed for bankruptcy in 1983, the bankruptcy estate submitted balance-due bills to Primary for $187,923.36, representing the difference between the unfiled, negotiated rates and the filed rates.

Primary refused to pay the charges and the bankruptcy estate brought suit against the firm in a U.S. district court, which then referred the issue to the ICC. The ICC, which interpreted the Interstate Commerce Act to allow it to determine if a motor carrier’s practices were unreasonable, found that Maislin’s solicitation and billing practices are unreasonable and, therefore, Primary should not be required to pay the undercharges. The district court granted a summary judgment in favor of Primary, a decision that was upheld by the 8th Circuit Court of Appeals.

These judgments were overturned, however, by the Supreme Court, which held that the ICC had no authority under the Interstate Commerce Act to negate the validity of the filed rate in preference of a negotiated rate due to unreasonable practices on the part of the carrier. The court found that the ICC could only find the filed rate itself to be unreasonable. Therefore, since Quinn did not file the negotiated rates with the ICC, Primary was responsible for the undercharges even though it was the carrier’s responsibility to file the rates and even though Primary believed that the carrier had filed them.

This decision has significant implications on shipper liability when dealing with motor carriers. Negotiated rates not filed with the ICC can now come back to haunt shippers in the form of undercharge claims, and the ICC’s power to mitigate these claims has decreased.

The monetary impact is substantial. As of June 1990, the ICC had pending before it 105 undercharge claims worth a total of more than $4.8 million. The commission has testified before Congress that potential claims could exceed $200 million.

The questions surrounding such claims can be traced to the Motor Carrier Act of 1980, which substantially deregulated the motor carrier industry in an effort to promote competition as well as efficient transportation services. Among other provisions, the act distinguishes between common motor carriers--those with ICC authority to accept freight from any shipper--and contract carriers--which are authorized to accept freight only from specific shippers. (A truck line may have both common and contract authority.) The act also provided mechanisms for negotiating rates based on a shipper’s authority. Contract carriers can negotiate freight rates with their contract shipper and are not required to file the new rate with the ICC. Common carriers, on the other hand, must file with the ICC all negotiated rates.

The following points could help shippers prevent undercharge claims.

When working with common motor carriers:

If a rate is negotiated, request proof that the negotiated rate was filed with the ICC. Rates filed with the ICC are returned with a date stamp, which indicates that the new tariff was received and filed. A filed rate decrease goes into effect one day after this date. A rate increase generally takes effect five days after this date. Shipments handled by the carrier before the effective date are governed by the filed rate regardless of the rate negotiated and subsequently filed.

When shipping under a new or existing tariff, make sure that all applicable aspects of the tariff apply to the shipment. The commodity and points of origin and destination must match those in the tariff for the rate being used.

Be aware that rules and conditions published in other parts of the tariff may have to be met in order to receive the rate that the shipper is claiming. When in doubt, talk with a traffic and transportation consultant.

Keep copies of freight bills, tariffs, and related documents for five years. This is the maximum time in which bankruptcy procedures can consider undercharge claims.

Motor carriers with contract authority and an exclusive contract with a shipper need not file negotiated rates for shipments covered in the contract. However, when contracts do not meet certain ICC requirements, the contract may be voided and the shipments it represents may then be charged according to the applicable tariff rates. Therefore, before shipping via a contract motor carrier, address the following points:

Ensure that the contract is in writing. The ICC does not hold verbal agreements to be binding contracts.

Specify in the contract a specific shipper and a specific carrier, and outline the series of shipments to be made during a stated period of time.

Include in the contract specific obligations on both the shipper and the carrier. If a shipper is not obligated to move freight via the carrier during a specific period of time, the contract may be found void.

As with common carriers, keep copies of all freight bills, contracts, and related documents for at least five years.

If, despite preventive efforts, an undercharge claim is made, a shipper should answer several questions before agreeing to pay it.

Are there any basic errors? Was the shipment actually sent? Was the shipment sent freight collect, making the consignee possibly responsible for the undercharges? Was there an error in computing either the original rate and/or the claimed undercharge?

Was there a valid contract for the rate charged?

Is the tariff quoted for the undercharge claim applicable? Is there a lower tariff that better represents the shipments in question? It is also possible that there was no valid tariff covering the shipments.

Has the statute of limitations for claims expired? The ICC generally allows undercharge claims on shipments made up to three years earlier. A bankruptcy claim could extend this to five years, but the extension is not automatic. Have an attorney determine the applicable limit.

If these defenses fail to negate an undercharge claim, a shipper has other options--albeit not very promising ones.

Challenge the rate’s reasonableness. The ICC has authority to judge the reasonableness of a filed rate, but it does not consider the existence of a negotiated rate, regardless of how frequently such a rate was used, as proof of the unreasonableness of a filed rate. Making a case for an unreasonable filed rate requires an in-depth economic analysis of the rate as it applies to the motor carrier’s costs.

Stall for time. It is possible to delay a decision on the undercharge claim via legal maneuvers while anticipating congressional relief legislation. However, these maneuvers increase legal bills and allow interest to accrue on the amount of the claim. Interest generally accrues from the date of the shipment, with the rate based on the Treasury bill rate in effect 90 days after that date. Legislation that would grant the ICC authority to rule on the reasonableness of practices by motor carriers that would lead to undercharge claims was introduced in the House and Senate last year, but failed to pass before the session ended. The proposed legislation also would have reduced the statute of limitations on undercharge claims and allowed shippers and carriers to reconcile billing and payment errors without ICC involvement. While efforts are under way to introduce relief legislation during the 102nd Congress, there is no guarantee that any will be approved.

Pay the claim but continue to contest the charges. This action stops the accrual of interest and the shipper, if successful, can apply for a refund. However, when dealing with a bankrupt motor carrier, obtaining a full or even partial refund may be extremely difficult.

Prevention is the best course of action when dealing with undercharges. Taking appropriate precautions before the shipment leaves is the most effective way to stop a shocking undercharge bill from appearing several years later.•

Shippers now face greater liability to pay undercharge claims filed by common and contract carriers.  Here's how to prevent such claims as well as how to fight them if they come back to haunt you.