Minimizing Litigation Expense and Reducing Liability
by John M. Daley, Esq. 

As some of you may already know, litigation can be very expensive. Most attorneys charge by the hour, and the hourly rates for most attorneys with any substantial experience in any sort of will run from around $350 per hour to $700 per hour and higher.

For the most part, however, it is possible to avoid litigation, or at least to minimize the expense of litigation, by seeking professional advice from an attorney or other experienced professional before you become involved in litigation. Although you must still incur some expense, the ratio of costs to benefits is much like the cost of an oil change as compared to the cost of repairing a seized engine. Most of you probably change your oil regularly to avoid major problems in the future--why not adopt the same approach for your business?

The benefit you enjoy by adopting this sort of "preventative maintenance" program for your business can reap tremendous financial benefits for you. For example, suppose that the bill of lading you use does not have a statement regarding the opportunity to declare a higher value, along with a blank where the shipper can declare the higher value it wants for the goods which are tendered to you.

Suppose further that an Non-Vessel Operating Common Carrier (NVOCC) undertakes to transport a load of optical disk drives with a destination market value of $400,000 from Yantian, China to Los Angeles under its own bill of lading, tenders the goods to you under your own bill of lading for transport to El Paso, Texas, and that your truck and trailer are stolen at a truck stop in Cabazon, California while your driver stops for a meal.
 
If your bill of lading does not have a statement regarding the opportunity to declare a higher value and a blank in which to insert the higher value required, you will ultimately be held liable for the entire value of the cargo, or $400,000.  See Adams Express Co. v. Croninger, 226 U.S. 491, 504 (1913) (in order to enforce a limitation of liability in its tariff, motor carriers must provide their customers with a fair opportunity to choose between a higher valuation by paying a correspondingly greater charge); New York, N.H. & Hartford R. Co. v. Nothnagle, 346 U.S. 128, 135-135, 97 L. Ed. 1500, 73 S. Ct. 986 (1953) ("But only by granting its customers a fair opportunity to choose between higher or lower liability by paying a correspondingly greater or lesser charge can a carrier lawfully limit recovery to an amount less than the actual loss sustained"); Caten v. Salt City Movers & Storage Co., 149 F.2d 428 (2d Cir. 1945); First Pennsylvania Bank, N.A. v. Eastern Airlines, Inc., 731 F.2d 1113, 1116-1117 (3d Cir. 1984) ("There must be a bona fide alternative enabling the shipper to declare a higher valuation upon paying a higher rate, in order for the carrier to limit its liability to the released value at a lower rate"); Sassy Doll Creations, 331 F.3d at 841 (noting that the reasonable opportunity requirement "has been part of the Carmack Amendment jurisprudence for at least the past fifty years . . . and has been applied throughout the circuits since that time"); Kesel v. UPS, 339 F.3d 849, 852 (9th Cir. 2003) (continuing to note the requirement that the carrier has to provide the shipper with "(1) reasonable notice of limited liability, and (2) a fair opportunity to purchase higher liability").

On the other hand, if you had consulted with a transportation attorney regarding your bill of lading prior to the loss, your bill of lading would have included the appropriate language and a blank giving your customer the opportunity to declare a higher value and an effective limitation of liability (e.g., $.50 per pound).  Your attorney would also advise you to make sure that your client is aware of this limitation by printing the limitation on the front of your bills, on the reverse side of the bills (as part of your terms and conditions of service), and on your web site, and possibly as an attachment to your credit application.  Your attorney might also advise you to include an attorneys’ fees clause in your terms and conditions in the event that a dispute should arise.  Thus, under the same circumstances, and assuming the load weighed 20,000 pounds, your liability for the loss would be limited to $5,000, and an offer of the $5,000 limit of liability would probably be accepted.

Even if your offer is rejected and a lawsuit filed,2 there is a very good chance that you will be able to obtain a judgment by filing a motion for summary judgment, rather than after trial, which could result in substantial savings.

In Example 1 below, I shall provide an estimated cost of defending this lawsuit if summary judgment is granted:

Example 1

Case Evaluation and Preparation-$8,000.00

Written Discovery Requests-$2,400.00

Response to Discovery Requests-3,600.00

Discovery Motion-$2,900.00

Deposition Preparation-$2,200.00

Conduct Deposition-$4,000.00

Defend Deposition-$4,000.00

Status Conference-$2,000.00

Strategy Sessions-$2,000.00

Summary Judgment Motion-$20,000.00

Total-$51,100.00

If your terms and conditions included an attorneys’ fee provision and the Court found that the provision was enforceable (which it should), you might even be able to recover these fees from the plaintiff.

In Example 2, I shall assume that you did not obtain the advice of an attorney, but that the form of bill of lading you borrowed from a prior trucking company employer does have an effective limitation of liability, that you did not post the terms and conditions on your web site or obtain your customer’s explicit agreement to the limitation, that the Court found that these shortcomings created a "triable issue of material fact" which precluded summary judgment, and that you prevailed only after a trial.  Your estimated litigation cost under these facts would look something like this:

Example 2

Case Evaluation and Preparation-$8,000.00

Written Discovery Requests-$2,400.00

Response to Discovery Requests-$3,600.00

Discovery Motion-$2,900.00

Deposition Preparation-$2,200.00

Conduct Deposition-$4,000.00

Defend Deposition-$4,000.00

Status Conference-$2,000.00

Strategy Sessions-$2,000.00

Summary Judgment Motion-$20,000.00

Pre-Trial Order-$6,000.00

Pre-Trial Conference-$600.00

Coordinate Expert Report-$2,250.00

Expert Report-$4,000.00

Expert Deposition (take)-$4,000.00

Expert Deposition (defend)-$2,000.00

Witness List-$600.00

Exhibit List-$600.00

Trial Brief-$8,000.00

Jury Instructions-$4,000.00

Trial (3 Days)-$12,000.00

Drafting Findings/Rulings-$1,600.00

Prepare Judgment-$800.00

Total-$97,550.00

Since your terms and conditions did not include an attorneys’ fee provision, and since attorneys’ fees are not recoverable in the absence of a provision, the net difference to you would be the full $97,555.00, even though you prevailed in both cases.

Thus, if you have not already done so, you should have an attorney conduct an overall review of the forms and documents you use in your trucking business, including your bill(s) of lading, tariff(s), Terms and Conditions of Service, and credit application, and recommend changes to these forms so that they protect you in accordance with existing law. The same review should then be conducted on an annual or semi-annual basis to ensure that your forms keep pace with changes in the law.

You should also have your attorney review your cargo insurance sales practices and and every lease, Broker-Carrier agreement, and Transportation/Contract Carriage Agreement before you sign them. There is no such thing as a uniform business lease (although there are several commonly used forms), and even if there were, the lease will not be specifically tailored to address your concerns as a trucking or other transportation company. Although there are at least two "model" Broker-Carrier contracts, I believe that one of them should never be signed by a trucking company, and the other can be improved upon. Moreover, Contracts of Carriage are often unique to the particular customer.

Although the following list is not comprehensive, some of the major concerns which should be addressed in these procedures and documents are as follows:

Bills of lading--the single most important thing about bills of lading is to include an effective limitation of liability, which requires both a notice that the shipper can declare a higher value (for a higher freight charge) and a blank in which it may do so, as well as a clear statement that liability is limited unless the blank is filled in with an amount which is higher than the limitation. I also recommend placing a "cap" on the higher value which can be declared without the approval of an officer (e.g., the President of your company).

In order to make your limitation of liability effective, you also need to establish a tariff or other means of calculating the higher amount which should be charged when a higher value is declared. Your attorney can advise you how this can be accomplished.

Although a so-called "Standard Truckload Bill of Lading" is available on the internet, this bill of lading does not include the provisions carriers need to protect themselves from excessive liability, including a limitation of liability, shipper representations or indemnity provisions, or venue provisions. Accordingly, I recommend that you avoid using this or any other "off the shelf" bill of lading without at least having the document reviewed by counsel.

Tariffs--in addition to setting out the default freight rates you charge, your tariffs should specify how to determine the amount charged when a higher value is declared. The tariff(s) should also refer to and incorporate your Terms and Conditions of Service.

Terms and Conditions of Service--your Terms and Conditions of Service should include, among other things, a description of who is responsible for the freight charges owed, the extent of the liabilities you undertake, a list of goods which you do not carry, a set of representations and warranties by the shipper, consignee and third party payor, an indemnity provision, a limitation or limitations of liability, time limits for filing a claim and lawsuit in the event of loss or damage, venue and attorneys’ fees provisions if desired, and a governing law provision.

Credit Application—each and every customers should be required to complete a credit application in which they provide the information you need to verify its creditworthiness, and your credit application should include (1) a complete copy of your Terms and Conditions and Service and (2) a statement that, by signing the application, the customer agrees to the terms and conditions of service.

Warehouse Receipts--like bills of lading, warehouse receipts should include a specified limitation of liability on the front side of the document, along with an opportunity to declare a higher value for a higher charge, and you must have a "tariff" or warehouse rate schedule which specifies how the higher amount is calculated. See California Uniform Commercial Code §7309(b). You should also include an option to refuse goods which are tendered with a value which is higher than that which is acceptable to you promptly after receipt of the goods tendered for storage. See California Uniform Commercial Code §7309(c).

Rigging Terms and Conditions--if you perform "rigging" services (e.g., installing or loading large equipment for transport), you need a separate set of "rigging" terms and conditions, since these services are not normally included as part of the service provided under a bill of lading or warehouse agreement. You should also discuss with your attorney and agree upon an appropriate limitation of liability for any such agreement.

Cargo Insurance Sales—if you sell cargo insurance, you almost certainly need a a license do so from the California Department of Insurance. A license to sell "shipper’s interest" cargo insurance is inexpensive and easy to obtain. By selling cargo insurance to customers who do not already have their own policy, you can also satisfy your customer’s concerns about the risk of loss or damage in the course of transit.

As with all activities, however, selling cargo insurance creates new risks for you. In particular, if the insurance turns out to be inadequate, or if the insurance carrier denies a claim, you might be sued for negligence by your customer. Accordingly, with the assistance of your counsel, you should prepare an "insurance guide" which you provide to your customers, and you should train your employees to be sure that insurance is not offered for goods or under circumstances where coverage is not available. Indeed, I recommend to my clients that they adopt a "script" for use by employees to who sell cargo insurance, and that all questions be referred either to one or two employees who are fully familiar with the cargo insurance you offer or to your insurance broker.

Leases--it is not possible to describe all of the provisions of a lease agreement about which you could be concerned in this article. However, since trucking and other companies in the transportation industry need to be particularly concerned with the security of the premises they lease, they should be sure to include a provision in the lease which permits them to terminate their obligations if the security of the premises is compromised, or if the security requirements imposed upon them by governmental authorities cannot be achieved at the leased premises.

Broker-Carrier Contracts--if some of your business comes from property brokers, you are very likely to be asked to sign a version the model Broker-Carrier contract which has been created by the Transportation Intermediary Association (TIA), a national organization which primarily represents the interests of property brokers. The TIA model contract includes several provisions which are contrary to the interests of truckers and should not be signed without amendment. In my opinion, and in the opinion of several other knowledgeable transportation attorneys, the TIA model Broker-Carrier contract is also not good for property brokers, since can be construed to create liability for them as carriers. Although the American Trucking Association has a competing model Broker-Carrier contract which is much better for truckers, I recommend to my clients that they keep a form of Broker-Carrier contract which is different from both model contracts, and which I believe represents a fair compromise between the interests of property brokers and truckers. If you want to do business with a property broker who has a form of contract which it uses, you should present the contract to your counsel and ask him or her to negotiate the changes you need to protect your interests.

Transportation/Contract Carriage Agreements—although you should always consult a transportation attorney before you enter into a Transportation/Contract Carriage Agreement, the American Trucking Associations has a model contract which you can use as a starting point, and which is available at http://www.transportationlaw.net/pdf/ATA-NITLAgreement.pdf. 

In many cases, however, a customer who wants to enter into a Transportation/Contract Carriage Agreement will provide you with the form of agreement it wants to use. In most cases, however, this form will include several provisions to which you should not agree, such as a provision which requires you to accept liability for the full value of the goods you carry. The contract will almost certainly have no representations, warranties or indemnity agreements by the shipper. Thus, every contract of carriage presented to you by customer or potential customer will probably require fairly extensive revisions to strike a fair and appropriate balance between the obligations and risks you undertake and the amounts you charge for the services provided. In order to avoid re-inventing the wheel, you should try to change or eliminate only the most egregious provisions (e.g., by including specific limitations of liability for specified types of cargo), then insert a clause which provides that your general or bill of lading Terms and Conditions of Service shall apply except in the event of a conflict between those provisions and the explicit terms of the contract of carriage.

Warehousing Agreements—some companies with trucking operations also have warehouse operations and, in some cases, act as the warehousing fulfillment center of one or more of their customers. If your customer is large enough, it may even present a warehousing agreement for you to sign which, like customer-prepared contracts of carriage, will include no limitations of liability or shipper representations, warranties or indemnity provisions. Thus, as with a contract of carriage, any such agreement will usually require fairly extensive revisions to strike a fair and appropriate balance between the obligations and risks you undertake and the amounts you charge for the services provided. As with contracts of carriage, you should at least insert a provision which specifies that your general or warehouse receipt Terms and Conditions of Service also apply except in the event of a conflict between those provisions and the explicit terms of the warehousing agreement.

Employee Policies, Handbooks and Contracts--like any other employer, you should have employee policies and handbooks which make it clear that employees are all "at will," which means that they can be terminated at any time, with or without cause. You should also have policies which indicate that all hiring and firing decisions are based upon merit, and not because of the employees’ age, sex, race or other characteristic unrelated to performance or ability to do the job. You also need both a policy which prohibits sexual harassment, and a procedure for investigating and resolving claims of sexual harassment. If you already have these procedures and documents, you should have them reviewed by counsel to ensure that they are adequate and appropriate for your business. If not, you should have counsel draft these documents for your use.

Insurance Policies--you should hire counsel to review your existing insurance policies, with the assistance of your insurance broker, to ensure both that you have the coverages you need and that the exclusions from liability and conditions of coverage are appropriate for your business. In my experience, trucking and transportation companies never have their insurance policies reviewed by counsel, and this omission has forced my clients to file lawsuits, at great expense to require their insurance carriers to defend them. In each case, these lawsuits could have been avoided if the client had hired counsel to review the policy as soon as it was received (the policy is usually, if not always, provided to you after you purchase the coverage). If you do so, you can usually address coverage and exclusion issues by obtaining a rider or amendment to the policy which addressed the problem discovered.

Web Sites and Marketing Materials--your web site and marketing materials should be reviewed by counsel both to avoid statements which can be used in litigation to establish liability where there otherwise would be none and so that he or she can suggest ways in which your web site can protect you in the event of a lawsuit.

Since web sites and other marketing materials are intended to induce customers to chose your services over the same services which are offered by others, they often include broad claims concerning the superiority of the services you offer, and in some cases explicit or implied "guarantees." Even if the claims do not rise to the level of a contractual agreement, plaintiff’s can rely upon the claims to assert that there is a "triable issue of material fact" which prevents the Court from granting summary judgment, which in turn can force you to settle a case which otherwise might have been dismissed.

The dangers of marketing publication are dramatically illustrated by the finding of the Court in Schramm v. Foster, 341 F. Supp. 2d 536 (D.Md. 2004), which arose out of a catastrophic accident between a pickup truck and a tractor-trailer in Allegany County, Maryland which severed the roof off the pickup truck and resulted in severe and permanent neurological injuries to both the driver and his passenger. In addition to naming the trucking company, driver and others as defendants, plaintiffs named the broker who arranged the shipment, C.H. Robinson Worldwide, Inc. ("C.H. Robinson"), as a defendant.

Since C.H. Robinson only acted as a property broker did not either own the equipment or hire or supervise the driver who was involved in the accident, it filed a motion for summary judgment wherein it asked the Court to dismiss the claims asserted against it by the plaintiff.

In denying C.H. Robinson’s motion, the Court explicitly relied upon marketing materials published by C.H. Robinson in finding that a "triable issue of material fact" existed, quoting from the materials as follows:

Robinson also addresses the issue of personal injury liability in its promotional materials:

Just as CHRW [Robinson] takes responsibility for freight claims, we also step forward when liability issues arise. We insulate the shipper in three important ways:

1. We work only with carriers who carry full insurance coverage. When CHRW begins to do business with a carrier, we verify their insurance coverage and keep a copy in our files of documents that prove the carrier has Federal Operating Authority and a current insurance certificate, with a minimum of $25,000 and $750,000 auto liability coverage. In addition, we check in with carriers regularly to make sure their coverage is current and renewed at necessary levels.

2. If an accident occurs, the carrier indemnifies both the shipper and CHRW from liability.

3. In the rare event that the damage goes beyond the carrier's insurance limits, CHRW maintains a liability insurance policy that pays the rest.

Although most marketing materials should be reviewed only to avoid liability issues, your web site should be reviewed to determine if it can be modified to provide additional insulation and protection against liability. For example, I recommend to all of my clients that they post their Terms and Condition of Service on their web site in order so that I may rely upon the publication of the document to rebut allegations by the plaintiff that it "did not" understand or "could not have" understood the nature or particulars of the obligations or agreements to which it agreed when hiring my client to perform services.

If your web site is interactive, i.e., if your customers can use the web site to submit credit applications or place shipping and pickup orders, this is even better, since you can use the power of the click to force customers to agree to your Terms and Conditions of Service when they apply for credit or place an order. You can then rely upon this form of agreement to defend against various claims. See, e.g., Treiber & Straub v. United Parcel Service, 474 F.3d 379 (7th Cir. 2007).

Develop a Document Retention and Destruction Policy--in addition to reviewing and revising your documents, all businesses, including trucking companies, you should also create and enforce an appropriate document retention and destruction policy, in most cases with the assistance of counsel.

For motor carriers, FMCSA regulations prescribe particular periods for the maintenance of particular types of records. However, there are several other laws which include document retention requirements which may apply to your business, including the Americans with Disabilities Act ("ADA"), the Family and Medical Leave Act ("FMLA"), the Health Insurance Portability and Accountability Act ("HIPAA"), and the Fair Labor Standards Act ("FLSA"), and the Sarbanes-Oxley Act ("SOX"). You may also be subject to document retention requirements under various State laws and, if you operate in foreign countries, under the laws of those countries. Your counsel can identify statutes with document retention requirements which apply to your particular business.

Any document retention and destruction policy you adopt must include a provision for a "litigation hold" on all documents, including electronic documents and data, which (1) you know or reasonably should know is relevant to the litigation (2) is reasonably calculated to lead to the discovery of admissible evidence, and (3) is likely to be requested during discovery. See Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 218 (S.D.N.Y. 2003).

The failure to adopt an appropriate document retention and destruction policy or failure to include a "litigation "hold" can be disastrous. For example, in Zubalake v.UBS Warburg, 229 F.R.D. 422, 430 (S.D.N.Y. 2003), an employment discrimination lawsuit, plaintiff proved that defendant had failed to produce all of the e-mails requested in discovery, and the Court held that this failure justified giving an adverse instruction which permitted the jury to conclude that the missing e-mails would have had information which was adverse to the defendant’s position in the litigation. Ultimately, the jury returned a $29.2 million award.

In United States v. Philip Morris, 327 F.Supp. 2d 21, 26 (D.D.C. 2004) the court awarded sanctions of $2.75 million when it was established that Philip Morris had continued to delete e-mails after it received a discovery request which called for the production of the documents.

In Stevenson v. Union Pac. R.R., 354 F.3d 739, 748 (8th Cir. 2003), the Court of Appeals upheld the trial court’s "adverse inference" instructions to the jury based upon the defendant’s of a voice tape pursuant to its document retention and destruction policy based upon evidence which showed that (1) the defendant knew that accidents which caused a certain type of injuries were likely to lead to lawsuits, especially in cases involving death or serious injury, (2) the defendant had preserved such tapes when they contained favorable information.

However, the Court of Appeals held that the trial court erred by giving an adverse inference instruction based upon the defendant’s pre-litigation destruction of track maintenance records, since (1) these documents were destroyed pursuant to the defendant’s pre-existing document retention and destruction policy and (2) there was no showing that the defendant knew or should have known that the documents destroyed might be relevant to the litigation.

Finally, at least one federal Court of Appeals has held that even negligent destruction of relevant evidence can justify the giving of an adverse inference instruction. See Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99 (3d Cir. 2002).

The failure to adopt and enforce an appropriate record retention and destruction policy can also result in enormous, unnecessary expense in litigation, since you might end up having to produce documents you have retained, including electronic documents, even though those documents should have been long ago destroyed. If documents are destroyed in accordance with your normal document retention and destruction policy, you can reduce your discovery expense and avoid any inference that the documents were destroyed for the purpose of concealing adverse evidence.

Although the document retention and destruction policy you adopt will be unique to your business, there are certain steps which every company should follow in adopting a Document Retention and Destruction Policy, including the following:

1. Identify the participants who are involved in the creation and maintenance of documents. Before you can develop a retention and destruction policy, you have to know who creates documents, what documents are created, and how they are stored and maintained. This can be particularly difficult if your salespersons have laptops, blackberries and other electronic documents upon which documents can be created and stored.

2. Identify the categories of documents you create. Since the time period for retaining documents will differ depending upon the type of document involved, you must establish a list of the types of documents which you create and store, and establish different periods for each category of document. Moreover, some categories of documents (e.g., employee medical records and business information from other companies) must be maintained as confidential.

3. Establish appropriate time periods for the retention of each category of document you create. The appropriate period will depend upon the category of document involved and the jurisdiction(s) in which you do business. For example, if you do business in several States, you may have to establish different periods for the retention of certain employee records, or at least a lengthier period than is required in some States. If you work in other countries, you must research the laws of the foreign countries involved, especially in Western Europe and Australia, to ensure that you are complying with the document retention laws of those countries.

4. Designate the officers and supervisory employees who are responsible for enforcing the document retention and destruction policy you have adopted, and ensure that the policy is enforced.

Conclusion

In the 1970’s, Fram Oil Filter had a television commercial which showed a mechanic in his garage fixing an engine. The mechanic explained that you could easily and inexpensively avoid major engine problems by replacing your oil filter whenever you changed your oil. He closed the commercial with the line "You can pay me now, or pay me later."

The message applies to legal advice as well—you can an attorney a few hundred or even a few thousand dollars now to make sure that your documents and procedures are in the best possible shape to avoid litigation in the future, or you can do nothing and take the risk of paying tens or even hundreds of thousands of dollars in defense of a lawsuit or lawsuits in the future--which makes more sense to you?