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A breach of trust

Sometime in 2004, Ontario's Bill 179 will become law, repealing the Truck Transportation Act to become the new Ontario Highway Traffic Act, and making some transportation brokers and carriers equally ...

Sometime in 2004, Ontario’s Bill 179 will become law, repealing the Truck Transportation Act to become the new Ontario Highway Traffic Act, and making some transportation brokers and carriers equally unhappy, all for different reasons.

The National Transportation Brokers’ Association (NTBA) says that Bill 179 will have negative consequences for those who broker freight, because it expands the requirement for all “transportation arrangers” based in Ontario to place money for contract of carriage “in trust.”

NTBA says it was not consulted about the trust account provision’s inclusion in Bill 179, and that it was included at the last minute at the behest of the Ontario Trucking Association, because it would help carriers collect money from brokers in bankruptcy claims.

“I believe they had the right idea but NTBA doesn’t believe that the trust account for that one reason warrants saddling the whole industry with these rules,” says John McDonald, president, U.S. Traffic International Transportation, and immediate past chairman, NTBA.

The NTBA says it offered the OTA as alternative a modification of the wording that is presently waiting to be proclaimed, and it said “or in lieu of a trust account, a surety bond of not less than $10,000 CDN”.

“That, it seemed to us, would have addressed the concern of the carriers that they weren’t going to get paid. We were quite prepared to do that because it wasn’t going to require us to do anything new. Those of us who operate in the U.S. as well already had a U.S. surety bond in place-and if you satisfy the U.S. as a rule, you’ll satisfy anything in this country. But the issue was never taken seriously,” says Ralph Milne, president FreightAudit Services, Ltd. and director, government relations, with NTBA.

Milne says OTA eventually dismissed the surety bond alternative, although NTBA thought there was a handshake agreement on the issue after a meeting with OTA’s vice-counsel and vice president.

“This is the tragedy of this thing- a surety bond was not a bad idea because that then sorted the wheat from the chaff. If you didn’t have the experience and the financial wherewithal to support your application, it wouldn’t be granted. So all of that has gone away, and effectively, any Tom, Dick and Harry can set himself up and call himself transportation broker. But now, his only obligation in law is to have a trust account in place, which conveys some very serious personal liabilities on owners and directors of such companies,” says Milne.

OTA President David Bradley says the proposal that intermediaries post a bond of $10,000 was based on the presumption that this was a workable and effective solution based on the U.S. model.

“OTA has discussed this at length with its U.S. counterparts and the consensus was that it was NOT an effective approach. (The posting of a $10,000 bond is the current requirement in Ontario). In the absence of any meaningful proposal from the load broker community OTA’s position will remain the same,” he says.

OTA is currently awaiting a counterproposal from the National Transportation Brokers Association, adds Bradley. In the meantime, OTA defends the trust account provision.

“It provides a carrier some protection in the event that a load broker becomes insolvent, bankrupt or otherwise unable to pay bills. This view has been affirmed by Ontario courts,” says Bradley.

He agrees that carriers should check the creditworthiness of the load brokers they deal with to the extent that they can, just the same as load brokers should be checking the creditworthiness of shippers they work with.

“But the trust provisions ensure that the monies that the brokers collect that represent the transportation costs do not form part of the assets of the load broker. Many reputable load brokers have stated that they pay the carriers before receiving payment from the shipper. In this situation the trust account provisions are not applicable,” he adds.

Charles Foster, coordinator of recently created Fair Trucking, an organization seeking to reinstate the licensing requirement for load brokers in the new legislation, insists a licensing requirement, if enforced, would help brokers maintain a competitive edge by removing the bad apples.

“Invariably when carriers are getting burned for freight charges it involves an unlicensed broker so Fair Trucking is an initiative born of the complaints we received from our carrier clients. Our immediate concern is to prevent the repeal of the load broker regulations,” he says.

Foster is trying to encourage shippers to ask for licensing, “because carriers don’t have a lot of choice from our perspective…You wouldn’t throw out regulations for carriers just because there are unlicensed carriers operating out there. The intention of the regulation is to keep people on the straight and narrow but also to capture them under a piece of legislation. But a lot of our future activities could become moot if the regulations are repealed,” he says.

Bradley says the Ministry of Transportation of Ontario has taken the position that its role does not extend to the governing of commercial relationships between carriers and shippers.

“They deem licensing procedures to be difficult, costly and ineffective,” he says.

The licensing or load brokerage certificate requirement will be eliminated altogether under Bill 179, but in the past several years many load brokerage certificate holders had already made a business decision not to renew their certificates. Milne says the reason for this goes back to when the Harris government was first elected in 1995.

“NTBA was then advised by senior MTO staff that if we were licensed under the TTA as load brokers we had to have a license, a surety bond, we had to have records that would let them relate our costs and our selling prices, etc., and we had to have a trust account. And right from the beginning we objected to (the trust account) and tried to negotiate it out. We were told by senior MTO staff that if we were licensed they could do anything they wanted. However, if we were not licensed, MTO would have no jurisdiction. That was the advice we got from the Ministry that if you want to avoid the exposures of the trust account thing then let your licenses lapse. There’s no downside to it because we have no ability to enforce it. And they said that in those words,” says Milne.

NTBA had further meetings with David Turnbull and Brad Clark, when they were at the helm as Minister, and at each of those meetings, very forthrightly said to them that very few significant brokerages are still licensed under TTA, adds Milne.

“And both those ministers turned around and said, yeah, we know that. Don’t worry about it-this thing (the Act) will be history before you know it,” says Milne.

As a result, many transportation brokers have not renewed their certificates for several years, says Milne. But the new Highway Traffic Act will superimpose the trust account provision regardless of licensing.

“The difference with this new legislation is, that you don’t have to apply, you don’t have to advise the Ministry that you’re brokering freight, you’re automatically caught in this legislation, and you’re only caught if your operations are based in Ontario or you have an office in Ontario. If you choose not to have a trust account you will be violating the Highway Traffic Act, even if you have a broker’s certificate and a $10,000 surety bond,” says Bill Tackaberry, NTBA chairman.

“I think the problem this legislation was attempting to address is carriers giving credit to people that perhaps might not be creditworthy. I’m not fundamentally opposed to people getting paid for what they do but I think this legislation is attempting to fix a granting of credit problem, with something that causes all kinds of other problems,” says McDonald.

“The crooked brokers, going into business not planning to be in it very long, will still get trucks because I’m afraid some carriers will say, well, we have a trust arrangement now, we don’t really have to be that careful with credit because if they don’t pay us, I can retrace through the company to the principal behind it, but if the guy’s a crook he’ll already be behind a tree somewhere. I don’t think it’s fair to penalize everyone that brokers freight including a lot of OTA members to avoid a situation that doesn’t happen very often and could be avoided through proper credit avenues,” he adds.

The trust account provision also affects brokers as investors in their own business, says Geoff Bennett, president, Kelron Logistics, and director, NTBA.

“What you’ve done with this legislation is you’ve taken away my protection as an investor in my own business. I’m not a secured creditor in second place, because the government has said this trust liability circumvents your preferred creditor status. You lend your own money to your company at your own peril, if you go bankrupt. It’s irrelevant whether or not you’ve actually put money into a trust account-the trust account requirements are superimposed on arrangers whether they are licensed or not,” he says.

“Very simplistically what you’ve tried to do within this legislation is set aside one class of business within the whole province of Ontario to the benefit of another class, with no other precedence that’s comparable to say that truckers should be protected from those bad load brokers, or worse, those bad load arrangers. There isn’t any other industry that I can say that really needs to be protected from itself. Truckers who don’t look after their own credit deserve what they get,” says Bennett.

Fair Trucking, meanwhile, thinks banks and other financial institutions are likely to prefer lending to businesses that treat their creditors with such care that creditors’ money is placed into trust accounts.

“These business will likely be more stable and less susceptible to insolvency. Further, by removing the trust monies from the business’ general revenues the income-to-overhead/expenses ratios would be improved. Carriers require trust accounts as security for their receivables (from load brokers). The removal of the load broker trust accounts would eliminate that security making the carriers a poor credit risk. The resulting destabilization of the trucking industry would benefit no one,” says Foster.

Tackaberry says that money that’s paid out of trust accounts tends only to come into play when a company is bankrupt. “It’s not going to improve carrier payments, and it’s not like a referral board you can go to if a carrier has a problem with a broker,” he says.

And, he says, carriers should realize the change in legislation has created a class of transportation group called “arrangers”, capturing incidental brokering into the trust fund requirement.

“If you’re a carrier who also brokers freight, this new change affects your brokerage operations as well. So you may be an asset-based carrier, but the fact of the matter is if you have a logistics division or broker freight you too will be required to put monies into a trust account. Do you really want to have those implications? This is something as carriers that you have to be concerned about,” says Tackaberry.

“Our conclusion is that it’s going to capture carriers whenever they hire another carrier. Our carrier clients aren’t thrilled about the prospect of more regulations because the regulatory burden on carriers is quite heavy already. But if it’s going to help carriers get paid then it’s probably a good thing,” says Foster.

Bradley adds that he agrees carriers will also be affected by the trust account provisions.

“OTA and its members support this. But again, most carriers engaged in these transactions have substantial assets and in fact pay the carrier actually performing the transport before they receive payment from the shipper,” he says.

Payment issues notwithstanding, the NTBA suggests that the trust account provision also unfairly singles out Ontario-based brokers and essentially handicaps them, something they say isn’t good for Ontario business.

“The NTBA’s main objection about the trust account is that it doesn’t put us on a level playing field with the rest of Canada including Quebec, and it doesn’t put us on a level playing field in the U.S.,” says Tackaberry.

“Transport brokers do business on a telephone on a 1-800 number. A broker can be located anywhere and we don’t think any law is good that suggests that if you want to be on an even playing field you should be in another province or state. It’s an invitation to brokers to be elsewhere,” says McDonald.

The OTA’s Bradley says that although Ontario is unique in that it has this type of legislation to protect carriers, the OTA does not believe this will negatively impact the trucking industry in Ontario.

“In fact, OTA does encourage other jurisdictions to do the same,” he says.

Foster, meanwhile, says that brokers wouldn’t necessarily improve their situation by leaving Ontario.

“In the U.S. load brokers across the country are regulated (Foster offers a Canada/U.S. regulations comparison on the website) and the U.S. regulations are more stringent than the Canadian ones. Arguably, load brokers in Ontario are at an economic advantage over American load brokers,” he says.

The NTBA is hoping, in any case, that under the new provincial government and new Transportation Minister Harinder Takhar they can try and put the Ontario brokerage industry on some sort of level playing field.

“We’re actively seeking a meeting with the new minister and we will go into that meeting armed with data about our gross annual sales, etc., to demonstrate that he’s not dealing with marginal people-he’s dealing with good sized, well-run businesses. And we’re going to make sure he understands that,” says Milne.

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