It is an ongoing problem that carriers face bankrupt load brokers who have been paid by their shipper clients but who have failed to pay the carrier.
After deregulation, Section 191.0.1(3) of the Ontario Highway Traffic Act was passed and included a trust fund requirement. Ontario is the only province which has a trust fund requirement and it applies to all “persons” arranging for carriage. Arguably this includes any carrier that sub-brokers a load.
This trust obligation requires that freight charges paid to load brokers or other persons arranging the carriage by their customers must be held in trust to pay the delivering carrier.
These funds cannot be mixed with other funds and cannot be used for any other purpose or be paid to any other person or company other than the carrier for the particular carriage. This means that the money cannot be deposited into a general account.
Trust obligation there to protect you
Carriers should be aware that the trust obligation is there to protect them. Failure to keep freight charges in trust may mean that carriers can sue directors and officers of the load broker company (or other person arranging the carriage) as they may be personally liable and any incorporation protection may disappear in certain circumstances. However, this is not automatic, and success depends very much on those circumstances.
In 1993, the Supreme Court of Canada heard a case called Air Canada v. M&L Travel Ltd. This case held that personal liability will be enforced upon the directors and officers of a corporation but will depend upon whether the director or officer committed or “knowingly assisted” in fraudulent and dishonest acts and breached the trust obligation.
This can be proved by actual knowledge, recklessness, or willful blindness. There is also no excuse that the director or officer simply was ignorant of the law. If a trust is created by statute, the trustee is deemed to know about it.
What constitutes ‘fraudulent and dishonest’ conduct?
The proper description of “fraudulent and dishonest” conduct is where the trustee or person who is supposed to be keeping the payment of freight charges safe for the delivering carrier instead uses that money for any other purpose or provides it to any other recipient, increasing the risk that the carrier will not be paid.
Because directors and officers of a corporation are often the same people as those running the actual business, they usually have knowledge of all the actions of the corporation that are taken.
For example, where the director or officer knew that the trust funds were being deposited in a general bank account and/or paid out to others (not the carrier), this constituted actual knowledge of breach of trust.
At the end of the day, it does not matter if there was good faith or intent by the person who did not honor the trust obligation.
Personal liability
Where a corporation is under a duty to pay out money from trust funds to a particular company or person but instead uses that money for other purposes, the directors and officers may be personally liable.
This is because they had a duty to make sure the funds were used to pay the freight charges to the earmarked carrier. They also cannot use the excuse that they did not use up or dissipate the funds or misappropriate them or that they otherwise acted appropriately.
Load brokers — or a carrier sub-brokering a load — should remember this trust obligation to keep any money collected for freight charges in a separate trust account and not in general accounts.
The incorporation of the business may not protect individual officers or directors if ultimately the carriers do not get paid. This is because carriers can sue the directors and officers of a corporation as personal defendants for non-payment of freight charges where it can be proven that the directors and officers were personally aware of the corporation’s breach of the statutory trust via their own knowledge of the day-to-day running of the corporation and details of the load broker corporation’s accounts.
Incorporation may not save you
Load brokers and others arranging carriage mandates: make sure you know your responsibilities to keep freight charges earmarked for delivering carriers safe in a separate trust account. Do not use those funds for other purposes. Otherwise, incorporation may not save you. Your personal assets may be exposed where you are in breach.
Carriers: you can, in some cases, increase your chances of recovery where the freight charges have been paid by the shipper but not paid ultimately to you. This can be done by potentially suing the directors and officers of the load broker personally for the outstanding freight charges in circumstances where you were not paid, where they did not keep those funds separate or in trust, used those funds improperly and now are unable to pay you.
Also, where possible, address this trust obligation directly in any transportation agreement for the greatest protection.
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