Hard-balling: Transportation Costs & Coal

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Disclaimer: I have no legal involvement in this case.  My opinion is formulated for no motive other than that to report on a case I found interesting.  I am primarily interested in the logistical aspects of this case and I do not discuss the legal details.  The denied appeal filed on June 21, 2013 can be found as Empire Trucking Company. v. Reading Anthracite Coal Company, 71 A.3d 923 (Pa.Super. 2013).  This is the direct link.

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The case highlights how businesses must play by the “rules of the game” (p. 20) and that Empire Trucking Company did successfully establish the elements that Reading Anthracite Coal Company made a tortuous interference with the contracts between Empire and its subcontractors.  Empire Trucking Company was recently awarded $271,000 in compensatory and $1,500,000 in punitive damages.

Context:

The situation began when fuel costs began to rise in 2000 and Empire Trucking Company (from now on “Empire”) began to apply a surcharge to cover their diesel fuel expenses on certain commodities that they hauled for Reading Anthracite Coal Company (from now on “Reading”).  Empire used subcontractors to do a sizable percentage of their work with Reading.  These subcontractors paid Empire 8% of their base trucking rates.

The new surcharge was applied only for hauling processed coal (as opposed to raw coal).  This charge was initially absorbed by Reading, who regained the cost when it was passed on to their customers.  Reading charged their customers the surcharge amount established by Empire in the form of “delivery costs”.  Empire only retained the surcharges if their own fleet had hauled the coal from Reading to the final destination.  Initially both Empire and Reading agreed on a set schedule for which to determine future fuel surcharges. 

By 2005, the surcharges had essentially disappeared, since the price of diesel had decreased.  However, in this same year, prices rose once again.  Surcharges were reinstated by Empire on deliveries of processed coal.  In April of 2005, Reading’s Director of Operations retired and was replaced by a new director.  This same month, Empire made an important change to their surcharge policy – now surcharges would apply to raw coal loads.

This impacted Reading’s profit margins since they could not pass on the surcharges for raw coal deliveries to its customers.  The proposed raw coal surcharge was set to be half of that applied to processed coal.

By August 2005, Empire stated that the surcharge applied to raw coal hauls would have to rise to 18%, a much higher percentage than initially established.  At this same time, the processed coal surcharge would rise to 23%.  This change was implemented on October 1, 2005.

On October 23, 2007 the surcharge applied to raw coal deliveries rose to match that on processed coals, effectively 23%.  As rates continued to rise in the Q2 of 2008, processed coal surcharges rose to become 53% of the total price of the cargo, while raw coal surcharges rose to a lesser degree, arriving at 33%.

Eventually, Reading’s profit sheets were reanalyzed by the company’s President.  An accountant (either internal or external) for Reading derived new estimates for past projected fuel expenses.  These estimates were a lot lower than those that Reading was charged by Empire.

This is the hard-ball moment:

Reading tried to recoup its losses by halting all payments (surcharges and base rates) to Empire (and consequentially to Empire’s subcontractors).  Empire paid its subcontractors only after it had received payments from Reading for deliveries.  Nonetheless, Empire and its subcontractors continued to make hauls for Reading for work in July and August 2008.  Not only did Reading not pay Empire, but it actually assured Empire that payments were pending.

Empire also transported processed coal only for two additional companies, Barakat and WMPI.  Unfortunately, the president of Reading was also the Secretary of Barakat and VP of WMPI.  Even though Empire continued to haul loads for these two other companies, payments were also halted by Barakat and WMPI.  Since these companies did not need raw coal transported, increased surcharges theoretically never hit their profit margins (assuming constant all other variables).  Therefore, they had no clear reason to stop payments to Empire at a time that coincided with Reading’s decisive action.

At the end of August 2008, Empire tells Reading that they can no longer afford to keep trucking coal.  Empire failed to tell their subcontractors to stop hauling coal for Reading.  Seizing the opportunity, Reading told Empire’s subcontractors that Empire had been paid all along, implying negligence on the part of Empire (not Reading).  This feeling of “animosity” helped sway Empire’s subcontractors to continue moving coal for Reading, but this time under Reading’s terms. 

By creating a situation of “financial distress” Reading was able to woe Empire’s subcontractors to haul both raw and processed coal directly for them, this time without the diesel fuel surcharges.  It is likely that these subcontractors were less able to absorb the complete absence of payments, and were in effect desperate for work.  They did not have the size or financial capacity to insulate themselves in situations such as these.

Regardless if Reading had initially devised to cut Empire out of the supply chain, the lesson should be noted.  In the future, the correct line of action would be to use your procurement department to determine if delivery costs can actually be effectively reduced.

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