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Q&A www.joc.com THE JOURNAL OF COMMERCE 63 By Colin Barrett 'SETOFF' WORKS, IF RELATIONSHIP ALLOWS Q: WE'RE A MOTOR carrier broker with a problem. One of our customers occasionally will set off loss-and- damage claims by holding payment of invoices on other shipments we've done for them. Sometimes, if it's one of our better customers, this happens because we tell it to do that, although only on the shipment in question until we can resolve the claim. Other times, the customer just withholds payments from us on, say, 10 invoices from other shipments. Is this legal? In this crazy industry you always hear two stories: Carri- ers say it's illegal, and shippers tell us there's nothing wrong with it. As a broker, we're stuck in the middle. Usually we wind up paying the carrier and getting stiffed by the customer. Please help if you can. A: I CAN HELP FROM A legal stand- point. Prag matically spea king, though, I'm sorry to have to say that you're on your own. Contrary to what you say your carriers are telling you, setoff of claims against freight charges is perfectly legal. Every creditor has the legal right "to apply the unap- propriated monies of the debtor, in his hands, in exting uishment of debts due to him," the Supreme Court wrote in U.S. v. Munsey Trust Co., 332 U.S. 234, 239-240 (1947). That is, if you owe me X dollars and I owe you Y, there's no need for us to exchange checks. We can simply subtract one from the other and the party with the larger balance due pays the difference. Now, at one point , t he old Interstate Commerce Commission declared this to be illegal when it came to transportation. But a series of court decisions reaching all the way to the Supreme Court (see esp. C. & N. W. Ry. Co. v Lin- dell, 281 U.S. 14 (1930)) overruled t he ICC, a nd it 's subsequently become widely accepted — yes, even among carriers — that the practice is fully as legal in trans - por tat ion a s elsewhere in t he economy. But t her e mu s t ob v iou sl y be a fully bipartite relationship between the parties before this "setoff," as it's termed, is valid, and in the situation you describe, there isn't such a relationship. Unless you're one of the rare brokers who contractually assumes liability to its shippers, it's not you who owes the claim to the shipper, the car- rier does. The shipper therefore isn't entitled to withhold money from you to satisf y the carrier's debt. Likewise, the carrier owes the claim to the shipper, not to you, so you can't withhold your payment to the carrier as an offset against the claim. That's where, in the real world, you u n for t u nately h it a wa l l. Shippers typically aren't all that interested in these fine points of law. It's you with whom they've dealt in arrang ing their trans - por tation, a nd it 's accordingly to you that they 're looking for recompense for something that went amiss in that process (i.e., in-transit loss or damage). When the carrier disputes or simply fails to pay the claim, it improperly but perhaps understandably feels the failure to pay is yours and there- fore it has a right to set off against your future invoices. On those occasions when I've professionally represented brokers in your situation, there have been two results. First, I've generally been successful in recouping the unpaid charges without having to resort to litigation. Second, no matter how tactfully and courte- ously I've handled things (indeed, usually long before I'm called in), the broker has lost the shipper's future business. In my experience, shippers who understand and are prepa red to honor t he lim ita- tions they legally accept as the price of the convenience of buying transportation ser vice through brokers won't try setoff in the first place, while those without that understanding or integrity seem determined to retaliate no matter how carefully the legal situation is described to them. With this in mind, you'll have to decide for yourself how to han- dle each occurrence based on the shipper's importance to you and the dollar amount of the setoff. If you actually have to go to court on this, you should win if your lawyer presents your case clearly. I ca n, however, add t hat in my experience, when a shipper resorts to claim setoff, it's already so severely prejudiced aga inst the ser vice provider because of its failure to voluntarily pay the claim that even accepting the set- off may not preserve the shipper's future traffic for you. Your only real hope is to present the legal rea lit ies to your customers up front so that the problem doesn't arise. Good luck! JOC Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at 5201 Whippoorwill Lane, Johns Island, S.C. 29455; phone, 843-559-1277, email BarrettTrn@aol.com. Contact him to order the most recent 351-page compiled edition of past Q&A columns, published in 2010.