Fight Back Against Freight Charge Setoffs

by gspencermynko

Can Brokers Legally Offset Freight Loss and Damage Claims?

Freight charge setoffs are at the very least frustrating, and for some carriers, devastating to business. For small carriers who operate on small, thin margins, freight charge set offs can put a company out of business. In this article, I want to explore how carriers can protect themselves against freight charge setoffs and their onerous consequences..

The Bad News

Carriers need to know what they are up against when dealing with brokers and their customers who insist on contractual provisions that allow them to set off cargo damage claims against freight charges. Brokers, and by extension shippers, may without fear of violating federal or state laws, refuse to pay carrier freight charges and offset unpaid cargo claims. The basis for a broker to legally be able to set off a freight charge for lost or damaged cargo arises from Draconian “set-off” provisions in broker-carrier contracts which dump all the liability at the feet of the carrier.

All too often, I have received telephone calls from upset carriers who are being denied tens of thousands, or even hundreds of thousands, of dollars worth of freight charges due to a single cargo claim. Of course, the cargo claim itself is unrelated to all of the other freight charges due the carrier, but the brokers rely on provisions in their contract to enable them to withhold carriers’ cargo payments. This particular situation can be extremely bad if a carrier has been working extensively, or even worse, exclusively, with a particular broker and is expecting payment on numerous pending freight bills.

What is particularly upsetting in this entire scheme is that often the broker will pay the shipper’s claim without contesting that issue, and then, armed with broad contractual rights to set off a cargo claim, force the Carrier bear the brunt of the loss. I have a problem with brokers who honor their customers cargo claims without question or adjustment and then attempt to collateralize the claim by deducting from the freight charges due the carrier from other customers shipments. It’s as if the brokers callously have this attitude where they don’t care if they are on the hook for a cargo claim because they can simply pass on the costs to the carrier.

Allowing a broker (or shipper for that matter) to hold freight charges hostage for settlement of a cargo claim can be devastating for carriers. Most small carriers lack the leverage to absorb the costs of an offset cargo claim. Few carriers can deal with the disruption to their cash flow. Indeed, an offset can put a small carrier out of business. First of all, many small carriers are forced to factor to survive. However, most factoring agreements require motor carriers to warrant that each freight invoice is due, owing and not subject to set off, defense or adjustment. The set off of a large cargo claim can put the carrier in default with the factoring company and result in the seizure of all its accounts receivable and other collateral.

Secondly, most broker-carrier contracts have oppressive venue selection and forum selection clauses, along with unfavorable choice of law clauses, that force a carrier to litigate the case against a broker in the broker’s hometown. As I have written before, forum selection, venue selection and choice of law clauses tend to be enforceable and are upheld by the courts. Furthermore, to add insult to injury, most broker-carrier contracts include arbitration clauses which, for all practical purposes, deny the small carrier any hope of justice. As I have written about before, arbitration is very expensive, and most small carriers simply have no hope hiring a lawyer in a far away jurisdiction (for thousands upon thousands of dollars) and paying the upfront arbitration costs (for more thousands of dollars). As such, the carrier is forced to “eat it” and the broker gets off scott free and without any consequences.

In all fairness, I know all brokers do not treat the carriers they work with this way. However, all of contracts of the big, well known brokers that I have seen have these provisions in their broker-carrier contracts. And big shot brokers are more than happy to utilize those provisions of their contracts with no concern for the carrier.

The Law (More Bad News)

In preparation for this article, I did legal research to see what the status of the law is and how the courts have been dealing with offset clauses. What I determined is not good news for carriers. Typically, the courts have up held offset provisions in broker-carrier or shipper-carrier contracts.

In REI Transp., Inc. v. C.H. Robinson Worldwide, Inc., 519 F.3d 693 (7th Circuit US Court of Appeals), acting on a shipper’s behalf, the broker hired the carrier to transport a shipment. Some of the cargo was missing when the shipment arrived at the depot. The broker reimbursed the shipper for the lost cargo. The carrier sued the broker after the broker deducted the value of the lost cargo from the carrier’s payment. The broker countersued and asserted that it was entitled to recover the amount required to fully reimburse it for the value of the lost cargo. According to the broker-carrier contract that the carrier signed, the broker retained the right to withhold compensation to satisfy claims or shortages arising out of contract, which included claims arising under the Carmack Amendment for the lost goods. The court held the broker did not breach the contract by legitimately deducting the cost of the lost cargo from the carrier’s payment.

Another case I came across involves two titans of the industry doing battle with each other: NATIONAL BANKERS TRUST CORPORATION (A Factoring Company) vs. TOTAL QUALITY LOGISTICS, LLC (A Freight Broker) (Federal District Court for W.D. Tenn.) While the facts of this particular case are somewhat complicated, essentially what happened was that the broker fronted the carrier various costs, which costs were deducted from what the broker paid the factoring company. Again, the broker relied on their broker-carrier agreement which included an offset clause, which allowed the broker to offset costs against the freight bill. The factoring company didn’t take too kindly to this and sued the broker. The court held that the broker was entitled to offset their costs against freight charges pursuant to the offset provision in the contract. The court held, “as a matter of law, …Total is authorized under the Broker-Carrier Agreement and § 9-404 (of the Uniform Commercial Code) to deduct from pending invoices valid claims on prior shipments”. And these are merely two examples of numerous cases I came across which upheld offset clauses in broker carrier contracts.

So What Can Carriers Do To Prevent Offsets?

It is easy for me to say that carriers must insist that freight charges are paid in full and without unilateral offset. I realize that Big Time Brokers have a “take it or leave it” attitude about their contracts. While I suppose a carrier could cross out language granting set off and”indemnity” or “hold harmless” clauses from broker prepared contracts, a broker may reject the contract. However if the deleted language goes unnoticed by the broker, a court may reject a broker’s claimed right to offset freight charges.

On the other hand, carriers can be proactive in providing that freight charges be timely paid and freight claims be handled in accordance with federal rules and without set off. Carriers should insist on their own language in contracts or through incorporation of their rules circular by reference. Furthermore, if your freight charges are held hostage, be sure to include a provision for interest and attorneys’ fees so you can recoup your litigation costs if necessary.

California Carriers may exercise a possessory lien on goods in transit to enforce payment for freight charges. The carrier may also be in a position to exercise a lien in order to ensure payment of past-due freight charges, provided the notice and other requirements of California Civil Code section 3051.5 are observed. But this is tricky – be sure to consult with a Transportation Attorney if you want to assert a Carrier’s Lien on cargo in your possession pursuant to section 3051.5. This strategy can backfire against a carrier if they don’t know what they are doing.

Don’t haul freight valued in excess of your cargo liability policy. A number of cases I have looked at have dealt with cargo claims that exceeded the carrier’s cargo policy limits. Know what you are hauling, and demand an agreement with the broker that you will not be liable for a cargo claim that is beyond the limits of your cargo policy.

Finally, as a matter of common sense, don’t put all your eggs in one basket. Carriers shouldn’t put themselves in the position of being owed a substantial amount of money from a single freight broker. I encourage carriers to do business with different brokers who are reputable, trustworthy, and hopefully, willing to exclude offset provisions from their contracts. That way, an offset won’t be so painful and the broker won’t have major leverage over the life or death of your company.

Contact Transportationattorneys.net today if you wish to discuss setoffs for freight bills and how to protect yourself against these contentious situations!