Q: I work as an account manager at a logistics company with several clients with management contracts for our services.
One carrier has withheld payment of a significant number of recognized claims because of shortage and visible damages, claiming payment is required for past-due invoices.
Several invoice-aging reports have been generated in the last four months attempting to identify the past-due bills. The invoices are for accessorial charges, weighing and inspection issues, and misapplication of fuel surcharges per contract schedules.
A number of these past dues were in dispute because the carrier did not provide proof or backup documents associated with the balance due that in turn became a past due.
I believe the carrier is unfairly withholding these claims while in many cases ignoring the root cause for invoices becoming past due. Is this practice legal? Is there case law or rulings on this issue?
I also tend to think the carrier is not applying this rule to all its clients in the same manner as I described.
A: I’ve long been a supporter of the practice of “set-off” by shippers for claims that carriers fail to pay — deducting the claim amount from freight charges owed the carrier.
In fact, this was a position I adopted more than 30 years ago, when the old Interstate Commerce Commission contended the practice was illegal and virtually the entire industry went along with that view. Time has proved me correct in my position; it’s now generally accepted practice.
It is, however, a two-way street, all deriving from the Supreme Court’s common-sense declaration that any creditor has the right “to apply the unappropriated funds of his debtor, in his hands, in extinguishment of the debts due to him; U.S. v. Munsey Trust Co., 332 U.S. 234, 239 (1947).
That is, if I owe you money and you owe me money, we need not exchange checks for the exact amounts. We can simply offset the debts one against the other; and, provided both debts are valid, any court will uphold such a resolution.
The carrier is merely exercising this right.
Note first, both debts must be valid. You say you’re disputing the past dues. The existence of that dispute doesn’t bind the carrier, which appears to disagree with you, but it may give you grounds to contest the carrier’s set-off in court.
In such a situation, you’re admittedly at a disadvantage. Where set-off is exercised in the other direction — the shipper withholding freight charges in satisfaction of claims — the carrier will usually have late-payment penalties it can assert. Thus, if the shipper fails to prove its claims, the carrier will win not only its unpaid freight charges but some possibly hefty penalties as well.
Here, though, you probably won’t be able to recover any punitive damages for the carrier’s holding your claims payments even if you otherwise win your case.
But there’s another requirement that may well inure to your benefit. Set-off is allowed only if the offsetting debts are between the same parties.
You say you’re a third party. Ordinarily these days, third parties pay freight charges to carriers. But also ordinarily, claims aren’t filed with carriers by third parties, but by the third parties’ customers who are the beneficial owners of the goods.
If the claims in question are those of your customers, the carrier’s argument falls apart. If I owe John money and John owes Mary money, I can scarcely offset my debt to John against what he owes Mary unless Mary and I are a lot closer than most third parties are to their customers.
Of course, this situation also deprives you of the right to sue the carrier for the unpaid claims on your own behalf. They’ll have to act for themselves; you can help them if you like, but a lawsuit must be in their name.
Such a circumstance deprives the carrier of its legal justification for withholding payment of your customers’ claims because you allegedly owe it for the past dues. Normally, I’d expect a court to issue a summary judgment for that without ever reaching the merits of the carrier’s counterclaims.
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, e-mail BarrettTrn@aol.com. Contact him to order the 536-page compiled edition of past Q&A columns, published in 2001, at $80 plus shipping.