Q: We’re a brokerage, and I have a couple of questions concerning our relationships with motor carriers.
First, can we enforce penalties in a contract that calls for them if the carrier delivers late? We put this penalty clause in our dispatch sheets, which carriers usually sign and return to us — sometimes with some provisions crossed out.
Second, one of our customers occasionally will file a claim with the carrier we set them up with, and the carrier either declines it or simply fails to pay. We then pay the claim ourselves. If the claim exceeds the amount of the freight charges on that shipment — say the charges were $500 and the claim is for $1,000 — can we hold back the excess from freight charges on other shipments that we owe the same carrier?
A: The general answers are yes and yes, but in both instances with important reservations.
Your first question concerning late-delivery penalties fails to make a key distinction between a contract and a dispatch sheet. The former is an explicit agreement between two parties — in this case, you and the carrier — whereas the latter is a unilateral instruction issued by you to advise the carrier of a pickup based on some unspecified agreement you’ve previously reached with that carrier to haul the load. They aren’t necessarily of the same legal effect.
Now, that the carrier “usually” returns the dispatch sheet to you with a counter-signature lends it quasi-contract status, which may extend to the penalty provision provided that isn’t something the carrier has crossed out. Indeed, even if the carrier doesn’t sign off on the sheet, there may be an implied contract created by the carrier’s acting on the sheet’s instructions and making the pickup.
But there are counter-arguments that can be advanced as well, especially because the dispatch sheet presupposes some prior discussion (oral or written) between you and the carrier regarding handling of the shipment.
Suppose the carrier argues what went before didn’t contemplate the penalty. And what if the carrier does cross out the penalty statement in the dispatch sheet before signing and then goes ahead and picks up?
You’re a lot better off signing actual contracts with your carriers that include the penalty provision. To be sure, the penalties aren’t likely to be severe enough to provoke litigation. Still, it’s best to have matters clarified in writing ahead of time.
Yes, it’s just paperwork, but paperwork is often what drives our legal system.
There’s also some important paperwork associated with your second question, about set-off of claims. You say you’re paying your shippers for the declined or unpaid claims, and want to know if you can recoup your outlays by holding the money out of payments you owe the carrier in question. You can do this if, and only if, you get from your paid-off shipper an “assignment” of the claim in question.
It’s well established that, if you owe somebody money who in turn owes you money, there’s no legal need to exchange checks; you can simply set off one debt against the other — see, e.g., U.S. v. Munsey Trust Co., 332 U.S. 234 (1947). This includes transportation freight charges and claims; North Chicago Rolling Mill Co. v. Ore & Steel Co., 152 U.S. 576 (1894), and C. & N. W. Ry. Co. v. Lindell, 281 U.S. 14 (1930).
But the parties must, obviously, be the same. If you owe John and John owes Paul, you can’t legally withhold John’s debt to Paul out of your payment to John. You can’t, that is, unless Paul gives you his right to collect from John, thereby making the debt situation mutual between you and John with Paul now out of the picture.
That’s what an assignment does. At the inception, you, the broker, owe the carrier freight charges but have no standing as to claims; your shipper owes the carrier nothing (its payment is to you instead), but has a claim against the carrier. So you pay the shipper, you get from it in exchange an assignment of its rights under the claim, and it’s now down to just you and the carrier and your setoff is legal.
Be sure you don’t exercise this on any questionable claim; you need to be certain of a claim’s validity or matters can get quite nasty. You also must hope the carrier doesn’t promptly declare bankruptcy; set-offs from 90 days prior to a bankruptcy declaration are usually invalidated. With these caveats, though, you’re good to go.
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 most recent 351-page compiled edition of past Q&A columns, published in 2010.