Q&A: Is Shipper’s ‘Set-Off’ Against Broker Legal?

Q: As a broker, we handled a prepaid shipment of a pallet of confectionery products being returned from a distributor to the manufacturer. The consignee refused delivery, claiming the candy had been contaminated because it was delivered in a trailer also containing pesticides and fertilizers. The consignee stated that the trailer emitted a strong chemical smell.

The distributor filed a claim with the carrier for the value of the product. The distributor, however, also is withholding payment for that freight invoice and two others as an offset against the unsettled claim.

The carrier is only offering to pay for half of the value of the products because it has paperwork stating that it originally transported the product from the manufacturer to the distributor a year earlier, and therefore claims the product was old and had no resale value.

I’ve received conflicting opinions as to whether the distributor can legally withhold payment of our freight invoice for this shipment as an offset against a claim against the carrier. And I can’t see any legal basis the distributor can use to not pay the other invoices. My contention is that these are completely separate transactions in the eyes of the law, and therefore their withholding payment is woefully unlawful.

Then we come to the carrier’s contention that the product had no resale value. To my mind, the carrier has no scientific basis or evidence to make such a claim. The carrier also says that after the product was refused, it sat in the carrier’s warehouse for approximately a month before being returned to the distributor, and a considerable amount of dust accumulated on top. The distributor claims this made the product further unsalable. My response is that once the product was refused and removed from a clear line of control, it was no longer a salable product anyway.

I also have an issue with the consignee’s contention that the product was contaminated while being transported. I question how a pallet of product could be packaged so well that sitting for more than a year in the distributor’s facility wouldn’t harm it, yet at the same time was so poorly packaged that riding in a trailer for a few hours along with pesticides and fertilizers that were properly separated according to federal regulations would harm it because the fumes leaked in.

So, how am I doing as a novice legal beagle? I really look forward to how you slice up these mangled issues.

 

A: They’re not that badly mangled. First, the shipper is simply seeking to exercise its right of “set-off” — deducting money it owes from money that it’s owed. The specific invoices it singles out for this aren’t important; it’s the dollar amount that matters.

The Supreme Court has specifically OK’d this, noting that any creditor has the right “to apply the unappropriated monies 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). And there are numerous cases ratifying the approach in transportation.

Note, however, that the Supreme Court said only that if you owe money to someone else who in turn owes you money, you may set off the two debts. It did not say that if you owe someone money and some third party (other than your creditor) owes you money, you can set those debts off against one another.

Yet the latter is exactly what your misguided shipper is trying to do. It owes you for properly billed freight charges; it contends a carrier you hired to haul its freight owes it for an unsatisfied claim. Those two debts don’t cancel out, because they involve different parties. It should pay you, and seek its remedies against the carrier otherwise.

I wish it the best of British luck in that venture. In its shoes, I’d snatch up the carrier’s 50 percent offer in a heartbeat because I don’t think it has a valid claim.

Never mind how old the candy was or how much dust had accumulated on the boxes. The point is the carrier maintained proper separation of the candy and the chemicals according to federal regulations. There’s a legal presumption that Uncle Sam knows what he’s doing in terms of keeping food products uncontaminated. I don’t care how bad the trailer smelled, the candy’s still officially good — and still, despite your likewise misguided suggestion to the contrary, legally salable.

Don’t quit your day job; but still, you came to the right legal conclusions.

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.

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