Q: We have kind of an unusual situation that I’d like your opinion about.
For a long time, we’ve been buying from a particular vendor, but in recent times the vendor’s service deteriorated markedly. We’ve been getting occasional defective items (what we’re buying are machined components that we use in our manufacturing process), and orders have been chronically late.
The latest order showed up a full week late. Partly out of annoyance, and partly to give us time to do quality control on the order, we held up payment to the vendor for more than a month.
Before we finally made our remission, we learned that the vendor had closed down. We can replace it, that’s not my problem — we’d already been moving in that direction due to the service problems. But we got a sharp note from a lawyer demanding immediate payment of the invoice. The lawyer said it doesn’t matter that the vendor is out of business, we still owe the money.
Well, that’s hard to argue with, and we were preparing to make our payment when we got another note — actually another bill, this one from the carrier who hauled the order. Although the shipment had moved prepaid, the carrier said the vendor never paid it, and that as consignee we’re liable for the freight charges.
Now I'm not sure what to do. If we pay the now-defunct vendor and pay the carrier, too, we’ll wind up out of pocket, in effect double-paying the freight. Yet both of them are threatening to sue us if we don’t pay up immediately. Help!
A: Uh-oh. To quote from the musical “The Music Man,” “Well, you got trouble, my friend, I say you got trouble right here in River City.” Or potential trouble, anyway.
For now, I’d suggest you not pay anyone. But don’t keep your reason a secret, say it right out to both of them. Tell your vendor’s attorney about the carrier’s bill, and tell the carrier about the demand from the vendor. That should hold up litigation for now, while you sit tight.
Let’s start with the propriety of the carrier’s demand. Never mind that it accepted the shipment on a prepaid basis; it always has the right to change that retroactively. Now, if you’d already paid your vendor in an amount including (either explicitly or implicitly) the “prepaid” freight charges, you could reject that demand. Because you haven’t paid the vendor, though, things are otherwise.
The rule of law is that by accepting delivery of the shipment you subscribed to the contract of carriage under which it was moved to you, including assuming a secondary obligation to pay the contracted charges. That obligation has now fallen due. But the case is more complicated than that.
You don’t say whether your vendor declared bankruptcy. If it didn’t, the solution's pretty simple. You get a quitclaim from the vendor for the amount of the unpaid freight charges, pay those to the carrier, and remit the remainder (invoice less freight charges) to the vendor. Everybody’s happy, or should be, and the money gets distributed equitably.
If, however, your vendor did file a petition in bankruptcy, matters get a tad more complicated. The bankrupt vendor and/or its lawyer have no say about the vendor’s receivables, they’re in the hands of the bankruptcy court. And you’ll need that court’s approval before you can reduce the amount of your indebtedness to the vendor, even in such a seeming good cause as to pay the carrier.
Sure, the answer I suggested above — pay the carrier and deduct freight charges from the vendor’s bill — sounds fair as to this isolated situation. But the bankruptcy court’s obligation extends far beyond any one transaction; its goal is to maximize the bankrupt estate’s assets and distribute them appropriately among its creditors.
And the court could well take the view that the estate ought to collect 100 cents on the dollar of every receivable, and that the carrier should queue up along with the other creditors and settle for whatever share of the assets its priority gives it legal entitlement. In this case it might take a dim view of any deduction from the vendor’s invoice.
In other words, it’s a very good time for you to follow all the procedural rules to the letter. Get agreement from all parties legally authorized to give it before you pay anybody a thin dime, or you could find yourself, as you say, having to double-pay those freight charges.
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.