Claims Setoff: Law vs. Practice

Claims Setoff: Law vs. Practice

Q: Is it acceptable for a shipper to set off claims against freight charges owed prior to finalization of the claim?

We’re a motor carrier, and we were still investigating the claim to determine the cause when the shipper deducted the amount from our freight bills. We question whether this is proper.

We do business with this shipper on a common carrier basis — that is, shipment by shipment with the bills of lading serving as the only transportation contracts. The freight bills against which the shipper held out the claim amount had nothing to do with the shipment on which the claim arose. Inasmuch as the shipments were unrelated, again we wonder whether the setoff was proper.

The claim amount is relatively small, about $6,000, but the principle still concerns us.

A: Unless you were taking an inordinate amount of time with your claim investigation, you have a very rude shipper there. Whether you have potential legal redress, however, is another question.

I have to take personal responsibility for popularizing setoff as a claim-collecting method for shippers. About 35 years ago, it was widely deemed illegal for a shipper to do this, by virtually all commentators on the question as well as by the former Interstate Commerce Commission.

But for reasons too complicated to go into here, I found myself researching the matter in connection with this column, and came across a major line of court rulings all the way up to the Supreme Court that reached the opposite conclusion. I wrote it up, said that in my view setoff was perfectly legal, and, after the predictable screams of outrage, was vindicated. Yes, Virginia, not only is there a Santa Claus, but setoff is legal.

It’s also, as I wrote then and have been writing ever since, not the preferred means of resolving claims disputes. It should be a last resort, applied only when a carrier is proving unreasonably recalcitrant about paying a clear-cut claim obligation. Shippers who use it otherwise risk some nasty consequences.

Now, if your investigation, when you finish it, shows the claim to be valid, that’s an end of it. You have a discourteous shipper, too distrustful to even wait for you to complete an investigation that is quite proper for you to conduct, but he’s just been impolite; he hasn’t violated the law.

But say your investigation shows you aren’t liable, that the loss or damage resulted from improper packaging, an act of God, inherent vice of the goods or pre- or post-transportation misadventure. Now the shipper’s in deep doo-doo.

You sue for your unpaid freight charges, plus — the “plus” being late-payment penalties, costs of litigation and anything else your tariffs or agreements allow you to pile on. The shipper tries to defend on the basis of its claim, but that falls flat. So it’s fresh out of excuses for not paying you and facing what is probably a fairly unsympathetic court.

Any shipper dumb (or arrogant) enough to put itself voluntarily in this lousy position simply because it’s too impatient to bide its time probably deserves what it gets.

Your point about the withheld freight charges applying to shipments other than the one on which the claim accrued isn’t well taken. What you’re doing is confusing this situation with the law that says carriers can’t withhold delivery of current shipments for payment of past-due freight charges on other shipments, an act known as holding a shipment hostage and definitely illegal in most jurisdictions. But this doesn’t cut both ways.

All that’s at stake in a setoff situation is money, on both sides. The shipper owes you money for freight charges; you owe the shipper money for a claim. In such cases, the law is that the two of you aren’t required to exchange checks; it’s quite OK for one of you to apply the money the other owes you against what you owe him.

For those who want case law to support this, see in particular U.S. v. Munsey Trust Co., 332 U.S. 234 (1947) for the general principle. Among those extending it to transportation are North Chicago Rolling Mill Co. v. Ore & Steel Co., 152 U.S. 576 (1894); C. & N. W. Ry. Co. v. Lindell, 281 U.S. 14 (1930); Burlington Northern Inc. v. U.S., 462 F.2d 526; Johnson Motor Transp. v. U.S., 149 F.Supp. 175; and N. P. Ry. Co. v. Associated General Contractors of N.D., 152 F.Supp. 126.

Yes, they’re all old cases, but it’s still good law. It’s just not always good practice.

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, Contact him to order the most recent 351-page compiled edition of past Q&A columns, published in 2010.