Don’t accept freight charge setoffs

Q Increasingly, our shipper and broker customers are insisting on contractual provisions that allow them the right to set off cargo damage claims against freight charges. Our cargo policy provides that we cannot settle the case without the insurance carrier’s consent. Does this mean we can lose the benefits of cargo insurance if we permit unilateral setoffs?

A You have hit upon another compelling reason for opposing the setoff of cargo claims against freight charges. The cargo insurance crisis – Swiss-cheese policies that exclude theft, moisture, etc. – has driven many shippers and brokers to insist on the right of setoff.

From the carrier perspective, however, there simply must be a better way to satisfy shipper and broker concerns about cargo coverage. Where there is coverage, most insurers will not honor your claim if they have not been involved in the mitigation and settlement process. If they do voluntarily pay, they may certainly question the amount of the setoff since the shipper and broker acted as judge and jury of the amount of the claim as well as the issue of liability.

About the only thing a carrier can do when faced with a questionable setoff and the refusal of the insurer to make a settlement is to sue the customer for the freight charges and initiate litigation of the cargo claim, which you then turn over to your insurer for a defense. This is not a happy prospect.

In addition, third-party logistics companies that have no statutory liability for cargo loss or damage increasingly are using draconian setoff provisions in their contract to keep their customers satisfied at the carrier’s expense. By paying a shipper’s claim without contesting the issue, a broker armed with broad contractual rights to setoff can gain competitive advantage over an asset-based carrier. A broker only becomes entitled to the value of a cargo claim by payment and assignment, and an intermediary cannot offset the claim of one shipper against the payment obligation of another.

I have a real problem with brokers that gratuitously agree to honor their customers’ cargo claims without adjustment and then attempt to collateralize the claim by deducting from freight charges due the carrier from other customers’ shipments.

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Allowing a shipper or broker to hold freight charges hostage for settlement of a cargo claim is a potentially lethal proposition for carriers. Most small carriers lack the leverage to finance the damage that an offset can do to its cash flow. Most factoring agreements, for example, require motor carriers to warrant that each freight invoice is due, owing and not subject to setoff, defense or adjustment. Any setoff of a large cargo claim can place the carrier in default of its factoring agreement and result in the seizure of all of its accounts receivable and other collateral.

Carriers simply must insist that freight charges are paid in full and without unilateral offset. And it’s not really enough that you delete language granting setoff and broadly worded “indemnity” from shipper and broker prepared contracts. You should be proactive in providing that freight charges be timely paid and freight claims be handled in accordance with federal rules and without setoff. Insist on your own language in contracts or through incorporation of your rules circular by reference. Then if your freight charges are held hostage, be sure you have made provision for interest and attorney’s fees so that you can recoup your litigation costs if necessary.