A Silent But Deadly Omission
By Henry E. Seaton

December 2006
Reprinted from etrucker.com

Q How should a model contract treat the right of a property broker to setoff cargo claims against freight charges?
A This is the second in a series of articles addressing the American Trucking Associations’ broker-carrier contract. In the first article, I noted that this model contract did not clearly delineate the role of the broker as an “agent/arranger” or a “principal/provider.” (See “Broker’s role must be fixed,” CCJ, November 2006.) This ambiguity is manifested in the deadly omission of a bar to the setoff of cargo claims against freight charges.

Under traditional principles of federal transportation law, a property broker is not liable under the Carmack Amendment for cargo claims. (See Chubb Group of Insurance Companies v. H.A. Transportation Systems, Inc., 243 F. Supp. 2d 1064 [C.D.Cal. 2002]; Custom Cartage, Inc. v. Motorola, No. 98(c) 5182, 1999 WL 89563 *3 [N.D.Ill. Feb. 6, 1999]; CGU International Insurance, PLC v. Keystone Lines Corp., 2004 U.S. Dist. Lexis 8123.)
Shippers should file cargo claims with the carrier that was in possession and control of the shipment at the time of the loss. Most sophisticated brokers recognize this and eschew liability for cargo claims, accepting only responsibility to pay claims for which their contracted carriers are adjudged liable in the event of nonpayment. (Many brokers carry contingent cargo insurance for this reason.)

Regulations and traditional case law support the proposition that motor carriers should adjust the cargo claim pursuant to 49 U.S.C. 370 and that neither shippers nor brokers should short-circuit the claims adjustment process by unilateral setoff. Administrative Ruling 65 and 128, which were promulgated when the filed rate doctrine was around, expressly hold that the shipper should pay its freight charges and litigate the cargo claim.

In practice, many brokers are tempted to keep their shipper customers happy by simply paying cargo claims without adjustment and deducting the cost of the claim from the motor carrier’s revenue. This “setoff practice” demonstrates the true Golden Rule: “He who has the gold makes the rules.” Carriers may complain bitterly about the practice, but there is ample precedent for the common law right of setoff if the broker has actually paid the claim and becomes the shipper’s assignee. As a result, carriers often must sue brokers to get freight charges that are otherwise due and owing, and the court may very well tie up the freight charges until the merits of the cargo claim are litigated.

So allowing the broker the unilateral right of setoff, even implicitly by silence, can frustrate timely payment of freight charges, result in protracted claims litigation, and frustrate the orderly adjustment of claims by your insurer.

A property broker is not a disinterested party. Don’t let it become, by default, the judge and jury of cargo claim liability, the customer’s duty to mitigate, or the value of the claim. Any small carrier that factors knows that each invoice it sells must be accompanied with a warranty that the amount is due, owing and uncontested. If your contract doesn’t prevent brokers from setting off charges, you leave yourself exposed for breach of your factoring agreement and an early demise if the factor forecloses when a setoff interrupts your liquidity.

Accordingly, the best practice, which was not followed in the ATA model contract, would be to expressly require payment of freight charges – without setoff – upon receipt of funds by the broker from its customer. If the broker and its customer are worried about protracted claims settlement procedures, propose expedited arbitration procedures in which an unbiased third party determines the merits as an alternative.

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