Can Brokers Legally Offset Freight Loss and Damage Claims?

John Anderson Q & A, Transportation

Facts:  A broker states that offsetting freight loss and damage claims against freight charges owed is a common everyday occurrence. However, the broker recently posted  three shipments on a load board and arranged for a single carrier to transport all three shipments.  Shipment number 1 was delivered without problem. However, there was a claim on shipment number 2 that exceeded the amount of freight charges owed for that shipment. The broker therefore offset the claim amount against the freight charges on both shipment numbers 1 and 2.  The carrier then refused to pickup and transport shipment number 3 and, further, filed a complaint with the load board charging the broker with improper offsetting. The load board ruled in the carrier’s favor and reduced the broker’s rating, which is causing other carriers to refuse to work with the broker. Despite arguing the issue at length, the load board won’t reverse its decision.

Question:   Is offsetting legal or illegal?  Is the load board right or wrong in upholding the carrier’s complaint and reducing the broker’s rating?

Answer:   Offsetting is legal, but the load board likely was correct and justified in upholding the carrier’s complaint and reducing the broker’s rating.

First, a little history. Prior to enactment of the Transportation Industry Regulatory Reform Act (“TIRRA”) in 1994, all regulated motor carriers were bound by the “filed rate doctrine.”  That doctrine required carriers to publish and file their tariffs with the Interstate Commerce Commission (“ICC”) and to strictly apply and enforce the provisions of the tariff. The primary purpose of the filed rate doctrine was to prevent and prohibit discrimination between similarly situated shippers. Thus, small shippers were entitled to receive the same rates as large shippers in the same industry.

Offsetting was a means for carriers to rebate and discriminate between shippers, so in 1937 the ICC adopted Administrative Ruling 65 which required a shipper to pay freight charges in full before filing a loss or damage claim. The ICC affirmed Administrative Ruling 65 in 1978 in Administrative Ruling 128. (It should be noted that although offsetting was prohibited between carriers and shippers informally, if and when  a case was in court in formal litigation, claims for offset were allowed to be made since the court was not bound by the ICC’s Administrative Rulings. Rather, the law and rules applicable to the court proceeding governed.)

As a result of TIRRA, the filed rate doctrine no longer applies to motor carriers (except household goods carriers). This means that offsetting is legal but, as discussed below, should be used in a reasonable manner with discretion.

However, even though offsetting is legal, the load board may be justified in upholding the carrier’s complaint and reducing the broker’s rating.  The broker does not state what justification the load board gave for its decision, but I suspect it had nothing to do with the legality or illegality of offsets in transportation. Rather, I suspect that the justification is found in the load board’s contract terms and conditions it requires all participants to agree to before being allowed to join. These terms and conditions are set forth on a screen when you go to join, and you must check the “I ACCEPT” box before being allowed to participate. So, the question is, what did the load board’s terms and conditions provide? More specifically, what did the broker agree to?

The load board used by this broker contains broad terms and conditions. However, because I am not a member and do not qualify to become a member, I was unable to search all areas of the website and the various programs, including those for complaints by carriers against brokers and vice-versa. However, I was able to find specific terms and conditions  on other load board websites that specifically state that “offsetting is not allowed.”  Thus, I believe that the broker got caught up in the load board’s contract terms and conditions and it rules and policies applicable to particular issues, including offsets.

Recommendations:

It is critical for brokers to have  comprehensive Broker-Carrier Contracts executed by each carrier used. Similarly, it is critical for shippers to have comprehensive Shipper-Transportation Provider Contracts with each carrier, broker and freight forwarder used.   If the broker or shipper, as the case may be,  plans on applying offsets, the contract should have specific provisions allowing offsets and further setting forth a reasonable procedure to be followed. The provision should allow the affected party a reasonable amount of time to investigate, adjust and process a claim before applying the offset. A broker or shipper runs the risk of paying tariff penalties, interest and attorney fees to the carrier if it improperly applies an offset. An offset is valid only if the carrier is liable under the Carmack Amendment or the provisions of the contract. Shippers and brokers are not allowed to unilaterally declare a loss and offset for some arbitrary amount without first giving the carrier and, in some cases, the broker, its “day in court.”

If there is a valid contract that authorizes offsets between the parties, then that contract should override any general provision in a load board’s terms and conditions or policies. The contract reflects the specific agreement between the parties to allow offsets.