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November 7, 2016 4:00 AM, EST

Opinion: Time to Deliver Broker Set-Off Changes

This Opinion piece appears in the Nov. 7 print edition of Transport Topics. Click here to subscribe today.

By Eric Belk

Vice President

The Match Maker Inc.

Today’s brokers increasingly rely on set-off tools as justification for not paying their carriers on valid freight deliveries, giving little or no consideration to the timing of these deliveries when enforcing set-offs. In doing so, they unfairly penalize motor carriers and expose the industry to a divisive practice. It’s time to develop some much-needed changes.

Set-off rights (also known as right of offset) are contractual provisions that allow transportation brokers to offset or deduct unpaid freight charges owed to their carriers (or the carrier’s factor) for unpaid or pending claims for cargo loss or damage.

Eric Belk

The provision protects brokers and their shippers for those occasions when the carrier’s insurance provider won’t pay cargo claims. And from the carrier perspective, agreeing to set-off rights enables them to do business with brokers who insist on it as a condition of doing business.

As an industry-certified executive of a transportation brokerage and factoring firm, I offer a unique perspective with a foot in each camp. I can see why brokers want this clause, and I can see why factors and carriers feel it’s unfair.

It might help to start with a little background. About 10 years ago, brokers started adding set-off rights to their contracts in response to carriers that had inadequate insurance policies and to insurance companies not paying legitimate claims.

However, I see some brokers pushing the limits by using set-offs to justify questionable deductions for late deliveries, delayed invoice submissions and missing carrier qualification paperwork. Some brokers offset freight charges without filing or investigating cargo claims, delaying carrier payment for up to nine months or more for a potential claim, or they simply accept their customer’s damages without giving the carrier ample opportunity to respond to the claim. Furthermore, many brokers will have their contingency cargo provider settle their claims and still not pay the carrier, knowing that the carrier either has gone out of business or already has been charged back by the factor.

Brokers don’t like carriers holding freight hostage, but that’s exactly what some brokers do to carriers when they set off freight charges for loads delivered prior to dates of “problem” loads. Small carriers, many of which factor their receivables, are placed in a precarious situation. They don’t have the leverage to waive set-off contractual provisions or the ability to finance the off-set damages to their cash flow.

According to a recent Allied Market Research report, the global third-party logistics, or 3PL, market is expected to surpass $1.1 trillion by 2021, a testament to the vital role and dominance brokers play in our industry. Carriers with one to five trucks make up about 80% of the U.S. trucking market and are small businesses, which are not in a position to demand direct relationships with shippers. And because most small carriers depend on factors for accounts receivable financing and management, factors end up taking the losses on set-off claims. Yet carriers depend on brokers for their freight, brokers depend on carriers to move their loads and factors depend on brokers to pay their carrier invoices. There is a mutual benefit to all parties working together.

Here are my recommendations:

• Let’s find a middle ground where brokers, carriers and factors can work together. Putting more emphasis on the timing of loads is an important step in reaching compromise.

• When possible, carriers should insist on the removal of this provision in broker-carrier contracts, but if that’s not possible, it should be limited in scope.

• Brokers pay carriers (or their factors) for loads delivered before the claim occurred; carriers (or their factors) should accept set-off risk for thoseloads moved after the claim.

• Brokers should create more transparency by building in more communication and eliminating disputed set-off penalties for things other than valid claims.

• Finally, brokers and carriers should follow proper cargo claim procedures, which will reduce unwarranted payment delays.

I find it interesting that the Transportation Intermediaries Association, the leading industry association for the brokerage industry, does not suggest the inclusion of any set-off language in its model broker-carrier contracts. It is their belief that brokers should adhere to proper cargo claim procedures and management, and pay their carriers for the freight they move.

My brokerage firm includes set-off provisions in its agreements for the reasons previously listed. However, we never have enforced this provision and have modified it as necessary to maintain good carrier relationships and sensible business conduct. Starting this fall, we are going to remove the set-off provision entirely from our standard contract. After all, if you are expecting change from others, you should require change from yourself.

My concern is that if we don’t become proactive with regulating this issue ourselves, chances are someone or some industry organization will attempt to influence change with new regulations that limit the use of set-off rights. The practice also may expose brokers to potential lawsuits from factors and carriers, thereby hurting our ability to use set-off rights in legitimate cases.

It’s a situation that’s getting worse every year, and if we don’t deal with it as an industry, someone else is going to deal with it for us — and we might not like the result.

Belk also serves as vice president of Match Factors Inc. in Florence, South Carolina. He also is a professor of business at Francis Marion University, a TIA-certified transportation broker and an IFA-certified account executive in factoring.