This post was written by Match Factors Vice President Eric Belk and originally published on Transport Topics' website. The original article may be found here: Opinion: Time to Deliver Broker Set-Off Changes.

Today’s brokers increasingly rely on setoff 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 setoffs. 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.

Setoff 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. 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 setoff 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. In the mid-2000s, brokers started adding setoff rights to their contracts in response to carriers who had inadequate insurance policies and insurance companies not paying legitimate claims.

However, I see some brokers pushing the limits by using setoffs 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, delay carrier payment for up to nine months or more for a potential claim, or 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 has either gone out of business or has already 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 setoff freight charges for loads delivered prior to dates of “problem” loads. Small carriers, many of whom factor their receivables, are placed in a precarious situation. They don’t have the leverage to waive offset contractual provisions or the ability to finance the offset damages to their cash flow. 

According to a recent Allied Market Research report, the global third party-logistics 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 approximately 80% of the U.S. trucking market and are small businesses, not in a position to demand direct relationships with shippers. And since most small carriers depend on factors for accounts receivable financing and management, factors end up taking the losses on setoff 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 not possible, it should be limited in scope.
  
  
• Broker should pay carriers (or their factors) for loads delivered before the claim occurred; carriers (or their factors) should accept setoff risk for those loads moved after the claim.
  
  
• Brokers should create more transparency by building in more communication and eliminating disputed offset 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 setoff language in its model broker-carrier contracts. It is their belief brokers should adhere to proper cargo claim procedures and management, and pay their carriers for the freight they move. My brokerage firm includes setoff provisions in its agreements for the reasons previously listed. However, we have never enforced this provision, and have modified it as necessary in order to maintain good carrier relationships and sensible business conduct. Starting this fall, we are going to remove the setoff 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 setoff rights. The practice may also expose brokers to potential lawsuits from factors and carriers, thereby hurting our ability to use offset 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.

Eric Belk serves as Vice President of The Match Maker, Inc. and Match Factors, Inc. in Florence, SC, and a professor of business at Francis Marion University. He is also a TIA certified transportation broker and an IFA certified account executive in factoring.