Calling it Even: When Is It Okay to Use Setoffs?

When your debt to someone is reduced by an amount that you are owed, it is called a “setoff.” Among friendly parties, setoffs are commonplace and useful. In business, setoffs can create efficiencies and preserve relationships by avoiding disputes that would otherwise cost time and energy to resolve. However, it is important that both parties are in agreement about how and when setoffs can be used.

Unfortunately, setoffs can seem most appealing in the heat of a disagreement. In the transportation industry, setoffs often happen when disputes arise between shippers, carriers, and logistics service providers. A common example is when a shipper has an open cargo claim against a motor carrier for goods damaged in transit. Rather than wait for the motor carrier to resolve the claim, the shipper may instead decide to withhold the cost of the claim from the motor carrier’s unpaid freight invoices.

These types of unilateral setoffs occur when one party believes the other party may not fairly resolve the dispute. Worries about the other side’s trustworthiness, reasonableness, timeliness, or solvency can play into the decision to withhold payment or short-pay invoices. These decisions may also arise from one party’s mistaken belief that they have a right to withhold payment when the other side owes them money. Additionally, while setoffs may be appropriate for undisputed claims, they should not be used when claims are in dispute or are still the subject of investigation or adjustment by the opposite party or their insurer. Absent a mutual agreement between the parties, unilateral setoffs not only damage business relationships, they may also be illegal.

The 9th Circuit Court of Appeals recently addressed the issue of setoffs in Central Freight Lines, Inc. v. Amazon Fulfillment Services in the context of a shipper-carrier relationship. After a dispute arose about the amount Central Freight was charging Amazon for “spot quote rates,” Amazon began withholding payment of Central Freight’s invoices. The district court granted Central Freight’s motion for summary judgment, finding that “Amazon had no right [to] withhold monies owed to Central Freight as a setoff.” On appeal, Amazon argued that all creditors have a common-law right to withhold payment when the counterparty owes them an equivalent sum. The court rejected this argument, noting that “mutual debts do not extinguish one another…‘rather, the agreement of the parties or judicial action is required.’” The court further noted that Amazon may not avoid potential liability for wrongfully withholding funds, stating that “a debtor violates a legal duty if it fails to pay a debt,” even when the creditor owes the debtor a larger sum.

When Is It Okay to Use Setoffs?

As the court mentioned, setoffs can be used when either: (1) both parties are in agreement through formal or informal negotiation; or (2) a court has stepped in and said so. Going into a new business relationship, if you foresee that the ability to use setoffs might be useful, you should include language in your contracts that addresses exactly when and how setoffs and disputes are to be resolved. Otherwise, you may consider alternative methods of dispute resolution, such as arbitration, mediation, or informal negotiation, to resolve disagreements about debts in a way that is more likely to keep your relationships, wallet, and reputation intact.

Mitchell-Handschuh: Atlanta Attorneys for Transportation and Logistics Companies

An experienced attorney can help you draft agreements that effectively address disputes and setoffs, as well as help resolve instances where your payments have been unfairly withheld. If you have questions or need advice about setoffs or unpaid charges, contact the experienced transportation and logistics attorneys at Mitchell-Handschuh, who are always ready to provide assistance.