OFFSETTING UNPAID CARGO CLAIMS
AGAINST UNPAID CARRIER FREIGHT CHARGES

IT USED TO BE ILLEGAL

Reproduced with the Permission of Miles L. Kavaller 

During last night's dinner Bob Lawson, the CBTC Board Chairman related a recent discussion he had with a business associate to the effect that it was unlawful for a shipper to offset unpaid cargo claims against unpaid motor carrier freight charges.  He asked me for my opinion. I told him that it used to be improper (not illegal) but it is now both proper and legal. 

As many of you  recall, until the ICC Termination Act of 1995 (“ICCTA”), the Interstate Commerce Commission (“ICC”) had regulated surface carriers including rail, motor, freight forwarders and brokers for more than a century. The California Public Utilities Commission (“CPUC”) did the same for intrastate transportation. The centerpiece of both the ICC's and CPUC’s regulatory responsibility was embraced in what came to be known as the "filed rate doctrine".  Carriers were required to file and publish tariffs containing their rates, rules, regulations and classifications and were required to strictly comply with them.  Deviation from the published tariff charges was prohibited.  This system was intended to ensure that similarly situated shippers and receivers were charged accordingly without undue preferences or advantages. And it was designed to promote access to surface transportation at reasonable, non-discriminatory prices.  The filed rate doctrine for interstate transportation was, for all intents and purposes, abolished on August 26, 1994 with the enactment of the Transportation Industry Regulatory Reform Act ("TIRRA").  It voided published tariffs then on file and relieved motor carriers of the obligation to file rates. The ICCTA with its preemption provision effectively brought CPUC rate regulation to an end as well.  Motor carriers were free to price their services without government oversight.  The policy prohibiting undue preferences and non-discriminatory rates was eliminated in favor of the free market.

In 1939 while the filed rate doctrine was in effest and strictly enforced by both the ICC and CPUC, the ICC adopted an administrative ruling interpreting the Interstate Commerce Act’s filed rate requirement to the effect that a shipper was required to pay the tariff-based freight charges before a motor carrier could entertain a cargo claim. The purpose for the  ruling was to preserve the anti-rebate provision of the law.  Cargo claims was seen as an area where shippers and carriers could conspire to defeat the published tariff charges and engage in rebating in violation of the statutory requirement.   

Although carriers were prohibited from paying cargo claims prior to receipt of payment for freight charges, when such matters were litigated in court, the state court or federal court rules of civil procedure governed the proceedings and superseded the ICC's administrative ruling.  Accordingly, a shipper could off-set (if its claims were less than the amount sought by the carrier) or actually obtain recovery (where its claims exceeded the carrier’s freight charges) by way of either a cross-complaint if in a California state court, or counterclaim if in a federal district court.  In the context of litigation, it is the either the state or federal rules of civil procedure which govern the parties' claims and not the ICC's administrative ruling.  

With the enactment of TIRRA and the ICCTA and the abolition of the filed rate doctrine, the integrity of the filed tariff system was no longer a statutory requirement.  Accordingly, if a shipper failed to pay carrier freight charges because the carrier had not paid claims, neither the carrier nor the shipper were in violation of the federal statutes which formerly required strict adherence to the filed rate.  And so, in the absence of contractual provisions in a written contract or bill of lading which may address this issue, shippers may, at their risk, withhold payment of carrier freight charges if they deem the carrier's failure to respond to cargo claims inadequate or inappropriate.   

While a shipper may, without fear of violating federal or state law, refuse to pay carrier freight charges and off-set unpaid cargo claims, it does so at its peril.  Carriers may still exercise a possessory lien on the goods in transit to enforce payment for freight charges and, if the shipments are intrastate, the carrier may also be in a position to exercise that lien in order to ensure payment of past-due freight charges provided the notice and other requirements of California Civil Code § 3051.5 are observed.