Set-offs and good faith

Cliff Sieloff
Cliff Sieloff is a Claims Analyst for Blue Book Services Inc.

The Problem
Can I withhold payment on an unrelated invoice to recoup losses on a shipment?

The Key Point
Set-offs may be justified as long as the deduction is claimed in good faith and fully supported.

The Solution
Deal in good faith.

Q: I’m a receiver located in Chicago. I purchased a load of limes on an FOB basis. The limes arrived in terrible shape and we rejected the product to the shipper. The rejection was supported with a portable recorder and reefer download (both proving normal transportation) and a federal inspection showing 29 percent condition defects. Now I’m looking at a $5,000 loss due to the freight expenses and cost of inspection. The shipper is not taking my phone calls or responding to emails. We do owe this shipper $6,000 on an unrelated invoice. Can I just short pay their invoice, so my losses are recouped?

A: Set-offs against a seller’s invoice may be permissible provided the deduction is claimed in good faith and fully supported. We have received inquiries from buyers in your position who want to know if they can “set up” a follow-up transaction with a seller to recoup their losses from a previous transaction. Setting up a trading partner in this way is, however, inconsistent with the requirements of good faith.

The Uniform Commercial Code (UCC) which generally applies to the sale of goods (including produce) throughout the United States, provides that “[E]very contract or duty within [the Uniform Commercial Code] imposes an obligation of good faith in its performance and enforcement.” (UCC Sec. 1-304) Further, PACA regulations provide that ‘good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” (7 C.F.R. 46.2 (hh)).

Arranging a transaction with a trading partner with the secret intention of withholding payment as a means of recouping losses strikes us as contrary to any standard of good faith dealing.
In the scenario you describe, however, because the set-off in question arose in the normal course of business, and in good faith, we would not consider it improper unless prohibited by specific contractual terms agreed to between both parties.

Cliff Sieloff is a claims analyst for Blue Book Services’ Trading Assistance group.