Produce Pointers

The Problem: Buyer using ‘set-off’ to recover on old claim.

The Key Point: Set-offs are not necessarily illegal, but must be applied in good faith.

The Solution: Pursue allegedly unpaid obligations through proper legal channels.

QUESTION
We are a grower and importer based in southern Florida. Three years ago a well-known shipper loaned us some money as a crop advance. Long story short, the production on the deal did not pan out as expected, resulting in a prolonged and complicated dispute. We ended up paying them more than we thought was fair, and considered the matter to be fully resolved.

Then, nearly a year later, this shipper reached out to us and agreed to purchase nearly $60,000-worth of product. At no time did we agree that their payment would be applied as a credit against our alleged debt—that was a completely separate matter. But now they’re telling us they will be ‘setting-off’ the amount they owe us for this product against the debt they claim we owe them. This conveniently results in them paying us nothing for the $60,000 in product we recently shipped. We’re planning on filing a PACA complaint to recover the money they owe us, but wanted to ask you if this type of set-off is allowed.

ANSWER
Set-offs are not necessarily illegal, and may be justified as long as the deduction is claimed in good faith and fully supported. However, “setting up” an alleged debtor with a follow-up transaction to recoup losses from a prior transaction is inconsistent with good faith dealing and is therefore improper.

If, for example, in the ordinary course of business this buyer (described by you as a well-known shipper) owed you $10,000 for an f.o.b. invoice, but you owed $3,000 in connection with a rejected load—and the buyer could support this $3,000 claim—then it could properly pay you just $7,000 and credit your account with the remainder. Of course, you could challenge the substance of the claim that this $3,000 was owed, but the set-off itself, if made in good faith, would not be improper.

But the case you describe is very different. It sounds as though the buyer entered into this recent transaction with the undisclosed intention of collecting on a debt allegedly accrued years before, one it had stopped actively pursuing nearly a year ago. The Uniform Commercial Code (UCC), Sec. 1-304,
provides —

Every contract or duty within [the Uniform Commercial Code] imposes an obligation of good faith in its performance and enforcement.

In the case you describe, it appears to us that the buyer failed to enter into this agreement, or perform under it (i.e., pay), in good faith. If the buyer believed it was owed additional money on the former transaction, it could have pursued the matter in court or through PACA. But, in our view, your buyer may not properly engage in a subsequent transaction as a means of remedying a perceived wrong in connection with a separate prior transaction.

What’s more, given that the prior transaction occurred more than nine months ago and is therefore outside of PACA’s jurisdiction, we would expect you to recover in full and without needing to delve into the merits of the prior transaction, at least before PACA. Of course, your buyer could always pursue the amount it alleges is owed in connection with the prior transaction in civil court, provided it files before the relevant statute of limitations runs out.

Your questions? Yes, send them in. Legal answers? No, industry knowledgeable answers. If you have questions or would like further information, email tradingassist@bluebookservices.com.