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“No Set-Off” Term in Freight Forwarding Contract Upheld
Published in the May 2009 issue of Transportation Notes - View Article
An Ontario court recently granted partial summary judgment to a freight forwarder by upholding a “no set-off” term of a contract with a customer. The plaintiff, ITN Transborder Services (“ITN”) is a freight forwarder and logistics provider. The defendant, WC Wood Corporation Ltd. (“Wood”) manufactures freezers and refrigerators and has locations in Ontario, Ohio and Mexico. Wood began using ITN’s services in March 2007, and the parties entered into a formal “Shipper-Agent Logistics Services Agreement” (“the contract”) on April 4, 2008.
The main issue in the action involved the determination of the amount payable by Wood to ITN. ITN argued that the contract called for a fixed rate for each trip in accordance with a set of tariffs that ITN provided to Wood at the time the contract took effect. Wood argued that the contract did not require fixed rates but rather the amount paid by ITN to the carrier, plus a margin or mark-up of 7-9%.
Until December 12, 2008, Wood paid all ITN invoices in full and on time, without complaint. Beginning in December 2008, Wood fell behind in its payments and by January 2009 it was seriously in default. In February 2009, Wood raised the issue of improper charges for the first time and demanded ITN produce copies of its contracts with carriers; ITN refused to do and claimed confidentiality. Wood then refused to make any further payments on outstanding invoices. ITN then issued a statement of claim seeking judgment for the amount of invoices outstanding since December 12, 2008. Wood delivered a statement of defence and counterclaim for the amounts it says it was overcharged on invoices paid prior to December 12, 2008. ITN brought a motion for summary judgment.
In addition to the main issue referenced earlier (i.e., whether the contract required fix-rate charges or the rate paid by ITN to the carrier plus a mark-up of 7-9%), ITN submitted that even if Wood’s interpretation of the contract should be correct, Wood is obligated to pay the invoices pursuant to clause 17 of the “Standard Trading Conditions” which form part of the contract. Clause 17 provides that “The Customer shall pay to ITN Logistics Group… all sums immediately when due without reduction or deferment on account of any claim, counterclaim or set off”. ITN argued that clause 17, in effect a “pay now, sue later” clause, is a very important term in the freight forwarding industry and one that is bargained for.
The motions judge held that he could not determine whether the contract was a fixed-rate contract at the summary judgment stage, as such a determination would require a full record, including assessment of witnesses. As for clause 17, the motions judge was not persuaded that it required Wood to pay invoiced amounts, notwithstanding a genuine dispute as to whether the invoices are accurate. Although clause 17 requires Wood to pay “all sums… due” without reduction for any claim, counterclaim or set-off, whether a sum is “due” is open to more than one meaning: “due” could mean 30 days after the invoice is submitted, whether or not it is accurate, or it could mean that only sums that have been accurately calculated and that are actually owing are “due”. Any ambiguity would be construed against ITN as the drafter, and thus the judge held that clause 17 does not preclude Wood from declining to pay a portion of the invoice claimed to amount to an overcharge.
However, the subject matter of ITN’s claim is the more than $1.8 million in invoices outstanding since December 12, 2008 and not the invoices paid by Wood prior to that date. Assuming that Wood’s interpretation of the contract is preferred, the most that Wood could establish is that the margin between the cost of transportation services and the amount charged to Wood may have been as much as 17%, or an overcharge of between 8-10%. Wood’s best position would be that only 90% of the outstanding $1.8 million is actually “due”. Clause 17 would not have precluded Wood from remitting a reduced amount of approximately $1.6 million to ITN. But Wood did not do so and withheld 100% of the outstanding amount on the basis that it was overcharged in the past; essentially, it set off amounts that it says ITN owes it against the amounts that it owes ITN. The judge held that Wood did precisely what clause 17 precluded it from doing, and even applying clause 17 strictly against ITN, the clause is clear in its exclusion of Wood’s right to reduce amounts owing to ITN “on account of any claim, counterclaim or set off.” The motions judge rejected Wood’s submission that clause 17 ought not to be enforceable due to ITN terminating or fundamentally breaching the contract and held that there was no question that ITN fulfilled its primary obligation of providing freight forwarding and logistics support services to Wood. The judge also declined to follow the cases relied upon by Wood which involved the unenforceability of “no set-off” clauses, as the cases involved different circumstances and did not involve freight forwarding contracts. The judge held that clause 17 should be read in light of the realities of the freight forwarding industry and that the court should consider that the contract was made by sophisticated parties of equal bargaining strength. Accordingly, there could be no set-off for amounts already paid on the theory that they were in excess of the amount actually due. With respect to the accounts outstanding—totalling $1.8 million—it was highly likely that at least 90% was due and owing. To account for the possibility that the amount of the accounts outstanding was overstated by an even greater margin, the judge assumed an overcharge of up to 20% and concluded there was no genuine issue for trial for at least $1.4 million of the amount claimed. The judge granted partial summary judgment for that amount. The balance of the claim would proceed to trial.
ITN Transborder Services Inc. v. WC Wood Corporation Ltd., 2009 CanLII 21762 (ON. S.C.)