Voyage Charters. Deduction from Freight. Cross-action Remedy

That a claim in respect of cargo cannot be asserted by way of deduction from the freight, is a long established rule in English law.… As a rule it has never been judicially doubted or questioned or criticised; it has received the approval of authoritative textbooks.
Aries Tanker Corporation v Total Transport Ltd (The Aries), [1977] 1 All ER 398 per Lord Wilberforce

Set off

In Henriksens Rederi A/S THZ Rolimpex (The Brede) [1973] 2 Lloyd’s Rep. 333; [1973] 3 All ER 589 the charterers assessed shortage of cargo and partial damage of delivered cargo on arrival. They estimated and deducted monetary value of their damages from freight. The owners strongly disagreed with the charterers and suggested them to pay the freight in full and promised to guarantee the payment of the damage claim through their P&I club. Charterers did not paid the freight in full and did not sue the owners for cargo damage. In two years when the owners claimed their freight back, the charterers put forward their claim in respect of the damaged cargo. In reply the shipowners contended that the Charterers’ claim is time-barred. The Court of Appeal , confirmed that freight is a special obligation which is not subject to the rule of equitable set-off. Lord Denning MR in his leading judgement distinguished law applicable to contracts for freight from the rule of abatement arising from defective performance of the contractual service in the following words at p.596:

If that general principle applies to contracts of carriage, then I think that the charterers here would be right… But the question is whether that general principle applies in England to a contract for freight. I do not think it does. The law of England as to freight has developed along its own special lines. Freight is payable according to the terms of the contract. No defence of recoupment is allowed.

His Lordship emphasised that the main reason for development and application of such special rules was a bare necessity to avoid, for the sake of good conduct of business, undesirable delays which may otherwise arise from unfounded allegations and disputes as to the amount and cause of the damage to the goods.

The second attempt to review the general principle restricting the charterers from any deduction from the freight to make up their damages in respect of short delivered goods was made in Aries Tanker Corporation v Total Transport Ltd (The Aries) [1977] 1 Lloyd’s Rep 334. The charterers having ascertained short delivery of cargo of gasoline on completion of discharge paid freight to the owners but for deduction therefrom $30,000 in respect of said shortage. The owners never accepted the validity of that deduction and issued a specially indorsed writ claiming $30,000 as unpaid freight. The charterers served a defence and counterclaimed for the $30,000. They had not, however, instituted the suit within 12 months of delivery of the cargo and were accordingly time barred, in accordance with art.III, r.6 of the Hague Rules which were expressly incorporated into the charterparty.

The House of Lord held that the time bar on claims for loss or damage of goods imposed by the contract was of the kind which, on expiry of the prescribed time limit, extinguished the claim and not merely barred the remedy. Therefore the charterers claim ceased to exist in law after one year upon completion of discharging. Their Lordships furthermore upheld decision of the Court of Appeal in The Brede where the old principles that freight was always an exception to the common law rules were approved. Lord Wilberforce emphasised at p.338 that:

…the rule of deduction, or abatement, is one confined to contracts for the sale of goods or for work and labour and never extended to contracts generally and to contracts of carriage in particular. The rule against deduction in cases of carriage by sea is, in fact, as well settled as any common law rule can be.

This law was subsequently applied in The Alfa Nord where it was held that the charterer is not entitled to set off against the freight a claim for damages for an alleged failure to prosecute the voyage with reasonable dispatch and later in Cleobulos Shipping Co Ltd v Intertanker Ltd (The Cleon) [1983] 1 Lloyd’s Rep 586. In The Cleon case the charterers sent the tanker from Terneuzen to Rotterdam to unload balance of cargo left undischarged in Terneuzen, but declined to pay the freight earned on that voyage by the owners. They alleged that the need to discharge at the second port was caused by defects in the vessel’s pumping facilities and therefore they were not raising a mere counterclaim for damages but were challenging the right of the owners to receive the supplemental freight at all, because the owners had not earned it. The Court of Appeal dealing with this case came to conclusion that at all material times vessel was performing under the Charterers’ orders and the charterparty remained in existence right up until the discharge of the balance of the cargo at Rotterdam. Thus Charterers’ claim was held to be indisputably a claim for freight and therefore prima facie came within the rule restated in The Aries.

Thus, there is no general right of set-off against voyage freight in respect of other debts and still less in respect of contentious claims. Accordingly the charterers may not withhold the value of their claim when paying freight unless they reserve in the charter a right to deduct, e.g., the c.i.f. value of cargo short delivered as against intake or Bill of Lading quantity as it was, for example, in The Olympic Brilliance, where cl. 7 of amended Exxonvoy 69 form provided inter alia that:

If there is a difference of more than 0.50% between B/Lading figures and delivered cargo as ascertained by Custom Authorities at discharging port, Charterers have the right to deduct from freight the C.I.F. value for the short delivered cargo…

According to the Customs Authorities’ certificate vessel discharged 2420 tonnes less bill of lading quantity, and although the reason of such short delivery was inexplicable both parties agreed that it was undisputed that the charterers were entitled to exercise their right of deduction under cl. 7. But the owners further contended that, in order to maintain the deduction, the charterers must go on to establish some breach of the contract of carriage which renders the owners liable in damages equal to, or greater than, the deduction. The Court of Appeal found that an express right to make a deduction from freight prima facie involves the right to make a final and not merely a provisional deduction, so as to reduce the freight which is payable to the lesser resulting figure and that the clause should therefore be construed as only having been intended to overcome the difficulties for charterers which have recently been highlighted by the decisions in The Brede and The Aries.

Authorities discussed above all dealt with non-repudiatory breaches and the rule stated in The Aries restricting equitable intervention was formulated by Lord Simon of Glaisdale as below:

… the equity of the bill had to impeach the title to the legal demand: per Lord Cottenham LC in Rawson v Samuel (1841) Cr & Ph 161 at 178, 179. The title to a claim for freight is not impeached by short delivery of cargo - unless, of course, the latter amounts to repudiation of the contract of carriage.

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