112. Federal Commerce and Navigation Ltd v Molena Alpha Inc (The “Nanfri”, “Benfri” And “Lorfri”) [1978] 1 Lloyd’s Rep 581; [1979] 2 Lloyd’s Rep 132; [1978] 1 Lloyd’s Rep 201

Owners’ repudiation of time charterparty – charterers’ right to make deductions from hire

The facts

Three vessels were chartered for six years on the Baltime form.

The contracts contained the usual employment and agency clause.

An off-hire clause provided that no hire was to be paid in respect of time lost for certain specified events. A clause specifically allowed deductions from hire for slow steaming and attendant losses.

The owners were given a lien upon cargo and freight.

The charterers periodically deducted claims from hire without reference to the owners. On occasion, the owners disputed the deductions which disputes were resolved.

Midway through the term of the charters, the charterers made a number of deductions from hire. The parties were able to agree on the deductions save for a relatively small amount.

At the time the markets had dropped and it would have been favourable for the charterers to terminate the charters.

The owners took the view that deductions could only be made by the charterers if the deductions were:

a. supported by vouchers signed by the Master
b. accepted by the owners; or
c. resolved by arbitration.

The charterers insisted that they were entitled to make deductions in their discretion.

The owners gave notice of arbitration to resolve the dispute concerning a. the specific deductions and b. the basis of the charterers’ right to make deductions.

Charterers retaliated by deducting hire for a slow steaming claim which had arisen almost two years earlier. The owners then threatened to clause the bills of lading to incorporate the terms of the charterparty and refused to endorse the bills “freight pre-paid” as required by charterers.

Each vessel had been sub-chartered on voyage charters which required the issue of freight pre-paid bills of lading.

The charterers thereupon cancelled the charters.

The parties entered into a without prejudice agreement in terms of which the vessels remained in the charterers’ service. The charterers paid all disputed deductions and agreed to make no more without the owners’ approval. On the owners’ side, freight pre-paid bills were issued without any endorsement referring to the charters.

Both sides co-operated in a speedy arbitration which took place a month after the cancellation.

The two arbitrators appointed were unable to agree and the matter was referred to an umpire who stated his award in favour of the charterers in the form of a special case.

Findings

Kerr J found that the owners’ lien over sub-freights did not justify their conduct. He pointed out that the owners’ right to hire was protected by their right to withdraw the vessel. He held, however, that the owners’ breach, particularly with regard to the fact that they held their position subject to the outcome of arbitration, did not constitute repudiation.

He followed the Teno which held that charterers were entitled to make deductions for bona fide claims assessed on a reasonable basis. He mentioned in passing, however, that his impression was that the generally held view among commercial practitioners was that deductions for hire could only be made in terms of the express terms of the contract itself and that, as with freight, there was no general equitable right of set-off.

The Court of Appeal (per Lord Denning MR, Goff and Cumming – Bruce LJJ each delivering a separate judgement) held that the owners did in fact repudiate the charters.

On the question of the general right of equitable set-off, Lord Denning MR and Goff LJ found in favour of such a right while Cumming-Bruce LJ did not.

In the House of Lords (Lord Wilberforce, Viscount, Dilhorne, Lords Fraser, Russell and Scarman – main speech given by Lord Wilberforce) the question of the general right of equitable set-off was not considered.

All the Lords held that the breach of the owners, whether actual or anticipatory, amounted to a repudiation of the contract.

Lord Wilberforce pointed out that if the breach went to the root of the contract, the subjective desire to maintain the contract could not prevent the other party from “drawing the consequences” of the defaulter’s actions.

Commentary

All three judgments in the Court of Appeal deal at length with the general right of equitable set-off despite the main issue being repudiation.

Although the outcome in the House of Lords is probably correct, the approach of Kerr J has much to commend itself. Kerr J recognized a lengthy relationship which could have been salvaged by a speedy arbitration.

Lord Denning quoted the iconoclastic dictum of Lord Diplock in United Scientific Holdings v Burnley Burough Council:

“My Lords, if by “Rules of Equity” is meant that body of substantive and adjectival law that, prior to 1875, was administered by the Court of Chancery but not by courts of Common Law, to speak of the Rules of Equity as being part of the Law of England in 1977 is about as meaningful as to speak similarly of the statutes of Uses or of Quia Emptores. Historically all three have in their time played an important part in the development of the corpus juris into what it is today; but to perpetuate a dichotomy between Rules of Equity and Rules of Common Law which it was a major purpose of the Supreme Court of Judicature Act 1873 to do away with, is in my view, conducive to erroneous conclusions as to the ways in which the Law of England has developed in the law 100 years….

Your Lordships have been referred to the vivid phrase traceable to the first edition of Ashburner’s Principles of Equity where, speaking in 1902 of the effect of the Judicature Act, he says “The two streams of jurisdiction [sc Law and Equity], although they run in the same channel, run side by side and do not mingle their waters.” My Lords, by 1977 this metaphor has in my view become both mischievous and deceptive. Innate conservatism of English lawyers may have made them slow to recognize that by the Judicature Act 1873 the two systems of substantive and adjectival law formerly administered by Courts of Law and Courts of Chancery (as well as those administered by Courts of Admiralty, probate and Matrimonial causes), were fused. As at the confluence of the Rhone and Saone, it may be possible for a short distance to dissern the source from which each part of the combined stream came, but there comes a point at which this ceases to be possible. If Professor Ashburner’s fluvial metaphor is to be retained at all, the waters of the confluent streams of law and equity have surely mingled now.”

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