Equitable set-off – abatement – not available as a defence against a claim for freight
Rice was shipped from Rangoon to a port in Poland under a Gencon form.
On outturn, the charterers deducted a sum for a portion of the cargo which was damaged.
Correspondence followed in which the owners or their P & I club insisted on full payment of hire. An indemnity was offered for damage to the cargo should this be proved at a later stage.
The charterers maintained their position and after expiry of the time bar in the Hague Rules, the owners instituted action for the balance of freight.
The charterers raised the defence of abatement on the basis of Mondel v Steel.
The two arbitrators appointed by the parties (RAH Clyde and John Chesterman) were unable to agree and an umpire, (Kenneth Stewart Rokison) was appointed.
The umpire stated his award in the form of special case for the decision of the High court.
He found that, in principle, nothing precluded the charterers from raising as a counterclaim damage and short delivery of the goods. However, as the counter claim was time barred, the owners had to succeed.
Counsel for the charterers (Kidwell QC) argued that Mondel v Steel had developed abatement as a pure defence, the very existence of which extinguished the main claim pro tanto.
The insurmountable obstacle he encountered was Dakin v Oxley which held that abatement was not available in the cases of freight & attorneys’ fees.
Mocatta J considered himself bound by Dakin v Oxley and upheld the owners’ claim for freight on that ground alone.
The Court of Appeal (Lord Denning MR, Cairns and Roskill LJJ) affirmed the judgement in the Commercial Court.
Where Counsel for the charterers, Kidwell QC, argued for the scrapping of the exception with regard to the freight as an unprincipled anachronism, Lloyd QC, for the owners argued that all claims by the charterers, whether arising out of the same transaction or not, were counterclaims which would be extinguished by a time bar.
The argument of Kidwell QC was carefully analysed in the judgment of Cairns LJ. The argument of Lloyd QC received more attention from Roskill LJ.
Through the semantic confusion, the following principles emerge:
1. a pure defence which pro tanto extinguishes the main claim without the need to raise a formal counterclaim exists in law, where defective goods or services are provided.
2. freight being the “mother of wages” is exempted from this principle on policy grounds.
Both Cairns and Roskill LJJ disagreed with Lord Denning MR’s analysis of the distinction between claims which arise from the same transaction and those which do not. Lord Denning MR entertained the simplistic dichotomy which held that claims which arise from the same transaction are in the nature of a pure defence while those which do not are counterclaims. The first category of claims cannot be the subject of time bar while the latter can.
Historically, true set-off or abatement was allowed by statute in the Common Law courts in respect of liquidated amounts. This principle was extended in the Common Law courts in Mondel v Steel to illiquid claims at a stage when formal counterclaims had not yet been invented. Despite the introduction of the counterclaim in practice this mechanism survived and was affirmed in the modern case of Hanak v Green.
In equity, the Court of the Exchequer gave an injunction against the main claim to allow a counterclaim to be brought. Although this was not abatement or set-off in the true sense, it became known as “equitable set-off”. This terminology in turn was transferred to denote true set-off or abatement as it had been developed in the Common Law courts.
South African law distinguishes in principle between illiquid and liquid claims. Whereas liquid claims can be the subject of true set-off extinguishing the main claim pro tanto, illiquid claims cannot and must be the subject of a formal counterclaim. This distinction is justified on the basis that only the court can finally decide on the quantum of an illiquid claim. Notionally, the distinction can be discarded on the assumption of an accurate assessment of damage by the claimant as occurs with deductions from hire.
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