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Abatement – equitable set off – freight assigned to bank – charterers not entitled to set-off damages claim

The facts

The vessel was chartered to carry agricultural products in bulk from India to North European ports. En route the vessel was arrested in Sri Lanka at which time the owners repudiated the charter.

The charterers’ accepted the repudiation and incurred expenses in the trans-shipment of the cargo.

In the interim freight had been assigned to the owners’ bank and notice of assignment was given to the charterers.

Clause 16 of the charter read as follows:

“16. Freight shall be pre-paid within 5 days of signing and surrender of final bills of lading, full freight deemed to be earned on signing bills of lading, discountless and non-returnable, vessel and/or cargo lost or not lost and to be paid….”

The bank claimed freight from the charterers who attempted to set up a claim for damages in defence.

The two arbitrators appointed in terms of the London arbitration clause held in favour of the charterers.


On appeal to the Commercial Court (Hobhouse J) four questions were decided:

1. the effect of the freight deemed to be earned clause;

2. the effect of the termination of the charter on the liability for freight;

3. the right of set-off viz a viz the ship owners;

4. the right of set-off viz a viz the bank.

The arbitrators had decided the first two points in favour of the charterers but the last point in favour of the bank.

The Commercial Court supported the finding of the arbitrators with regard to the interpretation of the freight deemed to be earned clause categorising it as a “loosely drafted and potentially self contradictory commercial contract”.

On a careful analysis of the authorities, the Commercial Court found that the termination of the charter had no effect on the liability for freight and that no right of set-off was available to the charterers.

With regard to the fourth point, the court rejected the argument that wider considerations applied in claims against assignees so that it was equitable to allow set-off. The court emphasised the fact that the bank had a contractual right to be paid freight without deduction.

In the Court of Appeal (Fox, Croomb,- Johnson and Mustill LJJ – judgment given by Mustill LJ) it was considered that the authorities proscribing deductions from freight dealt with non-repudiatory breaches. Where the charterer was deprived of its bargain, as in the present case where the voyage had only just commenced before trans-shipment was required, it would be equitable to allow set-off against freight.

The House of Lords (Lord Keith of Kinkel, Brandon of Oakbrooke, Oliver of Aylmerton, Goff of Chieveley and Lord Jauncey of Tullichettle – speech by Lord Brandon) restored the decision of Hobhouse J.


Lord Brandon’s speech decides the same four questions formulated by Hobhouse J in much the same way.

With regard to the third question (the right of equitable set-off in general) Lord Brandon concentrates on the principles of equity rather than the singular exception with regard to freight. He points out that non repudiatory breaches sometimes have more serious consequences for the charterer and that the distinction in the type of breach is therefore no ground for the disturbance of established precedent.

The conclusions drawn by Mustill LJ were based on an analysis of Dakin v Oxley. It is noteworthy that discussion on this case is omitted altogether by Hobhouse J and Lord Brandon. Dakin v Oxley is hallowed by the passage of time and the eminence of the judges on the panel, including Sir James Shaw Willes who gave the judgement.

With regard to the second point (the effect of termination on the rights and obligations in the contract already completed) reliance was placed in all the judgements on the useful dictum of Dixon J in the Australian case of McDonald v Dennys Lascelles Ltd.

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