How and when to offset claims against freight

In 2014, the Chinese energy giant Sinopec was engaged for the modernisation of the oil refinery at Atyrau in Kazakhstan, near where the Ural river drains into the Caspian Sea. Sinopec engaged DHL to arrange the transport of refinery units from China.

DHL sub-contracted Globalink for the sea and road leg from the Black Sea port of Novorossiyk through the Ural-Caspian canal to the refinery. Their agreement was entitled “Freight-Forwarding Services Contract”, Globalink was referred to as the “Forwarding Agent”, and they were to be liable for any delay in delivery.

In October 2014, two barges carrying the units launched from Novorossiysk. One barge failed to arrive at the destination because the water level in the Ural-Caspian canal was too low for its draft. To make matters worse, on November 23, 2014, the Ural-Caspian canal closed for winter, so some of the cargo had to be put into storage. Globalink were only able to complete the carriage to the destination when the canal re-opened the following spring.

As a result of this delay, DHL refused to pay the final two instalments of the contract price due to Globalink. Globalink brought a claim for those sums plus the winter storage charges, amounting to $1,647,780. DHL contended that they had a counterclaim of $2,364,976.05, being the costs they incurred in excess of what they would have paid to Globalink if the original agreement been fulfilled.

Globalink applied for summary judgment, relying inter alia on the rule precluding the set-off of counterclaims against the payment of freight under voyage charterparties.

The legal issues

Defendants to claims for money due under commercial contracts often resist payment on the basis that they have a counterclaim, which they wish to set-off against the sums due. English law generally permits this where a claim and cross-claim are so closely connected that it would be unjust to enforce one without taking the other into account.

One notable exception is the long-established principle that a defendant is not entitled to raise any counterclaims it may have in order to reduce the freight payable under a contract of carriage.

The Courts have taken a strict approach in only applying this rule to claims for freight payable under a contract of carriage. It does not, for example, extend to claims for hire under a time charterparty. However, while the rule is most widely known for its application to freight payable under voyage charterparties, it is not limited to the carriage of goods by sea and has been held to apply to the carriage of goods by road and by air.

It has also been held, in Britannia Distribution v Factor Pace [1998] 2 Lloyds Rep 420, that if a freight forwarder has acted as agent in entering a contract of carriage with a carrier and that carrier charges freight, then the forwarder is entitled to claim the sums due for that freight from his principal and the rule against set-off applies.

In this case, Globalink argued that the sum charged by Globalink to DHL was charged in consideration for transporting the equipment from one place to another. It is therefore properly described as freight, such that the rule in The Aries should apply.

DHL argued that the rule in The Aries only applies to contracts of carriage and that this was not such a contract. It was instead a contract to arrange carriage and was not subject to the rule against set-off.

The Commercial Court’s decision

The Judge’s starting point was to consider the nature of the contract between the parties. He noted that the contract described itself as a freight forwarding agreement, not a contract of carriage.

He stated that “the essential nature of [Globalink’s] obligation is not an obligation to carry, but an obligation to procure that carriage is achieved by others”. The fact that Globalink could incur liability for delayed delivery of the cargo did not mean that Globalink was a carrier, nor that Globalink accepted an obligation to deliver on a particular date, it just meant that if Globalink did not arrange for others to deliver the cargo by that date it would incur a penalty to DHL.

The Judge considered that applying the no set-off rule in this case would represent an extension of the existing law, extending the ambit of the rule beyond contracts of carriage and beyond freight in the narrow sense established by the authorities.

He concluded that it was not open to him to extend the rule to cover the services provided by a freight forwarding agent, when those services are simply to arrange the carriage of goods.

This decision confirms that the rule preventing set-off against freight only applies in cases of payment of freight under a contract of carriage. It will not assist freight forwarders who merely contract to arrange the carriage of goods by another.

It is advisable for freight forwarders who wish to avoid deductions being made from payment due to them to insert clear wording in their contracts, requiring the payment of all sums due in full and prohibiting their counterparty from making any deductions or set-offs against the sums that are payable.
Source: The Baltic Briefing (By Carl Walker and Iain Preston, Ince)