Golden Jet Freight Forwarders Ltd and Another v. Transmeridian Air Cargo Ltd and Another

HCA003488/1979

Air Charter Agreement Hire may be set off by shipper's related claims - strict rule at common law against any reduction of other claims from freight is limited to a voyage charter for carriage of goods by sea.

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Coram: Hon. Liu, J. in Chambers

Date: 17 April 1982

Re: 1. In Action 914/80 - Defendant's Appeal from Master's Decision

2. In Action 3488/79 - Plaintiffs' application by summons for consolidation with Action 914/80 and directions

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JUDGMENT

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1. In September, 1977, one of the aircrafts managed by the Transmeridian Air Cargo Limited (hereinafter referred to as "Transmeridian") crashed on take-off at Kai Tak.

2. Golden Jet Freight Forwarders Limited (hereinafter referred to as "Golden Jet") had secured an aircraft Charter Agreement from Transmeridian for the carriage of cargo up to a maximum payload of 27,000 kilogrammes on the 31st August, 1977 from Hong Kong to Dubai and to Netherlands, and subsequently extended to cover an airport in England, for a total net charter price of U.S. $46,000 exclusive of terminal charges.

3. As a result of the crash, three claims arose against Transmeridian. Together with two further heads of claim by Golden Jet, in all there were five claims against Transmeridian, and they are as follows :

(1) Charter-hire U.S. $39,842.46.

(2) Loss of cargo from Drama K. Co. $97,870.46.

(3) Loss of cargo from Tricoville (HK) Limited $36,383.00.

(4) Miscellaneous shipment claims from July to September 1978 $39,840.90 (U.S.$8,478 approx.)

(5) Claim on the abandonment or off-loading of 36 cartons of goods in September 1978 $95,000 approx. (U.S. $20,058.65).

4. Golden Jet raised all these five claims long before the commencement of Transmeridian's Hong Kong action commenced in February 1980, intituled High Court Action No.914 of 1980. Transmeridian can hardly be heard to say that any of these five items is not a bona fide claim of Golden Jet.

5. In the meantime, between March 1979 to June 1979, some charter hire was incurred and became payable by Golden Jet to Transmeridian.

6. On the 13th August, 1979 Golden Jet together with his associate company, Speedway Air Cargo Forwarders Limited (hereinafter referred to as "Speedway Air"), commenced an action in Hong Kong intituled High Court Action No.3488 of 1979, in which the five claims of Golden Jet were raised against Transmeridian and its associate company, the Transmeridian Air Cargo (HK) Limited (hereinafter referred to as "Transmeridian (HK)"). Not only did Golden Jet and Speedway Air commence their Hong Kong action on the 13th August, 1979, but on the very next day, the 14th August, 1979, solicitors for Golden Jet intimated to Transmeridian through its associate Transmeridian (HK) that the charter hire due from Golden Jet and Speedway Air would be set off. Therefore, the claim of set-off cannot be an afterthought.

7. Three days later, on the advice of counsel a similar action was commenced by Golden Jet and Speedway Air against Transmeridian and Transmeridian (HK) in the English Commercial Court. The Hong Kong action of Golden Jet and Speedway Air was held in abeyance by consent, and only the English action was proceeded with. In the English action, Points of Claim and Points of Defence were delivered, and particulars had been requested of Golden Jet and Speedway Air. In March 1980, receivers were appointed in Transmeridian under a Debenture, and in October of the same year there was a creditors' voluntary winding up. Hence the English action was not further prosecuted.

8. The period of limitation for raising claim on the first three heads of Golden Jet's claim expired on the 1st September, 1979 i.e. two years after the crash at Kai Tak.

9. On the 23rd February, 1980, Transmeridian commenced its present Hong Kong Action 914 against Golden Jet for the said charter hire accrued from March to June 1979. Transmeridian did not see fit to set off or counterclaim in Golden Jet's and Speedway Air's Hong Kong Action 3488 or their English Action in the Commercial Court, but they had chosen to institute a separate action in Hong Kong. In May 1980, an Order 14 summons was taken out, and on the 21st January, 1982 the learned Master granted Transmeridian leave to sign final judgment against Golden Jet in the sum of U.S.$78,123.05 with costs. It was against that decision of the learned Master that this appeal was brought.

10. Of the five heads of claim of Golden Jet against Transmeridian, the second and third claims of loss of cargo from Drama K. Company and Tricoville (HK) Limited had been settled between the cargo owners and Golden Jet allegedly on account of "good commercial relationship". No further particulars had been given. If indeed the claims of Drama K. and Tricoville (HK) Limited were incontestably valid and demands thereof made within the limitation period, the settlements could hardly be complained of. But if, in fact, settlements had been reached otherwise, for instance, against doubtful or unsubstantiated claims with demands thereof made beyond the limitation period in the absence of any legal proceedings, Golden Jet's claims against Transmeridian might well be affected, though not necessarily so as it would ultimately depend on the contractual relationship created by the documents signed. It was not suggested that Golden Jet was not so entitled to claim under their own agreement with Transmeridian. Also, both parties were silent on the effect of time-bar in a consolidation. Taking advantage of a time-bar in cargo claims even between the same parties has not been uncommon as in the case of Henriksens Rederi v. Rolimpex (The Brede), ⁽¹⁾ where the shipowners gained ground on the difference in the respective limitation periods for their own claim for freight and the charterers' claim for loss of or damage to cargo. These are all matters arguable and deserving a fuller examination at a proper trial. Moreover, it was pointed out by Mr. Mills-Owens that apart from the cargo claims of Drama K. Company and Tricoville (HK) Limited, the other three heads of claim (1), (4) and (5) together with interest on (1) alone would come to over U.S.$77,000, almost matching the claim of Transmeridian in their Hong Kong action.

11. The claims between Golden Jet and its associate and Transmeridian and its associate arose, at least arguably, from related transactions. These claims were evidently between the same parties in their same capacities. It was submitted that with Transmeridian's claim for U.S.$78,123.50 unchallenged, judgment ought to be entered in that sum against Golden Jet possibly subject to a stay and Golden Jet's counterclaim, if warranted by the circumstances. I was constantly reminded of the well-established rule for over a hundred years against any deduction from or set-off against freight.

12. I will begin with the case of Henriksens Rederi v. Rolimpex (The Brede),⁽¹⁾ where there existed mutual claims between the shipowners and the charterers in a voyage charter. The amount of freight claimed was not in dispute, but the charterers claimed to deduct £3,000 for short delivery of and damage to their cargo and withheld the same without the consent of the shipowners. The charterers were adamant about their right and declined any intervention with a view to amicably settling the dispute. They persisted in withholding the £3,000. After the expiration of the limitation period of one year, having themselves six years within which to pursue their claim for freight the shipowners took advantage of the difference in the time-bar and commenced an action against the charterers. It was held that in a cross-claim founded on the diminution of the value of goods sold or work done, deduction at common law from the price was "a true defence pro tanto to the plaintiff's claim" and that as such pro thanto defence it was not defeated by the limitation period. What truly concerns matters presently under consideration is the judicial pronouncement that the general common law rule for deduction could have no application to a claim for freight. The English Court of Appeal could find no compelling reasons for such non-application and was conscious of its waning historical justification, but exclusion from freight of the general common law rule allowing recoupment was upheld as settled law in an action on a voyage charter. Naturally, in that case with no right of deduction but having to make a cargo claim by a cross-action, the charterers were denied their right by the time-bar.

13. In the course of his judgment in "The Brede",⁽¹⁾ Lord Denning M.R. succintly summarized the difference between a counterclaim, a legal set-off and an equitable set-off: A legal set-off is a creature of statute law and applies only "where the claims on both sides are liquidated debts or money demands which can be ascertained with certainty at the time of pleading." These cross-claims in order to found a legal set-off "must arise out of separate transactions". Vide page 593g. A counterclaim is "any claim that could be the subject of an independent action. It is not confined to money claims ... and ... it need not relate to or be connected with the original subject of the cause or matter." Vide page 594b. An equitable set-off is "available whenever the cross-claim arises out of the same action as the claim; or out of a transaction that is closely related to the claim." Vide page 595g. It need be remembered that in order to succeed in an equitable set-off, there must be "good equitable grounds for directly impeaching the demand which the creditor is seeking to enforce." per Lord Denning, M.R. in Federal Commerce Ltd. v. Molena Alpha Inc.⁽²⁾ Both deduction and equitable set-off would have the effect of diminishing the value of the goods seld or the work done, in effect reducing the amount of the claim made, but a legal set-off and a counterclaim would not.

14. In "The Brede",⁽¹⁾ the learned Master of the Rolls referred to section 28 of the Limitation Act 1939, which is equivalent to section 35 of our Limitation Ordinance, and which reads as follows :

"For the purposes of this Ordinance, any claim by way of set-off or counterclaim shall be deemed to be a separate action and to have been commenced on the same date as the action in which the set-off or counterclaim is pleaded."

Lord Denning observed at page 593g that "set-off" in our equivalent section 35 of the Limitation Ordinance was used to denote a legal set-off and did not apply to an equitable set-off.

15. Evidently, in "The Brede"⁽¹⁾ the charterers' claim for loss of and damage to cargo arose out of the same transaction and was therefore not a subject-matter for a legal set-off. It was an alleged equitable set-off, which was in the circumstances tantamount to a proposed reduction or recoupment from the claim for freight. Reduction from freight or the defence of recoupment as known in other territory was disallowed in "The Brede".⁽¹⁾ Thus, the Court was not called upon to deal specifically with equitable set-off, which must have been rejected by necessary implication, and no more required to be said on the Limitation Act.

16. Approving the decision in "The Brede", ⁽¹⁾ the House of Lords added their own contributions in Aries Tanker Corporation v. Total Transport Ltd., ⁽³⁾ which was again a case of a voyage charter of a tanker for carrying petrol from the Arabian Gulf to Rotterdam. A claim for short delivery was made, and the charterers without the consent of the shipowners withheld a sum of $30,000 from the freight payable. The retention was, in the circumstances, also in the nature of an equitable set-off having arisen from the same transaction. It was observed that the said rule of disallowing reduction or recoupment from freight had been too well entrenched in English law to be questioned, thus dashing the last hope of revival of a set-off, equitable or otherwise. The charterers' claim of a right to deduct or recoup from freight was finally laid to rest in their Lordships' House in that case again of a voyage charter.

17. At page 190E, Lord Wilberforce said of the common law "rule of deduction or abatement" which his Lordship described as "settled law" in these words:"There is no case of its having been extended to contracts of any kind of carriage." Much capital was sought to be made of this observation, but Lord Wilberforce continued:

"The rule against deduction in cases of carriage by sea is, in fact, as well settled as any common law rule can be."

Lord Wilberforce cannot be, therefore, assumed as having accepted as "settled law" that no right of deduction, abatement or recoupment could exist in other kinds of contract of carriage than that of carriage by sea. A passing reference to that rule not having been known to have been extended to other kinds of carriage contract should not be cmbraced as an authoritative statement that in fact such a rule allowing deduction never did exist or could not prevail in contracts of any other kind of carriage. In fact, the contrary would seem to be more true as in a later case in 1978, it was held that the restriction against deduction from freight should not be extended.

18. At page 191B/C, Lord Wilberforce referred to the question of equitable set-off which was submitted as having been overlooked in "The Brede" :

"My Lords, a yet further argument was developed, that the charterers' claim for short delivery might operate by way of equitable set-off --- this, on the assumption as I understood it, that the right of deduction at law was not upheld. This contention was given more prominence in this House than perhaps it received in the Court of Appeal's judgments in The Brede though in fact it seems to have been given adequate consideration in that case. It does not appear to me to advance the appellants' case. One thing is certainly clear about the doctrine of equitable set-off --- complicated though it may have become from its involvement with procedural matters --- namely, that for it to apply, there must be some equity, some ground for equitable intervention, other than the mere existence of a cross-claim ...... But in this case counsel could not suggest, and I cannot detect, any such equity sufficient to operate the mechanism, so as, in effect, to over-ride a clear rule of the common law on the basis of which the parties contracted."

19. Arguments based on common law and equity were separately dealt with in the speech of Lord Simon who held that at common law the charterers were not entitled to deduct or recoup their claim for short delivery and that for some six given reasons it should also fail in equity. Lord Simon was "firmly of the opinion that The Brede was correctly decided". It must never be forgotten that the Aries ⁽³⁾ case like "The Brede" ⁽¹⁾ were both cases of a voyage charter.

20. Lastly, I turn to the case of Federal Commerce and Navigation Company Limited v. Molena Alpha Incorporation, ⁽²⁾ which was a case of a time charter as opposed to a voyage charter. The majority of the Court of Appeal (Cumming-Bruce L.J. dissenting) held that the "settled law" against the deduction from a claim for freight did not apply to a time charter and therefore an equitable set-off was permissible. At page 973D, Lord Denning directed special attention to the change of the description for freight in a time charter :

"The payments due under a time charter are usually now described as 'hire' and those under a voyage charter as 'freight'. This change of language corresponds, I believe, to a recognition that the two things are different. 'Freight' is payable for carrying a quantity of cargo from one place to another. 'Hire' is payable for the right to use a vessel for a specified period of time, irrespective of whether the charterer chooses to use it for carrying cargo or lays it up, out of use."

"So different are the two concepts that I do not think the law as to 'freight' can be applied indiscriminately to 'hire'. In particular the special rule of English law whereby 'freight' must be paid in full (without deductions for short delivery or cargo damage) cannot be applied automatically to time charter 'hire'. Nor is there any authority which says that it must."

21. At page 982 E/F, Goff L.J. concurred with opinion of Donaldson J. in Seven Seas case ⁽⁴⁾ that the strict rule of common law against deduction of freight should not be unduly extended. Having reached the conclusion that equitable set-off was "not excluded as a matter of law", the learned Lord Justice proceeded at page 988B to consider if indeed such equitable set-off was permitted by the terms of the charter-party.

22. In Order 14 proceedings, it would be quite unnecessary to refer to the dissenting judgment of Cumming-Bruce, L.J.

23. There is no question of any equitable set-off in this case. The only issue to be decided is whether Golden Jet can arguably raise a legal set-off. It has also not been suggested that the terms of the aircraft Charter Agreement in this case excluded any claim of set-off. Before I come to the effect of a legal set-off, it would not be impertinent to end this part of my judgment by referring to Note 1 at page 591 paragraph 661 in Volume 1 of Shawcross and Beaumont on Air Law 4th edition, which states: "It is not possible simply to read of the Marine cases in an aviation context."

24. Turning back now to "The Brede",⁽¹⁾ at page 594d Lord Denning M.R. analysed the effect of section 28 of the Limitation Act 1939 (equivalent to section 35 of our Limitation Ordinance) on a set-off and counterclaim in these terms :

"Where the defendant has a cross-claim for damages arising from a separate transaction, he can either bring a separate action for it: in which case he is subject to the ordinary time-bar. Alternatively, he can raise it by way of counterclaim. Before 1939, if he was time-barred for a separate action, he was time-barred for a counterclaim; because the counterclaim only dated from the time of its delivery; see Lowe v. Bentley. ⁽⁵⁾ But by section 28 a counterclaim, which arises out of a separate transaction, is on the same footing as a set-off. If it is not time-barred at the time when the plaintiff issues his writ, the defendant can raise it in opposition to the plaintiff's claim without being affected by any intervening running of time."

25. There have been strong judicial views that the strict rule against deduction, abatement or recoupment from freight should not be extended beyond the case of a voyage charter. It must, therefore, be arguable that such strict rule is not applicable to a claim for air charter hire. I have dealt with the arguments on time-bar and do not propose to repeat myself. It follows that in the circumstances, as a matter of law a legal set-off and counterclaim may arguably be raised by Golden Jet and Speedway Air against Transmeridian and Transmeridian (HK) and that a set-off would have the effect of reducing or extinguishing part of Transmeridian's claim. I have not, of course, been asked to reject Golden Jet's intended claim of set-off by reason of the contract terms in the Air Charter Agreement. These are serious matters to be fully ventilated for a determination at the trial and should not be summarily disposed of in an Order 14 summons.

26. In conclusion, it is my judgment that the defendant in 914 has a bona fide triable defence and that leave to sign final judgment should not have been granted. Therefore, the appeal must be allowed and the order of the learned Master and the judgment entered prusuant thereto must be set aside. I further order that Golden Jet do have costs before the learned Master and in this appeal against Transmeridian.

27. As for the summons for consolidation in Action 3488 of 1979, Mr. Mills-Owens indicated that he was seeking only (1) a consolidation, (2) a transfer to the Commercial List and (3) leave to serve defence and counterclaim. Such limited application was resisted by Mr. Donnelly, who submitted that consolidation was undesirable when the plaintiff in one action was not the plaintiff in another action. However, the Annual Practice at page 31, marginal reference 4/10/1 reads :

"Two actions cannot be consolidated when the plaintiff of one action is the same person as the defendant in another action, unless one action can be ordered to stand as counterclaim or third party proceedings in another action."

28. In the circumstances, it would appear highly desirable that these proceedings ought to be dealt with and disposed of at the same time. I order that the two actions be consolidated so as to have Action 3488 to stand as a counterclaim with leave to set off. It should be emphasized that the order for consolidation and for the other action to stand as a counterclaim in Action 914 together with leave for raising a set-off is to be taken as being without prejudice to any of the arguments canvassed before the learned Master and in this appeal and whatever other related legal contentions to be hereinafter advanced. I further find it appropriate, as consolidated actions in connection with carriage of goods and of a nature similar to other shipping transactions, to order a transfer to the Commercial List. I would now entertain application for directions unless the parties choose to have directions given by the Commercial Judge. Costs in this latter summons must therefore be costs in the cause of the consolidated proceedings.

(1)    [1973] 3 A.E.R. 589

(2)    [1978] 1 Q.B. 972

(3)    [1977] 1 W.L.R. 184

(4)    [1975] 2 Lloyd's Rep. 188

(5)    (1928) 44 T.L.R. 388

Representation:

Action No. : High Court Action No. 3488 of 1979

High Court Action No. 914 of 1980

Date of Hearing/Trial : 30th and 31st March, 1982

Date When Judgment Was Delivered: 17th April, 1982

ORDER:

Cases Cited by Counsel for the Plaintiff in Action No. 914/80 and Defendants in Action No. 3488/79 but not mentioned in the Judgment:

1.    The Right of Set-off and the Right to Connterclaim Halsbury's Law Vol. 34 at para. 673

Cases Cited by Counsel for the Defendant/Appellant in Action No. 914/80 and Plaintiffs in Action No. 3488/79 but not mentioned in the Judgment:

1. Henriksens Rederi v. Rolimpex (The Brede) [1974] Q.B. p. 233 and p.246

2. Shawcross & Beaumont, 4th Ed. paras. 443 and 661

Actual Cases Cited in the Judgment:

1. Henriksens Rederi v. Rolimpex (The Brede) [1973] 3 A.E.R. 589

2. Federal Commerce Ltd. v. Molena Alpha Inc. [1978] 1 Q.B. 927 at p. 974F

3. Aries Tanker Corporation v. Total Transport Ltd. [1977] 1 W.L.R. 184

4. Seven Seas [1975] 2 Lolyd's Rep. 188

5. Lowe v. Bentley (1928) 44 T.L.R. 388