[1989] 1 All ER 545

The owners chartered a vessel to the charterers on the Gencon form for a voyage from India to European ports at a lump sum freight. The vessel's earnings, including all freight, were assigned absolutely to a bank. Clause 16 of the charterparty provided that freight was to be pre-paid within five days of signing and surrender of final bills of lading and that full freight would be deemed to be earned on the signing of the bills. Bills of lading were signed before the vessel sailed for Europe via Colombo. When the vessel arrived at Colombo it was arrested by creditors, and, because of the owners' insolvency, it remained impounded. The charterers, as they were entitled to do, elected to treat the owners' conduct as a repudiation of the charterparty and arranged for the cargo to be discharged and shipped on in another vessel to the European ports of destination, thereby incurring costs which exceeded the amount of the advance freight payable under the charterparty. A claim by the bank for the advance freight and the charterers' cross-claim for damages for the owners' repudiation of the charterparty were referred to arbitration. The arbitrators held that the charterers' claim for damages for wrongful repudiation could be set off against the bank's claim for freight and dismissed the bank's claim because the charterers' claim exceeded the amount of the freight. On appeal, the judge set aside the award, on the grounds that the owners were entitled to recover the freight regardless of their repudiation and that the charterers' cross-claim did not provide a defence to, or set-off against, the claim for freight. The charterers appealed to the Court of Appeal, which allowed their appeal and restored the arbitrators' award, on the grounds that the owners, and the bank as assignees, could not recover the freight in full without regard to the damage caused by the owners' own wrongful repudiation of the charterparty. The bank appealed to the House of Lords, contending that the charterers would not have been entitled to set off their claim for damages as a defence to a claim by the owners for freight and were not entitled to such a set-off as against the bank claiming as assignees. The charterers contended that the charterparty had been terminated by the repudiation before the owners' right to advance freight accrued and that even if they could not set off their claim for damages as a defence to a claim by the owners for freight they were entitled to such a set-off as against the bank claiming as assignees, since under s 136(1)^a of the Law of Property Act 1925 the assignment of freight, although conferring the legal right to the freight on the bank, was 'subject to equities having priority over the right of assignee' and the charterers' claim for damages constituted such an equity.

545

Held - (1) On the true construction of cl 16 of the charterparty the owners' right to freight accrued on completion of the signing of all the bills of lading, which took place before the termination of the charterparty, and the postponement of payment until after the termination of the charterparty did not render the owners' prior acquisition of the right to the freight conditional, since the postponement of payment was an incident attaching to the right acquired and was not a condition of its acquisition. It followed that the owners' right to the freight had been unconditionally acquired before termination of the charterparty and was not divested or discharged by the termination (see p 547 f g, p 549 d to g, p 550 a to c and p 559 d e, post); dictum of Dixon J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-477 applied.
   (2) The principle that there was no right to set off a claim for damages for breach of a charterparty against a claim for freight applied to both a repudiatory and a non-repudiatory breach of the charterparty. Accordingly, as between the owners and the charterers, a defence by way of equitable set-off in respect of the damage suffered by the charterers as a result of the owners' repudiatory breach of the charterparty would not have been available to the charterers in a claim by the owners for freight. Furthermore, the charterers were not entitled to rely on their counterclaim as a defence between them and the bank because the fact that such counterclaim constituted an equity to which the assignment of the freight was made subject under s 136(1) of the 1925 Act did not avail the charterers, since the obligations giving rise to the counterclaim arose out of the same contract under which the freight was payable. It followed that the bank could recover the freight in full without regard to the damage caused by the owners' wrongful repudiation of the charterparty. The bank's appeal would therefore be allowed (see p 547 f g, p 556 a to c, p 557 j to p 558 a and p 559 b to e, post); Newfoundland Government v Newfoundland Rly Co (1888) 13 App Cas 199 and Aries Tanker Corp v Total Transport Ltd [1977] 1 All ER 398 considered.
   Decision of the Court of Appeal sub nom Colonial Bank v European Grain and Shipping Ltd, The Dominique [1988] 3 All ER 233 reversed.

Notes
For the effect of an assignment of freight, see 43 Halsbury's Laws (4th edn) paras 720-721, and for cases on the subject, see 43 Digest (Reissue) 456-457, 9997-10013.
   For the Law of Property Act 1925, s 136, see 37 Halsbury's Statutes (4th edn) 257.

546

Appeal
The Bank of Boston Connecticut (formerly Colonial Bank) of Connecticut, USA (the bank) appealed with the leave of the Appeal Committee of the House of Lords given on 13 June 1988 against the order of the Court of Appeal (Fox, Croom-Johnson and Mustill LJJ) ([1988] 3 All ER 233, [1988] 3 WLR 60) dated 21 December 1987, as amended on 14 January and 11 April 1988, allowing an appeal by European Grain and Shipping Ltd (the charterers) from the order of Hobhouse J ([1987] 1 Lloyd's Rep 239) dated 24 October 1986 made on the hearing of an appeal by the bank against an arbitration award dated 12 February 1986 made by the arbitrators Clifford Clark, Alex Kazantzis and Andrew Longmore QC, whereby the judge held, inter alia, (i) that under cl 16 of a charterparty on the Gencon form dated 16 June 1982, by which Vilamoura Maritime Inc, the owners of the vessel Dominique, let her to the charterers at a lump sum freight of $US 223,676 for a voyage from India to European ports, the charterers were liable to pay the bank, as assignee of the earnings of the vessel, the full amount of freight due notwithstanding the owners' wrongful repudiation of the charter and (ii) that the charterers were not entitled to set off a cross-claim for damages for wrongful repudiation of the charter against the bank's claim to freight. The facts are set out in the opinion of Lord Brandon.

9 February 1989. The following opinions were delivered.

LORD KEITH OF KINKEL. My Lords, I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend Lord Brandon. I agree with it, and for the reasons he gives would allow the appeal.

LORD BRANDON OF OAKBROOK. My Lords, the subject matter of this appeal is a claim by the appellants (the bank) as assignees of the owners of the mv Dominique (the owners) to recover from the respondents (the charterers) advance freight which the bank alleges became payable by the charterers under a voyage charterparty relating to that vessel made between the owners and the charterers in June 1982. The charterers dispute that any such freight became payable, but it is agreed between the parties that, if it did, the amount of it was $US 233,676.
   The bank's claim was referred to arbitration by three arbitrators in London, who by a reasoned award made on 12 February 1986 decided in favour of the charterers and dismissed the claim. The bank appealed with leave to Hobhouse J in the Commercial Court ([1987] 1 Lloyd's Rep 239), who by an order dated 24 October 1986 allowed the appeal and awarded to the bank the full amount of their claim. The charterers appealed to the Court of Appeal (Fox, Croom-Johnson and Mustill LJJ) ([1988] 3 All ER 233, [1988] 3 WLR 60), which by an order dated 21 December 1987, as amended on 14 January and 11 April 1988, allowed the appeal, set aside the order of Hobhouse J and restored the arbitrators' award. The bank now brings a further appeal from the decision of the Court of Appeal with the leave of your Lordships' House.

547

   The facts found by the arbitrators are as follows. By an assignment under seal dated 14 April 1982 the owners assigned absolutely to the bank all the earnings of the Dominique including all freight. By a charterparty dated 16 June 1982 the owners chartered the Dominique to the charterers to proceed to Kakinada, in India, and there load a cargo of agricultural products in bulk for carriage to European ports. Under that charterparty the Dominique loaded at Kakinada between 28 June and 13 July 1982 various parcels of cargo, in respect of which bills of lading were signed between those dates and on 14 July 1982. On that date the Dominique left Kakinada bound for Colombo for bunkers. At about the same time the bank received notice that the vessel's club entry would be cancelled with effect from 28 June 1982, and they accordingly gave to the charterers written notice of the assignment referred to earlier. On 19 July 1982 the Dominique arrived at Colombo and was arrested by previous suppliers of bunkers to her. The Dominique remained under arrest and it became apparent to both the charterers and the bank that the owners had no funds of their own with which to procure her release and that the club would not assist them. By a telex from the charterers to the owners dated 22 July the charterers justifiably elected to treat the owners' conduct as a repudiation of the charterparty. By 26 July all the bills of lading previously signed had been surrendered, which I take to mean delivered, to the shippers. On 12 August the charterers obtained the leave of the court in Colombo to discharge the cargo from the Dominique. During September the cargo, following such discharge, was transhipped to another vessel. That vessel then on-carried the cargo to European ports where it was discharged during November. The Dominique was later sold by order of the court in Colombo.
   The cost to the charterers of discharging and transhipping the cargo at Colombo, and having it on-carried to European ports and discharged there, exceeded the amount of the advance freight claimed from them by the bank.
   The charterparty was on the Gencon form with typed alterations, a series of additional typed clauses and an addendum, and was governed by English law. The essential provision relating to the payment of advance freight was cl 16 of the additional typed clauses, which was in these terms:

   The charterers disputed their liability to pay the advance freight claimed by the bank on two grounds. The first ground was that the charterers, by accepting the owners' repudiation of the charterparty, had lawfully brought the charterparty to an end before the owners' right to be paid freight under cl 16 had accrued. The second ground was that, if, contrary to the first ground, the owners' right to be paid freight under cl 16 had accrued before the charterparty was brought to an end, the charterers were entitled to set off against the bank's claim to freight the damage suffered by them as a result of the owners' repudiation.
   Hobhouse J considered, rightly in my view, that the grounds for disputing liability relied on by the charterers raised four questions for decision. Using my own words I would formulate those four questions as follows. (1) Had the owners' right to advance freight accrued before the charterparty was terminated by the charterers' acceptance of the owners' repudiation of it? (2) If such right had so accrued, did it survive such termination? (3) If so, would the charterers, had the owners not assigned their right to freight to the bank, have been entitled to set off against such right the damage suffered by the charterers as a result of the owners' repudiation of the charterparty? (4) If not, are the charterers nevertheless entitled to such set-off as against the bank claiming as assignees?

548

Question (1): accrual of owners' right to advance freight
   The answer to this question depends on two matters. The first matter is the sequence of the relevant events as found by the arbitrators. The second matter is the true construction of cl 16 of the charterparty.
   So far as the first matter is concerned the arbitrators found the sequence of the relevant events to have been as follows: (i) on 14 July 1982 the signing of the bills of lading was completed; (ii) on 22 July the charterparty was terminated by the charterers' acceptance of the owners' repudiation of it; and (iii) by 26 July all the bills of lading had been surrendered to the shippers. The expression 'by 26 July', used by the arbitrators in relation to event (iii) above, is in a sense equivocal, in that, on a literal interpretation, it might refer to any date not later than 26 July, including a date earlier than 22 July. The inference which I would draw, however, is that, while the arbitrators were unable to fix the date with certainty, they were satisfied that it was later than 22 July. In any case, in so far as it would be to the advantage of the bank to have had a finding that the surrender of the bills of lading was completed before the termination of the charterparty on 22 July, they failed to obtain such finding.
   So far as the second matter is concerned, it was recognised by both courts below that cl 16 of the charterparty is confusingly drawn and because of that difficult to interpret. The main difficulty arises from the apparent conflict between the first phrase of the clause, which reads 'Freight shall be prepaid within 5 days of signing and surrender of final Bills of Lading', and the second phrase, which reads 'full freight deemed to be earned on signing Bills of Lading'. For the bank it was contended that the effect of the two phrases taken together was that the owners' right to the freight accrued on completion of the signing of all the bills of lading, but payment was postponed until five days after the bills of lading, having been signed, were delivered to the shippers. On this basis the owners' right to freight accrued on 14 July 1982, well before the termination of the charterparty on 22 July. For the charterers it was contended that their obligation to pay the freight and the corresponding right of the owners to be paid the freight were both governed, and governed only, by the first phrase. On that basis the owners' right to be paid the freight accrued after 22 July 1982.
   While the matter is far from easy, I consider that the contention for the bank is to be preferred to that for the charterers. The reason why I take that view is that the contention for the charterers gives no effect to the second phrase of cl 16 'full freight deemed to be earned on signing Bills of Lading', whereas the contention for the bank does. This conclusion accords with the decision of the Court of Appeal on a different but comparable clause in a charterparty in Vagres Cia Maritima SA v Nissho-Iwai American Corp, The Karin Vatis [1988] 2 Lloyd's Rep 330.
   I would therefore answer question (1) by saying that the owners' right to freight accrued before the termination of the charterparty.

Question (2): effect of charterparty being terminated
   The principles of law applicable when a contract is terminated by the acceptance by one party to it of a repudiation by the other party to it are not in doubt. They were clearly and simply stated by Dixon J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-477, where he said:

549

That statement of the relevant principles was expressly approved and adopted by Lord Wilberforce in Johnson v Agnew [1979] 1 All ER 883 at 892, [1980] AC 367 at 396. Applying those principles to the facts of the present case it is necessary to consider whether the owners' right to the freight had been 'unconditionally acquired' by them before the termination of the charterparty. The circumstance that, by reason of the first phrase of cl 16, the charterers' obligation to pay the freight was postponed until after the termination of the charterparty does not, in my view, mean that the owners' prior acquisition of the right to the freight was conditional only. The postponement of payment was an incident attaching to the right acquired, but it was not a condition of its acquisition. It follows that, in accordance with the principles of law referred to above, the owners' right to the freight, having been unconditionally acquired before the termination of the charterparty, was not divested or discharged by such termination.
   I would therefore answer question (2) by saying that the owners' right to the freight survived the termination of the charterparty.

Question (3): set-off as between charterers and owners
   Under a contract for the carriage of goods by sea, such as the voyage charterparty in the present case, freight is the monetary consideration payable by the cargo owner to the shipowner for the carriage of the goods. The time when the freight is payable depends on the terms of the contract. It may be payable on delivery of the goods at the port of discharge, in which case it is called 'freight' without any qualifying epithet; or it may be payable at an early stage of the voyage, such as on completion of the signing of bills of lading, in which case it is called 'advance freight'; or part of it may be payable at an early stage of the voyage and the balance on delivery.
   It is a long-established rule of English law, dating at least from the early part of the nineteenth century, that a cargo owner is not entitled to set up, as a defence to a claim for freight, damage suffered by him by reason of some breach of contract by the shipowner in relation to the carriage, causing for instance partial loss of or damage to the goods, but must enforce any right which he has in respect of such breach by a cross-claim. The effect of the rule before the coming into force of the Supreme Court of Judicature Acts 1873 and 1875 was that a cargo owner sued by a shipowner for freight could only recover his damage by bringing a separate cross-action against the shipowner; the effect of the rule since the coming into force of those Acts has been that the cargo owner, instead of having to bring a separate cross-action, has been able (though not bound) to raise his cross-claim by way of counterclaim in the shipowner's action. The rule applies equally to freight payable on delivery of the goods and to advance freight payable at some earlier stage of the voyage.
   The rule of law referred to differs from that prevailing in many other countries and has been subjected to a considerable amount of criticism in various quarters from time to time. The continued existence of the rule was, however, affirmed by the Court of Appeal in Henriksens Rederi A/S v P H Z Rolimpex, The Brede [1973] 3 All ER 589, [1974] QB 233, in which the earlier authorities were fully examined. That decision of the Court of Appeal was unanimously approved by your Lordships' House in Aries Tanker Corp v Total Transport Ltd, The Aries [1977] 1 All ER 398, [1977] 1 WLR 185. It follows that the rule concerned (which I shall from now on call 'the rule against deduction'), whatever its merits or demerits may be, is not open to challenge.
   In all the cases in which the rule against deduction has been applied, up to and including The Aries, the breaches of contract by shipowners sought to be relied on as defences to claims for freight have been non-repudiatory breaches resulting in partial loss of or damage to cargo or delay in its delivery. So in A/S Gunnstein & Co K/S v Jensen Krebs and Nielsen, The Alfa Nord [1977] 2 Lloyd's Rep 434 at 436, a case in which charterers claimed the right to deduct damage caused by delay from freight due to shipowners, we find Roskill LJ applying the rule against deduction and saying:

550

The words 'or otherwise' used by Roskill LJ in this passage might, if taken out of context, cover a claim for damage caused by an accepted repudiation. In my view, however, Roskill LJ did not have a claim of that kind in mind, but was referring to other breaches of contract of a non-repudiatory character.
   Since 1977 the rule against deduction has been applied to cases of non-repudiatory breaches of kinds different to those referred to above. In Cleobulos Shipping Co Ltd v Intertanker Ltd, The Cleon [1983] 1 Lloyd's Rep 586 the rule was applied by the Court of Appeal to a case in which the breach of contract relied on was inadequacy in the ship's cargo pumps, making it necessary for her to leave one port of discharge and proceed to another. In Elena Shipping Ltd v Aidenfield Ltd, The Elena [1986] 1 Lloyd's Rep 425 the rule was applied by Steyn J to a case in which the breach of contract relied on was the unfitness of some cargo spaces because of lack of facilities for ventilation.
   It does not appear that, in any of the nineteenth century cases in which the rule against deduction was applied, equitable principles were invoked in order to defeat such rule. In The Brede [1973] 3 All ER 589, [1974] QB 233 a defence by way of equitable set-off, based on short delivery of and damage to cargo, was put forward and rejected by the Court of Appeal. In The Aries [1977] 1 All ER 398, [1977] 1 WLR 185 the same defence, based on short delivery, was again put forward and rejected by your Lordships' House. As is apparent, however, the breaches of contract relied on in both these cases were again of a non-repudiatory character. The present case, therefore, raises for the first time the question whether, although a claim in respect of a non-repudiatory breach of a voyage charterparty cannot operate as a defence by way of set-off to a claim for freight, a claim in respect of repudiation of such contract, accepted as such, is capable of doing so.
   In the present case it was contended for the bank that, as between the owners and the charterers, the owners were entitled to rely on the rule against deduction as precluding the charterers from setting up, as a defence to any claim by the owners for advance freight, the damage suffered by them as a result of the owners' repudiation of the charterparty. For the charterers, on the other hand, it was contended that, while they could not, having regard to the decision in The Aries, set up their damage as a defence at common law by way of abatement or otherwise, they were entitled to set it up as a defence by way of equitable set-off. They accepted that an ordinary cross-claim in respect of loss of or damage to cargo amounting to no more than a breach of warranty, such as was relied on in The Aries, could not give rise to a defence by way of equitable set-off; but they contended that, where there was a much more serious breach of contract by the owners in the form of a repudiation of the charterparty accepted by them, a defence by way of equitable set-off was available to them.
   Before examining this contention for the charterers it is necessary to explain briefly the nature, origins and basis of a defence by way of equitable set-off. Until the coming into force of the Supreme Court of Judicature Acts 1873 and 1875 courts of equity had the power to prohibit by injunction the enforcement of a common law claim where there was a cross-claim which they regarded as being of an appropriate character. Section 24 of the Supreme Court of Judicature Act 1873 took away that power and provided instead that such a cross-claim could be raised as a defence to the claim. Those provisions of the 1873 Act have since been replaced successively, without any difference in effect, first by ss 36 to 41 of the Supreme Court of Judicature (Consolidation) Act 1925 and more recently by s 49 of the Supreme Court Act 1981. It therefore becomes necessary, in order to decide whether a party can rely on a particular cross-claim as giving him a defence by way of equitable set-off to a common law claim today, to see whether such cross-claim is of such a character that it would before the coming into force of the551 Supreme Court of Judicature Acts 1873 and 1875 have led a court of equity to prohibit by injunction the enforcement of such common law claim.
   The authority most relied on as providing the relevant test is Rawson v Samuel (1839) 1 Cr & Ph 161 at 179, 41 ER 451 at 458, in which Lord Cottenham LC said that a cross-claim, in order to give rise to a defence by way of equitable set-off, must be such as 'impeached the title to the legal demand'. He then gave examples of cross-claims of that character. One case referred to was Beasley v D'Arcy (1800) 2 Sch & Lef 403. There a tenant was entitled to redeem his lease on payment to his landlord of rent due. The landlord had previously caused damage to the land let and the tenant was held to be entitled to deduct from the rent due the amount of the damage so done. Another case referred to was Piggott v Williams (1821) 6 Madd 95, 56 ER 1027. There a solicitor brought a claim against a client for the costs of work done. The client cross-claimed on the ground that the incurrence of the costs had been caused by the solicitor's negligence. It was held that the client was entitled to rely on such cross-claim as a defence.
   The concept of a cross-claim being such as to 'impeach the title to the legal demand' is not a familiar one today. A different version of the relevant test is to be found in the decision of the Judicial Committee of the Privy Council in Newfoundland Government v Newfoundland Rly Co (1888) 13 App Cas 199. In that case there was a contract between the Newfoundland Railway Co and the government of Newfoundland under which the company agreed to build a railway line some 340 miles in length in five years and, having done so, to maintain it and operate it continuously. In return the government agreed, inter alia, to pay the company an annual subsidy for 35 years, such subsidy to be paid in proportionate parts as and when each five-mile section of the line was completed and operated. The company built part of the line and, on completion of each five-mile section, was paid by the government a proportionate amount of the annual subsidy attributable to it. Subsequently, the company abandoned the building of the remaining part of the line, on which the government refused to make any further payments of subsidy. The company, together with certain assignees of its rights under the contract, brought a petition of right against the government claiming, inter alia, that the government was bound to continue payment of subsidy in respect of the five-mile sections of the line which had been completed for the full period of 35 years. It was held that the government was bound by the terms of the contract to continue the payments of subsidy as claimed, but that it was entitled, as against both the company and the assignees, to set off against that liability the damage suffered by it by reason of the failure of the company to complete the whole of the line. In this connection Lord Hobhouse, who delivered the judgment of the Board, said (at 212-213):

Lord Hobhouse then referred to Smith v Parkes (1852) 16 Beav 115 at 119, 51 ER 720 at 722, and continued (at 213):

It is to be inferred that the change of law there referred to by Lord Hobhouse had been brought about by legislation in what was then the colony of Newfoundland, which adopted the principles enacted in England by s 24 of the Supreme Court of Judicature Act 1873 to which I drew attention earlier. Newfoundland Government v Newfoundland Rly552 Co was clearly a case of a defence by way of equitable set-off based on a cross-claim. It was treated as such by Sellers LJ in Hanak v Green [1958] 2 All ER 141 at 154, [1958] 2 QB 9 at 31, and by Hobhouse J in his judgment in the present case (see [1987] 1 Lloyd's Rep 239 at 255). It is to be observed, however, that the criterion which Lord Hobhouse applied in deciding whether the government's cross-claim for unliquidated damages could be set off against the company's claim was not that the cross-claim 'impeached the title to the legal demand', as in Rawson v Samuel (1841) 1 Cr & Ph 161, 41 ER 451, but rather that it was a cross-claim 'flowing out of and inseparably connected with the dealings and transactions which also give rise' to the claim (see 13 App Cas 199 at 213).
   I turn now to examine, against the background of the origin and nature of a defence by way of equitable set-off which I have described, the manner in which your Lordships' House dealt with such a defence in The Aries [1977] 1 All ER 398, [1977] 1 WLR 185. That case arose out of a voyage charterparty under which the entire freight was payable on delivery. Delivery having been made, the charterers did not pay to the shipowners the full amount of freight due but deducted a substantial sum from that amount on the ground of short delivery of the cargo. The owners brought an action against the charterers in the Queen's Bench Division in which they claimed payment of the balance of freight so deducted. The charterers resisted the claim on the ground that they were entitled to set off against it the amount of the damage which they had suffered by reason of the short delivery. They also counterclaimed for the amount of that loss. The owners having applied for summary judgment under RSC Ord 14, Donaldson J refused leave to defend and gave judgment in favour of the owners for the full amount of their claim. The charterers, having appealed unsuccessfully to the Court of Appeal (see [1976] 2 Lloyd's Rep 256), brought a further appeal to your Lordships' House which was, as I indicated earlier, unanimously dismissed.
   The primary ground on which the House dismissed the appeal was that the charterparty expressly incorporated art III, r 6 of the Hague Rules, which provides that any claim for loss of or damage to cargo shall be discharged unless suit is brought within one year from the date of delivery or the date on which the goods should have been delivered, that the charterers had failed to bring suit within that period of time and that their cross-claim in respect of short delivery had therefore become prescribed, so that it could not be relied on by way of either defence or counterclaim.
   While this was the primary ground on which the appeal was dismissed, the House also rejected arguments put forward for the charterers that their cross-claim in respect of short delivery afforded them a defence to the owners' claim for the balance of the freight either by way of abatement at common law or by way of equitable set-off.
   Lord Wilberforce emphasised four main points (see [1977] 1 All ER 398 at 403-404, [1977] 1 WLR 185 at 189-191): first, that it was a long-established rule of English law that a claim in respect of cargo could not be asserted by way of deduction from freight; second, that the status of the rule, as a rule of law, was not affected by the fact that the reason for it could not readily be ascertained; third, that the principle of abatement at common law was confined to contracts for the sale of goods and contracts for work and labour: it did not extend to contracts for the carriage of goods by sea and it would not be right for the courts so to extend it; fourth, that the parties had contracted on the basis of the rule, and it was not for the courts to alter that basis even if they were convinced that a different rule would have greater merit. Having dealt with these matters Lord Wilberforce turned to the question of equitable set-off, saying ([1977] 1 All ER 398 at 404-405, [1977] 1 WLR 185 at 191):

   Lord Simon also dealt with the question of equitable set-off, where he said ([1977] 1 All ER 398 at 406-407, [1977] 1 WLR 185 at 193):

   There are certain observations which I would make with regard to the passages from the speeches of Lord Wilberforce and Lord Simon quoted above. First, the cross-claim of the charterers which they held could not operate as a defence by way of legal set-off to a claim for freight was, as I indicated earlier, a cross-claim based on a non-repudiatory breach of contract, namely short delivery of cargo. Lord Wilberforce did not deal with the question whether a cross-claim based on repudiation of a charterparty could or could not operate as such a defence. He did not do so because the case before him did not raise that question. Lord Simon did refer to repudiation when he said: 'The title to a claim for freight is not impeached by short delivery of cargo-unless, of course, the latter amounts to repudiation of the contract ... ' It is not entirely clear to what kind of repudiation Lord Simon was there referring. Since, however, he was dealing with a case in which freight was only payable on delivery, it seems likely that he was referring to repudiation in the form of total failure to deliver, a failure which would of itself prevent freight becoming payable at all. In any case it is clear that he was not referring to a case like the present one, in which, after the owners' right to advance freight had accrued, they then repudiated the charterparty.

554

   Second, both Lord Wilberforce and Lord Simon considered that the characteristic of a cross-claim necessary to enable it to operate as a defence by way of equitable set-off was the characteristic prescribed by Lord Cottenham LC in Rawson v Samuel (1841) Cr & Ph 161 at 179, 41 ER 451 at 458, namely that the cross-claim impeached the title to the legal demand. Lord Wilberforce added that it must create an equity sufficient to override a clear rule on the basis of which the parties contracted (see [1977] 1 All ER 398 at 404-405, [1977] 1 WLR 185 at 191).
   Third, Lord Simon distinguished cases of assignment, such as Newfoundland Government v Newfoundland Rly Co (1888) 13 App Cas 199 on the basis that one cannot take the benefit of an assignment without assuming the burdens, because both flow out of and are inseparably connected with the same transaction. With great respect to Lord Simon, I believe him to have been in error on this point. The decision in the Newfoundland case was that the government's cross-claim for damage caused by the company's failure to complete the railway line could operate as a defence by way of equitable set-off against both the company and the assigness, no distinction in this respect being drawn between the two. It is essential to bear in mind, however, that the company's claim in that case was a claim for subsidy under the particular terms of what was in essence a building contract, so that the special character which the law attaches to a claim for freight under a contract for the carriage of goods by sea was in no way relevant.
   My Lords, in The Aries [1977] 1 All ER 398 at 405, 410, [1977] 1 WLR 185 at 191, 197 Viscount Dilhorne and Lord Edmund-Davies agreed with Lord Wilberforce on all points. Lord Salmon delivered a separate speech, agreeing substantially with Lord Wilberforce, except on the question of the prescriptive effect of art III, r 6 of the Hague Rules, with regard to which he reserved his opinion.
   The speeches of Lord Wilberforce and Lord Simon in The Aries make it clear that, when an owner's breach of charterparty is of a non-repudiatory character, such as partial loss of or damage to cargo, it does not give rise to an equity in favour of the charterers sufficient to override the established rule against deduction. The question for decision in the present case is whether, where an owner's breach of charterparty is of a repudiatory character, it does give rise to such an equity.
   Various arguments can be advanced to support an affirmative answer to that question. First, it can be said that a repudiatory breach or breach of a voyage charterparty by an owner, occurring after the right to the payment to him of advance freight has accrued, satisfies the test for a defence by way of equitable set-off laid down in Rawson v Samuel of giving rise to an equity sufficient to 'impeach the legal title' to the claim for such advance freight. I find it difficult, however, to see how, when a charterparty expressly provides, in effect, that the legal title to advance freight is to be deemed to be complete on the signing of bills of lading, a subsequent breach of the charterparty, even one of a repudiatory character, can properly be regarded as impeaching that title.
   Second and alternatively, it can be said that a claim based on a repudiatory breach of a voyage charterparty by an owner, occurring after the right to the payment to him of advance freight has accrued, satisfies the test for an equitable set-off laid down in Newfoundland Government v Newfoundland Rly Co of being a breach flowing out of and being inseparably connected with the transaction, namely the charterparty which gave rise to the claim for such advance freight. The same might be said, however, of claims with regard to non-repudiatory breaches, such as partial loss of or damage to cargo, in respect of which The Aries is conclusive authority that they do not give rise to a defence by way of equitable set-off.
   Third, it can be said that the rule against deduction is in any case anomalous, that it has hitherto been applied only to cases of non-repudiatory breach and that the courts ought not to extend its application to cases of repudiatory breach. In my view, however, there is little force in this argument, because a case like the present one seems never to have arisen before, and it is unlikely, except very rarely, that it will arise again.

555

   Once the three arguments discussed above are rejected, as I think on the grounds which I have given that they should be, it is possible to state a number of good reasons for holding that a repudiatory breach of a voyage charterparty is no more capable of giving rise to a defence by way of equitable set-off than is a non-repudiatory breach. I shall set out those reasons shortly first and then develop them. The first reason is that a repudiatory breach of a charterparty by an owner does not necessarily cause more damage to a charterer than a non-repudiatory breach; it may cause less. There is, therefore, no justification based on quantum of damage for applying the rule against deduction to the latter breach but not to the former. The second reason is that the application of the rule against deduction only works to the ultimate disadvantage of a charterer when the owner's financial situation makes it impossible for a counterclaim to be enforced against him. That risk, however, exists whether the breach is repudiatory or non-repudiatory. The third reason lies in the manner in which the legislation has treated the premature termination of a voyage charterparty by frustration.
   With regard to the first reason it is easy to visualise a case where partial loss of or damage to a valuable cargo would cause greater loss to a charterer than a premature termination of the voyage as a result of accepted repudiation, especially if the latter occurred at a late stage of the voyage rather than an early one. Yet, if the contentions for the charterers are right, the rule against deduction would apply to the former greater loss but not to the latter lesser loss. It is difficult to see any justification for this.
   With regard to the second reason, provided that an owner's financial situation is such that a counterclaim for damages can be enforced against him, the charterer will not in the end suffer from the application of the rule against deduction. A good illustration of this is to be found in Turnbull v Great Eastern and Peninsular Navigation Co (1885) Cab & El 595. In that case a steamer was chartered to carry a cargo of coal from Birkenhead to Bombay. The charterparty provided that four-fifths of the freight was to be paid in cash in one month from the ship's sailing from her last port in Great Britain, steamer lost or not lost. The perils excluded by the charterparty did not include negligence of the master. The ship sailed with her cargo on 12 July 1884 and was lost through the negligence of the master on 19 July, the loss being known in England on 21 July. On 26 July the charterers paid four-fifths of the freight to the owners. In an action subsequently brought by the charterers against the owners for damages for breach of the charterparty resulting in the loss of the cargo, it was held, first, that the expression 'steamer lost or not lost' did not apply to a loss caused by the master's negligence and, second, that the charterers were entitled to include in the damages recoverable by them the four-fifths of the freight which they had paid in advance. The risk of a charterer's counterclaim being defeated by insolvency of the owner can arise when such counterclaim is based on a non-repudiatory breach as well as when it is based on a repudiatory breach, so that, since the rule against deduction applies in the former case, there is no good reason, so far as that risk is concerned, why it should not also do so in the latter case.
   The third reason requires rather more elaboration. At common law frustration of a contract did not cause it to be rescinded ab initio, but terminated it forthwith on the occurrence of the frustrating event. The effect of such termination was to release both parties from further performance of the contract, while leaving intact any payments already made and any rights already acquired under it. Put shortly, the principle followed by the common law was that, on a contract being frustrated, losses and gains lay where they fell and no adjustment of the parties' rights could be made. So, in the case of a voyage charterparty stipulating for the payment of freight in advance, if the charterparty became frustrated after the date for such payment had passed, the result was this: if the charterer had already paid the advance freight, he had no right to recover it, while, if he had not already paid it, he remained obliged to do so. If authority for these propositions is needed, it is to be found in the advice of Brett J to the House of Lords in Allison v Bristol Marine Insurance Co Ltd (1876) 1 App Cas 209 at 226. One modification to the common556 law of frustration as it had previously been understood to be was made by the decision of your Lordships' House in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] 2 All ER 122, [1943] AC 32. That modification was that, when, as a result of a contract being frustrated, there was a total failure of consideration for a payment already made, the payment could be recovered by the payer as money had and received to his use. This modification, however, was of a very limited effect, since it left untouched payments in respect of which the consideration had failed partly but not wholly.
   The law relating to the frustration of contracts as I have described it was radically altered, soon after the decision in the Fibrosa case referred to above, by the passing of the Law Reform (Frustrated Contracts) Act 1943. That Act, except in the case of a few specified kinds of contract, got rid of the common law principle that, on a contract being frustrated, losses and gains lay where they fell, and substituted for it an elaborate code by which the rights of the parties could be readjusted in an equitable manner. It is not necessary to go into the details of this code of readjustment; it is sufficient to say that it included, where appropriate, repayment in whole or in part of payments already made by one party to the other, and the release of a party in whole or in part from obligations to make payments already accrued due: see s 1(2) including the proviso to it.
   The significance of the 1943 Act for present purposes, however, lies in the fact that, as I indicated earlier, certain specified contracts are excluded from its application. These contracts include 'any charterparty, except a time charterparty or a charterparty by way of demise' and 'any contract (other than a charterparty) for the carriage of goods by sea': see s 2(5)(a). The legislature must have had a reason for this exclusion and the only reason which it seems to me that it could have had is an unwillingness to create a situation in which, following the frustration of contracts of this kind, advance freight already due could, if paid, be recovered back in whole or in part, or, if not paid, cease to be payable in whole or in part. In other words the legislature was preserving, in the context of the premature termination of such contracts by frustration, the indefeasibility of an accrued right to advance freight. The attitude of the legislature in this respect seems to me to make it difficult to say that, when a voyage charterparty or other contract for the carriage of goods by sea is prematurely terminated by the owner's repudiation of it, the indefeasibility of an accrued right to advance freight should not be similarly preserved by applying the rule against deduction to the situation so created.
   It was argued for the charterers that, where a court had before it in the same action an owner's claim for freight under a charterparty and a charterer's counterclaim for damages for breach of that charterparty, it could by procedural means bring about a set-off of the counterclaim against the claim, even though, under the substantive law governing the rights of the parties, no such set-off was available. The court, it was said, could try and determine both the owner's claim for freight and the charterer's counterclaim for damages, and then, supposing both to have succeeded in whole or in part, exercise its power under RSC Ord 15, r 2(4), which provides: 'Where a defendant establishes a counterclaim against the claim of a plaintiff and there is a balance in favour of one of the parties, the Court may give judgment for the balance ... ' It was further argued that, if the court could act in this way, arbitrators could do the same thing. The practical result would be a set-off, by procedural means, between the owner's claim for freight and the charterer's counterclaim for damages.
   In my opinion, for the court to act in the manner suggested would constitute a wrong exercise of its discretion, because it would involve using rules of procedure to bring about a result contrary to the rights of the parties under the substantive law. That would be inconsistent with the principle that the Judicature Acts, while making important changes in procedure, did not alter and were not intended to alter the rights of parties: see Stumore v Campbell & Co [1892] 1 QB 314 at 316, 318, [1891-4] All ER Rep 785 at 787 per Lord Esher MR and Lopes LJ.
   For the reasons which I have given I would answer question (3) by saying that, if the557 owners had not assigned their right to freight to the bank, the charterers would not have been entitled to set off against such right the damage suffered by them as a result of the owners' repudiation of the charterparty.

Question (4): set-off as between charterers and bank
   The bank's claim for freight against the charterers was brought by them as legal assignees of the owners. It follows that the bank's rights against the charterers are governed by s 136(1) of the Law of Property Act 1925, which provides:

It was contended for the charterers that, even if, as I have held in answering question (3), they were not entitled to set up their counterclaim in respect of the damages suffered by them as a result of the owners' repudiation of the charterparty as a defence by way of equitable set-off as between them and the owners, they were nevertheless entitled to rely on such counterclaim as a defence as between them and the bank, on the ground that it constituted an equity to which the assignment of the right to freight was made subject under s 136(1) above.
   In support of this contention for the charterers reliance was placed on certain passages in the judgment of the Privy Council delivered by Lord Hobhouse in Newfoundland Government v Newfoundland Rly Co (1888) 13 App Cas 199 and on passages from various textbooks which appear to be largely founded on that case. I discussed the Newfoundland Rly case in some detail in connection with question (3), and I also referred to what I respectfully suggested was a misunderstanding about its effect in the speech of Lord Simon in The Aries [1977] 1 All ER 398 at 406-407, [1977] 1 WLR 185 at 193. The charterers relied particularly for present purposes on a passage in the speech of Lord Hobhouse immediately preceding the passage which I quoted earlier. In the passage so relied on by the charterers Lord Hobhouse, referring to the company's claim for subsidy on the one hand and the government's counterclaim for damages for the failure to complete the railway on the other, said (13 App Cas 199 at 212):

Hobhouse J in his judgment in the present case made a very full and careful analysis of the Newfoundland Rly case (see [1987] 1 Lloyd's Rep 239 at 254-257). I respectfully agree with that analysis, and in particular with two matters contained in it. The first matter is that the case was one of equitable set-off, in the sense that it was held that the government's counterclaim in respect of the company's breach of contract in failing to complete the railway, because it flowed out of and was inseparably connected with the contract between the parties, operated as a defence by way of equitable set-off to the558 company's claim for subsidy. The second matter is that Lord Hobhouse drew no distinction in this respect between the rights of the government against the company on the one hand and its rights against the company's assignees on the other. On the contrary he made it clear that the government's counterclaim operated as a defence by way of equitable set-off both against the company and against the assignees.
   Having regard to these matters I do not consider that the Newfoundland Rly case affords any support for the contention of the charterers presently under discussion. On the contrary, it seems to be inconsistent with it.
   I would, therefore, answer question (4) by saying that the charterers are no more entitled to rely on their counterclaim for damages as a defence by way of equitable set-off against the bank than they would have been entitled to rely on it, but for the assignment, against the owners.
   Having regard to the answers which I have given to the four questions discussed above, I would allow the appeal, set aside the order of the Court of Appeal dated 21 December 1987 as later amended and restore the order of Hobhouse J dated 24 October 1986.

LORD OLIVER OF AYLMERTON. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend Lord Brandon. I agree that the appeal should be allowed for the reasons which he has given.

LORD GOFF OF CHIEVELEY. My Lords, for the reasons given by my noble and learned friend Lord Brandon, I would allow this appeal.

LORD JAUNCEY OF TULLICHETTLE. My Lords, I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend Lord Brandon. I agree with it, and for the reasons he gives would allow the appeal.

Solicitors: Holman Fenwick & Willan (for the bank); Wilde Sapte (for the charterers).

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