The no-set off rule in freight contracts – where are we?

In a claim for recovery of sums due under invoices relating to the carriage of goods by road, the court held that the governing contract was more akin to a hire contract than one for freight. The no set-off rule was therefore not applicable to the defendant’s counterclaim.

Set-off – general principles

Under English law, where a party makes a claim for a debt, which is responded to with a counterclaim, both claims would usually be dealt at the same time - especially in circumstances when the claims arise out of the same contract. In these circumstances, the defendant would seek to reduce the claimant’s claim by off-setting it with the counterclaim.

However, there is an exception to the rule of set-off which arises out of freight contracts. In the case of Aries Tanker Corp v Total Transport Ltd [1977] (The Aries) the court held that a party will not be permitted to withhold a freight payment even if it has a separate claim arising out of the same carriage.

Whilst this is an exception to the general principles under English law, it is a principle widely known by most parties that deal with carriage by road contacts. Accordingly, any attempt to withhold freight is likely to see that party facing a judgment against them for the sums due, even if the counterclaim for freight has real prospects of success.

The application of this rule has, however, been revisited by the courts on numerous occasions. In Globalink Transportation and Logistics Worldwide LLP v DHL Project & Chartering Ltd [2019], the Commercial Court considered the no set-off rule, as confirmed in The Aries, does not extend to freight forwarding contracts. In this case, the judge reminded the parties that the rule has a narrow application and applies in carriage contracts only, rather than freight forwarding contracts.

Recent interpretation

The no-set off rule has recently been revisited by the court in Holleman Special Transport & Project Cargo SRL v Co UK Shipping and Trading Limited [2022].

In this case, the court held that a claim for recovery of sums due under invoices relating to the carriage of goods by road was more akin to a hire contract than one for freight. The no set-off rule was, therefore, not applicable to the defendant’s counterclaim.

The case concerned the transport of wind turbine components by road between a port and a windfarm. The contract was contained in a document titled ‘Transport Contract’ and made no reference the word ‘freight’. By way of summary judgment, the claimant sought the resolution of issues by claiming application of the no set-off rule.

The Transport Contract was subject to a daily price for the transport services. The claimant brought proceedings in relation to unpaid invoices for ‘freight’. The defendant responded with a counterclaim and argued that it should be permitted to set-off the claim being pursued by the claimant’s claim because the contract was not a contract for carriage nor 'freight' and, therefore, the no set-off rule did not apply here.

The court agreed with the defendant on the basis that the claim for ‘freight’ was not actually a claim for freight but, instead, a claim for daily hire charges.  

Comment

This case is a reminder of the narrow application of the set-off rule, and the narrow definition of the term ‘freight’.

In order to take advantage of the no set-off rule, it is recommended that a contract for carriage clearly states the term ‘freight’ in order to avoid the potential for a dispute on the proper construction of the contract.