Web Alert: The Aries rule held not to apply to freight forwarders

On 19 February 2019, the Commercial Court held that the rule established in The Aries [1977] 1 WLR 185 (HL), as per which freight must always be paid and claims cannot be set off against it, did not apply to freight forwarders.

Nicholas Vineall QC, sitting as a deputy judge of the High Court, had to decide about an application made by the claimant, Globalink Transportation and Logistics Worldwide LLP (Globalink) for summary judgment against the defendant, DHL Project & Chartering Limited (DHL), pursuant to CPR part 24. 

As is often the case when it comes to claims for payment of freight under a contract of carriage, the defendant seeks to bring a counterclaim in an attempt to extinguish or at least reduce the claim for freight.
 
Whilst generally English law allows for a counterclaim to be advanced as a defence, especially where claim and counter-claim arise out of the same contract, the defence of set-off is not an option for freight claims.
 
The rule of law as derived from The Aries is that the carrier has a right to payment of its freight. Setting off a counter-claim against the freight claim is not permissible and the carrier is entitled to a summary judgment even if there is a considerable counter-claim with a realistic chance to succeed. However, in this recent judgment, it was held that this rule did not extend to freight forwarders.

The facts of the case were as follows:

In 2014 one of the defendant’s clients, Sinopec, was engaged in a construction project at a refinery near Atyrau. Sinopec engaged the defendant DHL to arrange the transport of fourteen units of refinery plants from China to the refinery by means of a contract. 

All units were carried to Novorossiysk from China by sea. At Novorossiysk, the units were then placed onto two barges destined to Atyrau, Kazakhstan. 

The first ten units were shipped on board one barge, arriving at Atyrau on 29 October 2014 and well within the agreed voyage duration of 22-24 days. The remaining four units were shipped on another barge, which departed at the same time, but arrived at the mouth of the Ural Canal much later on 15 November 2014, due to the barge being underpowered. The barge could not proceed any further as the water level in the Ural-Caspian Canal was too low for the draught of the loaded barge. 

As a result, the parties had a meeting on 17 November 2014 and among other topics, discussed whether the low water levels were to be viewed as a force majeure scenario. On 23 November 2014, the canal closed to navigation for the winter and the four units were taken off the barge. The smallest unit could still be carried to its final destination by truck while the other larger items had to be stored at nearby Kuryk. The defendant consented to the storage.

In early 2015, the parties commenced negotiations to arrange the transport of the stored items from Kuryk to Atyrau, agreeing estimated costs and signing a further agreement. Before signing the agreement, it was discussed whether a clause should be included as per which the defendant DHL would indemnify the claimant Globalink against claims arising from the force majeure circumstances that were discussed at the previous meeting in November. The defendant DHL proposed that this clause should be removed and the claimant Globalink accepted.

Of the invoices raised by Globalink after the transport was completed, only some were settled by DHL as DHL argued it had a considerable counter-claim for failure to perform the original agreement.   

DHL argued it had suffered a loss as the transportation cost under the original agreement was far lower than the one under the subsequent agreement and the additional costs for storing the units at Kuryk during the winter. 

A successful set-off would have extinguished the claim for freight and still left a considerable outstanding amount due to DHL. Globalink applied for summary judgment and argued that the rule in The Aries applied, thereby making a defence of set-off not permissible. 

The Commercial Court considered first the legal principles in general and the merits of the counter-claim specifically. 

The Court pointed out that the rule in The Aries was a long standing and somewhat arbitrary one that had no clear justification. However, that did not affect its status in the law and the deputy judge underlined that it was important that established rules for commercial matters were not disturbed by the courts. 

It went on to note that the rule as set out in The Aries has been extended for the types of carriage to which it applies and also for the types of cross claims which it covers. However, the authority in The Aries does not apply to all transport related contracts – for example, it was decided in The Nanfri [1978] QB 927 that the defence of set-off was available in respect of time charters, which, of course, involve the payment of hire rather than freight. 

In the current case, the Commercial Court considered whether any part of the sums the claimant demanded even came within the definition of freight. The answer was that the contract in place between the claimant and the defendant was a 'freight forwarding agreement', where the nature of the obligation undertaken in the contract was not to transport the client’s cargo but to procure carriage by others. 

(Of course on occasion, a freight forwarder may also be a carrier but that is the exception. The position nowadays is that a freight forwarder contracting as agent will accept personal responsibility to the carrier for the freight and will discharge it personally.) 

Crucially, Globalink failed to show any documents that clearly showed that sums due were freight in the narrow sense as laid out in The Aries. As a reminder, freight is payable for carrying a cargo from one place to another – this is not the case when a freight forwarder is engaged to procure the actual carriage of the goods by engaging a third party, which then ultimately is the carrier. 

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The most important point to take away is that freight forwarding contracts are simply not the same as a contract of affreightment and one of the consequences of that difference is that there will generally be a right to set-off in a freight forwarding contract.

Members having dealings with freight forwarders should bear this in mind and when in doubt, are encouraged to contact the club for clarification and further assistance.

The case also serves as a useful reminder in respect of force majeure.  With respect to whether or not the low water levels constituted a force majeure event, the Court held that it was not: not only was it foreseeable that the water levels would be low in the canal at that time of year but furthermore, it was Globalink’s failure to arrange for a timely delivery at the final destination which caused the delay. Had transport arrangements been made earlier, then the goods would have arrived at the refinery before the canal closed down for the winter. 

As the judge put it, 'it would be absurd if a party could excuse itself from the consequences of a breach by reference to force majeure when the force majeure was caused by the party’s own breach.'