Before freight or hire is paid under a charter, the charterer may suffer loss or damage for which he contends that the owner of the ship is responsible. He may feel that the most practical method of dealing with this problem is to set-off or deduct his damages claim from his freight or hire payment, leaving the owner to challenge the deduction in due course. While this may often place the charterer in a good tactical position, it is a practice which can give rise to legal difficulties. There are strict rules governing deductions from both freight and hire, and a wrongful deduction by the charterer can create significantly greater problems than it solves. For example, the owner may seek to exercise a lien over the goods in respect of his freight or hire claim. In the case of a time charter, if the owner has a contractual right of withdrawal for non-payment, he may be able to withdraw the ship from the charterer's service (a right which he may well wish to exercise if hire rates have increased in the meantime). With both types of charter, in an extreme case, the owner might even be able to argue that a deduction was so serious as to amount to a repudiatory breach of the entire contract. This article examines the circumstances in which a right to deduct from freight or hire may arise, how the deduction should be effected, and some of the practical consequences which follow.
The right of set-off with which this article is mainly concerned is often termed "equitable set-off". This is only one of several rights of set-off recognised by English law. There may also be (i) a right of set-off or "abatement" under the common law, although this only arises in limited circumstances, (and not, generally, in relation to contracts of carriage); (ii) a form of procedural set-off of mutual debts (not claims for damages) under the Statutes of Set-Off (originally enacted in the 18th Century!); and (iii) special rules relating to the setting off of claims on an insolvency. But none of these set-offs are likely to provide the charterer with a remedy in the situation described above, and they are beyond the scope of this article.
Many charters contain express provisions which give the charterer the right to make deductions in specified circumstances. Since these provisions are agreed in the contract, they will generally be given effect. Unlike the set-off cases considered below, these deductions do not of course depend on establishing a breach of contract or recoverable damages.
In the case of a time charter, such deductions may be addressed in one of two ways. Firstly, the clause may simply provide that hire does not accrue during a given period, so that there is no question of it being earned at all. This situation will generally be dealt with in the off-hire clause in such a way that an accrued claim for off-hire will be deducted from the next hire payment. (These clauses were considered in detail in Issue 14 of the Maritime Review.) Secondly, the charter may provide that hire remains payable without interruption, but that certain specific items may be deducted from it. For example, Clause 14 of the Baltime form obliges the charterer to advance funds for disbursements in certain circumstances, but the amount so advanced can then be deducted from hire.
Examples of an express right to deduct in voyage charters are perhaps less common, but the principles to be applied are the same. If the charter permits deduction, there is no reason why that provision should not be given effect. For example, the Baltimore Berth Grain C form permits the charterer to deduct from freight the amount of any despatch which may have been earned at the load port.
In considering whether a deduction can be made under the express terms of a charterparty, it may be necessary to consider a number of questions. Firstly, and obviously, does the deduction fall within the scope of the clause in the first place? If it does not, the charterer may be unable to deduct at all, unless he can bring himself within the principles considered below. Secondly, does the clause oblige the charterer to follow any particular procedure? For example, he may be required to give notice of the deduction, or provide documentary support or vouchers for the amount to be deducted. Thirdly, does the clause merely entitle the charterer to deduct by way of security for his claim, leaving the owner to dispute the deduction and claim the sums back; or is the deduction intended, in itself, to constitute a final determination of the parties rights? Clauses which bind the owner in this way will of course be rare, and clear words are needed to achieve such a result. They are not, however, unknown. In The "OLYMPIC BRILLIANCE"  2 Lloyd's Rep. 205, the parties entered into a voyage charterparty for the carriage of oil. Freight was payable on the bill of lading quantity but the charter provided:
"If there is a difference of more than 0.50% between B/Lading figures and delivered cargo as ascertained by Customs Authorities at discharging port, Charterers have the right to deduct from freight the C.I.F. value for the short delivered cargo. Owners have the right to appoint independent surveyor in order to check cargo figures in conjunction with Customs Authorities".
This was held to be a legitimate means of calculating, on a final basis, the amount of freight payable. It was not concerned with ascertaining owners' liability for loss of the cargo. There was therefore no scope for the owners to claim back the amount deducted in a subsequent arbitration.
Once the right to deduct is established, there is no need for it to be agreed by the owners in advance unless, of course, the clause so provides. It was argued in The "NANFRI"  2 Lloyd's Rep. 132 that such a term should be implied but this was, not surprisingly, rejected on the basis that it would deprive the right to deduct of its entire practical effect.
In the absence of an express right of deduction, the charterer must rely on the rights allowed by the general law, which we now turn to consider.
It has long been established that the right of deduction from freight under voyage charters (and indeed bills of lading) is subject to special rules which differ from those of the general law. The effect of these rules is, in effect, to prohibit the deduction of damages claims of any nature, provided of course that the freight is otherwise properly due and payable (as to which, see the article in Issue 16 of the Maritime Review). While the rule has been established for many years, it has been reaffirmed and its extent clarified in two modern House of Lords authorities. There have also been a number of recent decisions of the lower courts which have helped to clarify the position.
In The ARIES  1 Lloyd's Rep. 334, the owners had let their vessel to the charterers for a voyage from the Arabian Gulf to Rotterdam. Freight was due after completion of discharge and the charter incorporated the Hague Rules, including the one year time bar provided for in Article III Rule 6. The cargo was short delivered and the charterers deducted sums from the freight in respect of their claim. Two years later (and therefore after the one year time bar had expired) the owners pursued their claim for the balance of the freight. The House of Lords were faced with two issues:-
(a) Firstly, were the charterers entitled to set-off or deduct their cargo claim against the freight, having regard to the rule against deductions? The House of Lords held unanimously that they were not. The Court was asked to reconsider whether it was appropriate, in the late 20th Century, to maintain the rigid rule against deductions at all but, following a lengthy review of the history and rationale of the rule, they decided that there was no reason to depart from it.
(b) Secondly, (but of less relevance to the present article), even if a "set-off" had been allowed, would this have made any difference? The owners argued that, since no "suit" had been brought within one year, as required by Article III Rule 6, the charterers' claim was extinguished in its entirety, so that it could not be asserted at all, whether as a counterclaim or a set-off. By a majority, the House of Lords held that this was indeed the effect of the Rule, so that the charterers' claim was time barred whether or not they had been entitled to set it off against the freight.
In The CLEON ( 1 Lloyd's Rep, 586), the vessel encountered problems with her cargo handling equipment as a result of which she was compelled to proceed to a second port to complete discharge. This involved an extra charge for freight (on the basis of a two port discharge), which the charterers refused to pay. They argued that the problems at the first port (and therefore the need to call at the second port at all) arose from defects in the vessel, so that the owners would never have been in a position to have claimed the extra freight if it had not been for their own breach. Notwithstanding this, the Court of Appeal upheld the shipowners' application for summary judgment concluding that, following The "ARIES", even this did not give rise to a right of set-off.
In The ELENA  1 Lloyd's Rep. 425, the rule against deductions was applied to a situation where the owner had failed, at the outset of the charter, to make the whole of the guaranteed cargo space available to the charterer. (The freight was payable on a lump sum basis, and not by reference to the amount of cargo loaded.)
In The DOMINIQUE  1 Lloyd's Rep. 431, the vessel was voyage chartered to carry goods from Kakinada to Europe. Unfortunately, she called at an intermediate port for bunkers where she was arrested by creditors. The owners failed to procure her release and made it clear that they would be unable to complete the voyage. The freight was deemed earned on shipment but was not payable until after release of the bills of lading. Accordingly, after the freight had been earned, but before it had become payable, the charterers terminated the charter as a result of the owners' repudiatory breach. The charterers' costs of on-carrying the goods exceeded the amount of the freight; which they therefore, perhaps not surprisingly, refused to pay. The freight had, however, been assigned to the owners' bank, who sought to recover it from the charterers. Again, the House of Lords was faced with two arguments. Charterers argued firstly that, since the owners had been in repudiatory breach before the freight had become payable, it had never become due at all; so that no action could be taken to recover it. The House of Lords rejected this argument on the basis that the freight had been deemed earned on shipment, regardless of when it had become payable (see the Article in Issue 16 of the Maritime Review). Secondly, the charterers argued that they had a claim against the owners which exceeded the amount of the freight; and that the rule against deductions should not extend to a situation where the owners were in repudiatory breach, particularly where they had simply refused or failed to perform the voyage in question. Again, however, the House of Lords rejected this argument, making it clear that the rule against deductions applied even in the case of a repudiatory breach.
The rule against deductions for freight is therefore now not only clearly established, but is extremely wide in its scope. If a deduction could not be made in the circumstances contemplated in The DOMINIQUE, it is difficult to envisage any realistic situation (save perhaps in the case of fraud by the owner) in which a deduction might be justified.
Finally, it would appear from the decision in The KHIAN CAPTAIN (NO. 2)  1 Lloyd's Rep. 429, that the rule against deductions applies not only to damages claims but also to cross claims by the charterer for a liquidated sum or debt (in that case, a claim by the charterers for reimbursement of overtime costs paid by them for owners' account).
(a) The doctrine of equitable set-off
It is not feasible to review the whole history of equitable set-off in this article, since whole books have been written on the subject. In very broad terms, however, a rule had developed by the 19th Century under which such a right of set-off might arise where, for example, a claimant's claim for payment in respect services rendered, and a defendant's cross claim for defective performance of those services were so closely linked that the defendant had, in effect, been deprived of the benefit of the contract. The test, however, was a strict one. In the words of Lord Denning in The NANFRI  2 Lloyd's Rep. 132 at 140:
"... it is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it. And it is only cross-claims which go directly to impeach the plaintiff's demands, that is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross- claim ..."
Unfortunately, however, both this doctrine and the rule against deductions from freight, effectively developed in parallel with no satisfactory authority as to the relationship between them. As time charters became more common (from about 1940 onwards), the question inevitably arose as to which path they should follow. Should they, by analogy with the rule applicable to voyage charters, be subject to a rule against deductions from hire? Or should they be governed by the general law, so that the doctrine of equitable set-off should apply to them? By the late 1970s, a number of cases had come before the courts in which this issue had arisen. For example, in Seven Seas Transportation Limited -v- Atlantic Shipping Co. S.A.  2 Lloyd's Rep. 188, Donaldson J. held that time charters should be aligned with voyage charters, so that the "no deduction" rule should be applied. This was also the view of Carver on Carriage of Goods by Sea and Scrutton on Charterparties. Two years later, however, in The TENO , 2 Lloyd's Rep. 289, Parker. J, disagreed, holding that a right of set-off could in principle exist.
The matter finally came to be considered in detail in the Court of Appeal in The NANFRI  2 Lloyd's Rep. 132. (The case in fact went to the House of Lords but, as will be seen, it was decided there on other grounds.) The owners had let three ships to the charterers for periods of 6 years to carry grain from the Great Lakes to Europe, with steel cargoes being carried on the return voyages. The cargoes were generally sold on CIF terms under which the shippers paid the freight in advance and required freight prepaid bills. There were the usual provisions relating to the payment of hire in advance. The owners were given a contractual right of withdrawal for non-payment of hire, and a lien in respect of sums due. There were also two specific clauses under which off-hire claims and sub-performance claims could be deducted from hire. However, while the charters remained in existence, it was also provided that the master was to be under the orders of the charterers as regards employment, agency and other arrangements. It was the charterers' practice to sign bills as the master's agent, rather than presenting them to him for signature.
Disputes arose as to the owners' performance of the charter, and charterers made a number of deductions from hire as a result. Many of these deductions fell within the specific "deduction" clauses referred to above. However, after a period of time, the owners sought to challenge the deductions, and asserted that no sums could be withheld unless, in effect, they were agreed or upheld by an arbitration tribunal in advance.
Owners therefore informed the charterers, firstly that the masters of all three ships were being instructed "to withdraw all direct or implied authority to charterers or their agents to sign bills of lading", and secondly that the masters themselves would not sign bills of lading which were endorsed "freight prepaid" and which did not bear an endorsement incorporating the charterparty lien clause. Instructions to that effect were indeed given to the masters. The effect of such instructions on the charterers' business was potentially disastrous, since they had to be able to procure the issue of clean freight prepaid bills. Despite this, the owners persisted in their position and the charterers accepted their conduct as a repudiation of the charters, thereby bringing them to an end.
The case involved a number of issues which are not directly relevant here. Indeed, in both the Court of Appeal and the House of Lords, the charterers ultimately succeeded on the basis that, while the charters continued in existence, the owners were not entitled to instruct their master not to comply with the charterers' orders, so that their instructions amounted to a repudiatory breach. For this reason, the House of Lords expressly declined to consider the set-off point. In the Court of Appeal, however, the issue of equitable set-off was considered in depth. After reviewing the previous case law, and the history of the voyage charter deduction rule, the Court decided, by a majority of two to one, that time charters should be aligned with the doctrine of equitable set-off, and not with the rule against deductions. The right of equitable set-off did therefore apply, in principle, to time charters. In view of the passage of Lord Denning quoted above, however, not every damages claim by the charterer would give rise to a right of deduction. The right would only exist where:-
i) The claim in respect of which the charterer sought to deduct arose out of the same transaction or was closely connected with it; and
ii) Where it directly impeached the owner's demand for hire. This would generally only be the case where the owner's conduct had wrongfully deprived the charterer of the use of the vessel or in some way prejudiced his use of it.
Although the Court of Appeal decision was only by a majority (Cumming Bruce LJ considered that there should be no distinction drawn between time and voyage charters), and the House of Lords expressly declined to adjudicate upon the point, the reasoning of the majority has been followed time and time again in subsequent decisions, and it now appears to be well established that, where the requisite criteria are met, a time charterer may in principle make deductions from hire by way of equitable set-off. Further, the rule has been applied both to ordinary time charters and trip time charters (see e.g. The CHRYSOVALANDOU DYO  1 Lloyd's Rep. 159 and The KOSTAS MELAS  1 Lloyd's Rep. 18).
(b) The types of claim which may give rise to set-off
As stated above, the majority in The NANFRI made it clear that equitable set-off by the charterer would only be allowed where the owners' breach "impeached" the charterer's use of the ship. Again, in the words of Lord Denning:
"I would hold that, when the shipowner is guilty of a breach of contract which deprives the time charterer of part of the consideration for which the hire has been paid in advance, the charterer can deduct an equivalent amount out of the hire falling due for the next month. I would as at present advised limit the right to deduct to cases when the shipowner has wrongly deprived the charterer of the use of the vessel or has prejudiced him in the use of it. I would not extend it to other breaches or default of the shipowner ..."
This can be a difficult test to apply, and the best way of illustrating it is by way of case examples. Some of the cases considered below were decided prior to The NANFRI, but were ones in which the judge reached the same conclusion as the Court of Appeal in that case as to how time charters should be treated for this purpose.
i) Claims giving rise to a right of set-off
Cases involving loss of time as a result of total deprivation of the use of the ship are usually straightforward. Thus, in Sea & Land Securities -v- Dickinson  1 KB 286, the withdrawal of the ship to fit de-gaussing apparatus was regarded by Atkinson J as capable of giving rise to a right of equitable set-off (although, in the event, the Court of Appeal concluded that, on the facts, no breach had been established). In The CHARALAMBOS N. PATERAS  2 Lloyd's Rep. 42, the master wrongfully refused to enter port, and loss of time ensued as a result. Mocatta J. appears to have considered that the charterers would have been entitled to deduct a sum representing hire during the period of delay, had there not been an exclusion clause exempting the owners from liability. It is submitted that, on the basis of The NANFRI as well, a claim in respect of delay arising from the refusal of the master to comply with charterers' orders would be treated as capable of set-off.
Even where the entire ship has not been withdrawn from charterers' service, rights of set-off may still arise if the charterers' use has nevertheless been prejudiced. Thus, a claim in respect of under performance will probably give rise to a right of set-off, (see The CHRYSOVALANDOU DYO  1 Lloyd's Rep 159 - although the deduction in that case was, at least in part, based on an express clause; see also The CORFU ISLAND 1973 - unreported and The KOSTAS MELAS  1 Lloyd's Rep. 18). Further, failure to make the whole cargo space of the ship available to the time charterer may equally be within the set-off principle. In The TENO  2 Lloyd's Rep. 289, the master advised that, on the basis of the maximum permissible draft at the load port, the vessel should be capable of loading 20,541 m.t. of cargo. Unfortunately, the vessel's ballast pipeline system broke down, with the result that deballasting could not continue and the vessel reached her maximum draft when she was still 769 m.t. of cargo short. The master refused to delay at the port in order to repair the ballast pipe unless charterers accepted responsibility for the time lost as a result, which they refused to do. In the event, he insisted on sailing from the load port without the balance of cargo on board. Parker. J, held that the charterers were entitled to make a deduction from hire in respect of their claim, to reflect their loss of use of the vessel.
ii) Claims not giving rise to a right of set-off
The prime example of a claim which does not give rise to a right of equitable set-off is a claim for cargo shortage or damage. This was identified by both Lord Denning M.R and Goff L.J in The NANFRI as insufficiently `impeaching' the owner's claim for hire. Contamination of cargo may well be a wrong in respect of which the charterer is entitled to recover damages, but it does not go directly to his use of the vessel. This view has been affirmed repeatedly in subsequent cases.
This is not, however, the only type of claim which is excluded. In The LEON  2 Lloyd's Rep. 470, Hobhouse, J. was confronted with a case in which the charterers had made deductions from hire as a consequence of three alleged breaches of the charter. It was said that:
(i) the master had failed to keep a proper log;
(ii) he had conspired with bunker suppliers to produce false invoices; and
(iii) the owners had breached their duty as bailees of the charterers' bunkers.
Hobhouse, J. said, at p.474:
"All these matters even when expressed as breaches of express or implied terms of the charterparty are collateral. They do not relate to the use of the vessel. There is no suggestion that in the present case the charterers ever directly or indirectly lost even a minute of the ship's time as a result of any of these breaches nor is there any suggestion that at any time by reason of any of the breaches the whole reach of the vessel's holds, etc, were not at charterers' disposal or that the master did not prosecute the voyages with despatch or comply with the orders of the charterers as regards the vessel's employment .... None of the three alleged breaches is capable in law of justifying a conclusion that they prejudiced the charterers or their use of the vessel".
Perhaps the decision which is nearest to the dividing line between claims which can be set-off and those which cannot is The ALIAKMON PROGRESS  2 Lloyd's Rep. 499. The vessel, while approaching her berth, struck the quayside and was damaged. Delay was thereby incurred while she was repaired. During this period, she went off-hire. However, as a result, the charterers lost their anticipated cargo and had to wait for a new one. Further delay was therefore incurred, even after she had come back on hire. Charterers contended that they were entitled to set-off their claim for time lost waiting for the new cargo, on the basis that the delay had been caused by the casualty. In the event, the Court concluded that the owners were not liable for the casualty at all, so that no cross-claim arose. If that had not been the case, however, the Court of Appeal considered that the claim would not have given rise to a right of set-off anyway. A set-off would only have been available if the charterers had been deprived of the use of the ship. In the present case, they had had the full use of her throughout the period in question. Their difficulty was that they could not make good use of that period, because no cargo was available. Further, their claim for loss of profits arising from lost business was also considered to be "clearly outside any equitable set-off".
This latter point was also considered in The ADITYA VAIBHAV  1 Lloyd's Rep. 573. The charterers' alleged that owners had failed to clean the holds properly as a result of which time was lost and the charterers incurred additional loss and expense. They deducted from hire not only in respect of the time lost but also for an extra period sufficient to compensate for their additional losses. It was not seriously disputed that the first category of deduction was justified. Saville J held, however, that the second was not. The vessel was fully at the service of the charterers at the time in respect of which the deduction had been made.
(c) Exercising the right of set-off
The act of set-off itself is, of course, straightforward, since it merely involves making a payment which is for less than that which would otherwise be due. However, although the cases do not address the problem in detail, it is plainly both good legal and commercial sense for the charterer also to give clear notice to the owners as to what he is doing and why, and how the amount of the deduction is calculated. This will be particularly important if the "bona fides" of the calculation is later called into question (see (d) below).
(d) The effect of making an unjustified deduction
If a set-off is justified, and is for an amount which is subsequently found to be correct, the charterer's conduct in deducting will be vindicated and, if the owners have, for example, withdrawn the vessel from service as a result, that withdrawal will itself have been a breach of the charter. What happens, however, if the charterer's conduct turns out not to have been justified? This may be for one of two reasons. Firstly, the owner may contend that the claim is not of a nature which gives rise to a right of set-off at all. Secondly, he may challenge the amount of the deduction itself. Unfortunately, although the cases are not entirely specific on the point, it seems reasonably clear that the legal effect of these two challenges will differ.
If the charterer deducts in respect of a claim which does not, in principle, give rise to a right of deduction at all, he probably does so at his own risk, even if he does so bona fide and reasonably (see The BUNGA MELAWIS  2 Lloyd's Rep. 271). Thus, if there is no right to deduct at all, the owner may probably treat the charterer as in breach, and exercise a right of withdrawal if the charter provides for one (see The "LUTETIAN"  2 Lloyd's Rep. 140).
The position in relation to the quantum of the deduction may, however, be different. The precise calculation of, say, a sub-performance claim may be extremely complex and may ultimately depend on the ship's records to which the charterer does not have immediate access. Thus, even though the charterer may know that this is a deduction he is, in principle, entitled to make, he may overcalculate his claim and deduct too much. Does this matter, even if his deduction has been calculated reasonably and in good faith? In The NANFRI there was a difference of opinion between Lord Denning M.R. and Goff L.J. on this question. Lord Denning took the view that, if the amount deducted was a reasonable assessment made in good faith, the charterer was not in default and the owner could not withdraw the vessel. If it subsequently turned out that he had deducted too much, the owner could recover the balance "but that is all". Goff L.J. took a harsher line. It appears to have been his view that the charterer acted at his peril. If it transpired (for example in a subsequent arbitration) that he had he deducted too much, the owner could withdraw and the charterer would be liable for damages. The disadvantage of this approach is, of course, that rights of deduction and withdrawal can then only be assessed with hindsight. The rights of the parties at the crucial moment can only be guessed at.
The question arose again in The CHRYSOVALANDOU DYO  1 Lloyd's Rep. 159. Mocatta, J. adopted the views of Lord Denning M.R. which he considered were more in sympathy with commercial reality. This was also the view of Robert Goff J in The KOSTAS MELAS  1 Lloyd's Rep. 18, Hobhouse J in The LEON (above) and Webster J in The BUNGA MELAWIS  2 Lloyd's Rep. 271. Indeed, this is now the prevailing view and it would appear that (i) if the charterer acts in good faith and reasonably, the owner cannot withdraw but must seek redress instead by way of a claim for the sum over-deducted; (ii) if the charterer does not act in good faith, but seeks to make a deduction in order to apply commercial pressure or for some other ulterior motive, he is at risk both of withdrawal and, indeed, of committing a repudiatory breach of the contract. (The position in this respect seems to be the same whether the right of deduction arises under a specific clause or by virtue of the general doctrine of equitable set-off - see The BUNGA MELAWIS at page 272.) There are, however, still no appellate authorities directly on the point.
(e) Excluding the right of set-off
As indicated at the outset, the parties can of course expressly agree that certain deductions may be made against hire. In principle, it is equally open to the parties to agree that deductions by way of equitable set-off shall not be made, although such a clause would, in the event of ambiguity, be construed against the owner and in the charterer's favour. It is for example clear that the words "without discount" will be insufficient for this purpose (see The TENO  2 Lloyd's Rep. 289 and The NANFRI itself). (We have not considered in this article any possible impact of the Unfair Contract Terms Act 1977, in the rare cases in which that Act might apply to a normal type of charterparty.)
5. PROCEDURAL CONSIDERATIONS
While this article is not primarily concerned with procedural issues, there are a number of important aspects of the right of set-off (or lack of it) which are worth mentioning. Some of these will already have become apparent from the cases considered above.
(a) Firstly, where set-off is not permitted (having regard to the factors discussed above), an owner who has not been paid freight or hire will usually be able to bring an immediate action to recover the sum improperly deducted. He may, in order to do so, be entitled to summary judgment in the courts or an interim arbitration award in respect of his claim, leaving the charterer to pursue his counterclaim for damages for alleged breach at an inevitably slower pace. It may even be the case that the court would refuse to grant the charterer a stay of execution of the owners' judgment, with the result that the charterer will have no choice but to pay the missing freight or hire before he has been able to pursue his cross-claim. Whether the court or arbitrator would (or could) in these circumstances, order the provision of security by the owners in respect of the charterer's counterclaim, as a condition of granting the judgment or award, would of course depend on the facts of the case.
(b) Again, where set-off is not permitted and a wrongful deduction is made, the owner may seek to commence court proceedings, even where the charter contains an arbitration clause. The charterer may, of course, then apply for a stay of the proceedings under the Arbitration Acts. However, in cases where it is quite clear that an improper deduction has been made (for example in the case of a voyage charter), it is possible that the court will refuse the application for a stay on the grounds that there is no `dispute' as to whether the freight is due. This is a complex area of law and the recent cases on the subject are somewhat unsatisfactory. However, such a procedure has been successful in the past and the possibility of adopting this approach certainly exists (see The CLEON  1 Lloyd's Rep. 586).
(c) Where the charterer's claim is subject to a time-bar which is shorter than that for the owner's claim for freight or hire, but the claim does not give rise to a right of set-off, the charterer cannot afford to wait until the owner brings his claim for freight, and then bring his counterclaim in the same proceedings. This is because, if the counterclaim does not give rise to a right of set-off, it will not constitute a defence to the owner's claim and since, standing on its own, it will have already become time barred by the time of the owners' action, there will be nothing left in respect of which a counterclaim can be asserted. But, even where the cross claim does give rise to a right of set-off, the position may be no better. Some time bars serve not only to extinguish the charterers' claim, but also their right of set-off. If the time bar has this effect, it will extinguish not only the charterer's cross claim, but also the charterer's defence to the action for freight or hire. This was, for example, held by the majority of the House of Lords in The ARIES to be the effect of Article III Rule 6 of the Hague Rules. This is therefore an important hazard to watch out for.