Schenker Ltd v Negocios Europa Ltd

Factual and Procedural Background

The Plaintiff seeks to recover approximately $58,000 under an invoice pursuant to a contract with the Defendant for the carriage of goods by air. The dispute arises from a contract entered into in October 2015 for the transportation of Chia seeds by air, where the Defendant contends that delivery was to occur within seven days but was delayed until early January 2016. The Defendant denies the freight is due or argues the freight payable should be reduced to the amount payable for sea carriage. The Plaintiff relied on the British International Freight Association (BIFA) standard trading conditions, which the Defendant denied were incorporated. The Plaintiff alternatively asserted a common law rule that there can be no set-off against freight and that any breach of contract claim should be brought separately.

During a summary judgment application hearing in April 2017, the Deputy Judge decided the issue of the common law rule should not be summarily decided as it would establish precedent and required full argument. The matter was thus ordered to be dealt with as a preliminary issue. The Plaintiff supported its case with a witness statement and an expert report, including oral evidence from the expert.

Legal Issues Presented

1. Whether there exists a common law rule that prohibits set-off against air freight charges.
2. Whether the common law freight rule, established in shipping and extended to road haulage, applies to carriage of goods by air.
3. Whether the common law rule applies in cases involving delay in delivery under air freight contracts.

Arguments of the Parties

Plaintiff's Arguments

• The common law rule prohibiting set-off against freight is well established in shipping law, as supported by authorities such as The Brede [1974] QB 233 and The Aries [1977] 1 Lloyds Rep 334.
• Lord Wilberforce’s judgment in The Aries confirmed the rule’s long-standing acceptance and its importance in contractual certainty.
• The rule has been extended to road haulage, supported by cases including R H & D International Ltd v IAS Animal Air Services Ltd [1984] 1 WLR 573 and United Carriers Ltd v Heritage Food Group [1996] 1 WLR 371.
• Expert evidence from a specialist insurance broker with 40 years’ experience confirms the rule applies as an industry-wide custom in air freight and underpins the freight liability insurance market.
• The rationale behind the rule is to protect cash flow for freight forwarders and carriers, ensuring credit providers are not disadvantaged compared to those demanding cash.
• Hong Kong authorities, although not binding, endorse the application of the rule to air freight, finding no logical distinction between sea, road, and air carriage.
• The rule applies even in cases of delay, as supported by the Court of Appeal in The Alpha Nord and the RAF Forwarding case.

Defendant's Arguments

• The common law rule is clearly established in shipping cases but does not extend to air freight.
• There are significant differences in cost and delivery time between air and sea freight, with the contract explicitly requiring delivery within seven days.
• It would be unfair and inequitable to apply the common law rule to delay-related claims in air freight contracts.
• The Defendant should be allowed time to bring a counterclaim regarding the delayed delivery.

Table of Precedents Cited

Court's Reasoning and Analysis

The court acknowledged that the common law rule prohibiting set-off against freight is well established in shipping law and has been extended to international and domestic road haulage. Although English authorities had not expressly ruled on its application to air freight, the court found the reasoning in road haulage cases persuasive and instructive. The court considered the expert evidence, which was unchallenged, confirming the rule’s acceptance as an industry-wide custom in air freight and its centrality to freight market contracts and insurance.

The court noted that the rationale for the rule—to protect the cash flow of freight forwarders and carriers—applies equally to air freight as to sea and road carriage. The court found no logical or sensible distinction to exclude air freight from the rule’s operation, concurring with the reasoning of the Hong Kong authorities. The court also rejected the Defendant’s argument that the rule should not apply in cases involving delay, citing authority that the rule applies even in delay situations.

While recognizing the Defendant’s difficulty in accepting the ruling due to delayed delivery, the court emphasized that the Defendant remains free to bring a separate claim or counterclaim for breach of contract. The court declined to alter the well-established rule, noting that judicial intervention for harmonization is inappropriate.

Holding and Implications

The court held that the common law freight rule prohibiting set-off against freight charges extends to carriage by air.

The direct consequence is that the Defendant cannot deduct or set off claims related to the goods (including delay) against the freight payable under the air carriage contract. However, the Defendant retains the right to bring a separate claim or counterclaim for any alleged breaches, such as delay in delivery. The decision does not establish new precedent beyond confirming the extension of the rule to air freight and does not alter the existing legal framework governing set-off in freight contracts.