A-994-85
Atlantic Lines & Navigation Company Inc.
(Plaintiff) (Appellant)
v.
The Ship Didymi and Didymi Corporation
(Defendants) (Respondents)
INDEXED AS: ATLANTIC LINES & NAVIGATION CO. INC. v.
DIDYMI (THE)
Court of Appeal, Mahoney, Stone and Lacombe
JJ.—Vancouver, April 9; Ottawa, May 20, 1987.
Practice — Judgments and orders — Appeal from Trial
Judge's refusal to grant judgment under R. 341(a) and to
dismiss counterclaim — Time charter of vessel — Statement
of claim seeking damages for premature dry-docking and
improper loading — Respondents seeking to set-off claims for
damage to vessel and increases in charter hire due to saving of
fuel and vessel's performing beyond warranted speed capabili
ties — Respondents admitting breach of charter party and
existence of interim arbitration award in favour of appellant
— Appeal allowed — Judgment for appellant in accordance
with arbitration award — Cross-claims separate and distinct
— Not case for set-off — Arbitration award final by own
terms, and as nothing further required by arbitrators to make
it final — Otherwise respondents' pleading not containing
"admission" for judgment pursuant to R. 341(a).
Maritime law — Contracts — Equitable doctrine of set-off
— Time charter — Claim for damages due to premature
dry-docking, improper loading — Cross-claims for damage to
vessel and increases in charter hire — Appeal from Trial
Judge's refusal to grant judgment or dismiss cross-claims
allowed — No set-off as respondents' claims not impeaching
appellant's — Development of doctrine of set-off and freight
exception to common law rule of abatement.
Equity — Doctrine of set-off — Time charter of ship —
Claim regarding premature dry-docking, improper loading
Whether claims regarding damage to vessel, charter hire
increases may be set off — Historical development of set-off
— Only cross-claims arising from same transaction and going
directly to impeach plaintiffs demands set off — Respon
dents' , claim not impeaching appellant's — In denying judg-
ment, Trial Judge apparently of view respondents entitled to
set-off — Appeal allowed.
Federal Court jurisdiction — Trial Division — Appeal
from Trial Judge's refusal to grant judgment pursuant to R.
341(a) or dismiss counterclaim — Time charter of ship —
Claim for damages due to premature dry-docking, improper
loading — Counterclaim for damage to vessel and increases in
charter hire due to fuel saving and vessel exceeding warranted
speed capabilities — Trial Division having jurisdiction over
counterclaims — Letter of undertaking by which security given
requiring respondents to accept service of claim and to file
defence — Subject-matter of claims within Federal Court Act,
s. 22(2)(i) — By bringing action in Trial Division, appellant
submitting to jurisdiction for action and defence including
cross-claims arising out of charter party — Counterclaim not
stayed pursuant to Arbitration Act, s. 1 as Federal Court
without authority to act thereunder.
This is an appeal from a Trial Division decision dismissing an
application under Rule 341(a) for judgment in the action and
the dismissal of the counterclaim.
The respondent chartered a vessel to the appellant. The
amended statement of claim sought damages in respect of: the
premature dry-docking of the vessel; loss of freight revenue
from failure to load the vessel to the draft; a claim for loss of
market value of the goods not loaded by the consignees of this
cargo; additional expenses for discharging to lighters because
the vessel was, on another occasion, overloaded and legal fees.
The respondents admitted breach of a term of the charter
contract by prematurely dry-docking the ship and the existence
of an interim award by arbitrators. However, they cross-
claimed for damage done to the vessel and for increases in
charter hire due to a saving of fuel and the vessel exceeding her
warranted speed capabilities. They seek to set off their claims
against those of the appellant. Arbitrators issued a "final
interim award" holding the owners in breach of the charter
party and Atlantic entitled to damages in the amount of
$54,793.06 U.S.
The appellant contends that the Trial Judge erred as no basis
in law exists for set off given the nature of the respondents'
claims, and as the Trial Division lacks jurisdiction to determine
those claims required to be disposed of by arbitration. The
respondents contend that the Trial Judge properly exercised the
discretion conferred by Rule 341(a). They also assert that the
arbitration award does not entitle the appellant to judgment
under that Rule because it is merely an "interim" award.
Finally, they submit that judgment was rightly refused because
they are entitled to set off their claims under the doctrine of
equitable set-off.
Held, the appeal should be allowed.
The appellant is entitled to judgment for damages for breach
of the charter party found to be recoverable under the arbitra
tion award.
Although the Trial Judge did not give reasons for refusing
judgment under Rule 341(a), it may be assumed that the
argument relied upon by the respondents, that they were en
titled to set-off, and which was specifically pleaded, was a
factor in his decision.
There are three categories of set-off: set-off under statute,
abatement in certain cases at common law, and equitable
set-off. Rule 418 recognizes equitable set-off. For equitable
set-off to apply, there must be some equity, some ground for
equitable intervention, other than the mere existence of a
cross-claim: Aries Tanker Corpn y Total Transport Ltd,
[1977] I All ER 398 (H.L.). It is only "cross-claims that arise
out of the same transaction or are closely connected with it"
and which "go directly to impeach the plaintiff's demands such
as to render it manifestly unjust to allow him to enforce
payment without taking into account the cross-claim" that may
be the subject of equitable set-off: The Nanfri. The claims on
both sides arose out of the same charter party agreement.
However the respondents' claims asserted by the counterclaim
do not go directly to impeach the appellant's claim that it was
put to additional costs by being wrongly deprived of the vessel's
use. The cross-claims are each separate and distinct claims
having no bearing whatsoever on it. The respondents, as a
matter of law, cannot invoke the doctrine of equitable set-off.
The arbitration award was not an interim one. Nothing
further needed to be done by the arbitrators for it to be made
final. By its own terms, the award "is final of the matter
determined" and was to be paid "forthwith".
Although the appellant is a foreign corporation, by bringing
this action in the Trial Division the appellant submitted to the
jurisdiction for the purpose of its action, and also for the
purpose of enabling the respondents to adequately defend them
selves. This includes asserting cross-claims by way of counter
claim when those claims arise out of the same charter party
upon which the appellant bases its claims for breach of
contract.
The subject-matter of the claims in the counterclaim fall
within the jurisdiction in paragraph 22(2)(i) of the Federal
Court Act. The words "arising out of any agreement" are broad
enough to embrace the subject-matter of the claims in the
counterclaim, the substance of which is damages for alleged
breach of contract.
The Federal Court of Canada is not the court invested with
authority to act pursuant to section 1 of the Arbitration Act
(U.K.), 1975, c. 3. Therefore the counterclaim should not have
been stayed pursuant to that section.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Arbitration Act (U.K.), 1975, c. 3, s. 1.
Civil Procedure Acts Repeal Act, 1879, 42 & 43 Vict., c.
59.
Currency and Exchange Act, R.S.C. 1970, c. C-39, s. 1 l .
Federal Court Act, R.S.C. 1970 (2nd Supp.), c. 10, s.
22(2)(i).
Federal Court Rules, C.R.C., c. 663, RR. 341(a), 418.
Statute Law Revision and Civil Procedure Act, 1883, 46
& 47 Vict., c. 49.
Statutes of Set-Off, 2 Geo. 2, c. 22 (1728); 2 Geo. 2, c.
24 (1734).
Supreme Court of Judicature Act, 1873, 36 & 37 Vict.,
c. 66.
CASES JUDICIALLY CONSIDERED
APPLIED:
The Nanfri, [ 1978] 3 All ER 1066 (C.A.); Aries Tanker
Corpn v Total Transport Ltd, [1977] 1 All ER 398
(H.L.); Rawson v. Samuel (1841), Cr. & Ph. 161; 41
E.R. 451 (Ch.); Government of Newfoundland v. New-
foundland Railway Company (1888), 13 App. Cas. 199
(P.C.); Cormorant Bulk-Carriers Inc. v. Canficorp
(Overseas Projects) Ltd. (1984), 54 N.R. 66 (C.A.).
CONSIDERED:
Hanak v. Green, [1958] 2 All E.R. 141 (C.A.); Mondel v.
Steel (1841), 8 M. & W. 858; 151 E.R. 1288 (Exch.);
The "Brede", [1973] 2 Lloyd's Rep. 333 (C.A.); Ex
parte Stephens (1805), 11 Ves. Jun. 24; 32 E.R. 996
(Ch.); The "Angelic Grace", [1980] 1 Lloyd's Rep. 288
(C.A.).
REFERRED TO:
IBM Canada Ltd. v. Xerox of Canada Ltd., [1977] 1
F.C. 181 (C.A.); Bankes v. Jarvis, [1903] 1 K.B. 549;
Meyer v. Dresser (1864), 16 C.B.(N.S.) 646; 143 E.R.
1280 (Com. Pl.); SIS Steamship Company Ltd. v. East-
ern Caribbean Container Line S.A., [1986] 2 F.C. 27;
(1986), 66 N.R. 74 (C.A.); The "Teno", [ 1977] 2 Lloyd's
Rep. 289 (Q.B. (Com. Ct.)); Morgan and Son, Ltd. v.
Martin Johnson (S.) & Co., Ltd., [1948] 2 All E.R. 196
(C.A.); The "Leon", [1985] 2 Lloyd's Rep. 470 (Q.B.
(Com. Ct.)); Kaps Transport Ltd. v. McGregor Tele
phone & Power Const. Co. Ltd. (1970), 73 W.W.R. 549
(Alta. C.A.); Abacus Cities Ltd. v. Aboussafy (1981), 29
A.R. 607 (C.A.); United Chemicals Ltd. v. Prince Albert
Pulp Co. Ltd. (1981), 11 Sask. R. 320 (Q.B.); Norbury
Sudbury Ltd. v. Noront Steel (1981) Ltd. (1984), 47
O.R. (2d) 548 (H.C.); Coba Indust. Ltd. v. Millie's
Hldg. (Can.) Ltd. (1985), 65 B.C.L.R. 31 (C.A.); Euro-
bulk Ltd. v. Wood Preservation Industries, [1980] 2 F.C.
245 (T.D.); The Cheapside, [1904] P. 339 (C.A.);
Baumgartner v. Carsley Silk Co. Ltd. (1971), 23 D.L.R.
(3d) 255 (Que. C.A.); Batavia Times Publishing Co. v.
Davis (1978), 88 D.L.R. (3d) 144 (Ont. H.C.); Am-Pac
Forest Products Inc. v. Phoenix Doors Ltd. (1979), 14
B.C.L.R. 63 (S.C.).
COUNSEL:
S. Harry Lipetz and John W. Bromley for
plaintiff (appellant).
J. W. Perrett for defendants (respondents).
SOLICITORS:
Ray, Connell & Co., Vancouver, for plaintiff
(appellant).
Campney & Murphy, Vancouver, for defen
dants (respondents).
The following are the reasons for judgment
rendered in English by
STONE J.: This appeal is from a decision of
Collier J. in the Trial Division rejecting an
application of November, 1985 brought pursuant
to Rule 341(a)' of the Federal Court Rules
[C.R.C., c. 663] whereby the appellant sought to
secure judgment in the action, and the dismissal
or, alternatively, the staying of the respondents'
counterclaim. Leave to file a conditional appear
ance to the counterclaim was granted. The
Rule 341. A party may, at any stage of a proceeding, apply
for judgment in respect of any matter
(a) upon any admission in the pleadings or other documents
filed in the Court, or in the examination of another party, or
(b) in respect of which the only evidence consists of docu
ments and such affidavits as are necessary to prove the
execution or identify [sic] of such documents,
without waiting for the determination of any other question
between the parties.
respondents seek to set off their claims against
those of the appellant. It was argued by the appel
lant that the Trial Division is without jurisdiction
to hear and determine those claims and that, in
any event, as a matter of law none of them may be
set off against the claims made in the amended
statement of claim.
Background
In 1979 the respondent corporation, as owner of
the vessel, agreed to charter her to the appellant
for a period of approximately five years ending on
February 29, 1984 upon terms contained in a time
charter dated March 26, 1979 on a New York
Produce Exchange form. Among the terms of the
contract is clause 53, providing for reference of
disputes to arbitration. It reads in part:
Arbitration:
Any dispute arising out of this Contract shall, unless the parties
agree forthwith on a single Arbitrator, be referred to the final
arbitrament of two Arbitrators carrying on business in London
who shall be members of the Baltic Exchange, one to be
appointed by each of the parties, with power to such Arbitra
tors to appoint an Umpire, who shall be a member of the Baltic
Exchange.
In April, 1980 the appellant sub-chartered the
vessel on voyage terms to carry a full and complete
cargo of steel from Foss Sur Mer to the United
States/Canada with an expected ready-to-load
date of "June 1980". On June 9, 1980 it notified
the sub-charterer that the vessel would arrive at
the port of loading on June 17/18. Later that day,
the respondent corporation informed the appellant
that it intended to dry-dock the vessel for a week
to ten days in southern Italy. Dry-docking could
not be deferred. As the vessel had been involved in
four separate groundings and in a collision, her
Classification Society insisted she be dry-docked
before carrying her next cargo. She entered dry-
dock on June 16 and was unavailable to load cargo
until early July. The sub-charterer asked the
appellant to nominate a substitute vessel and that
was done. After the dry-docking, the vessel was
able to re-enter service under the charter party.
The appellant submitted a claim to the respon
dents in respect of its losses. Additional disputes
ensued, resulting in the appellant submitting fur-
ther claims. All of these claims were referred to
arbitration in London in accordance with
clause 53.
In March of 1984, the vessel arrived at the Port
of Vancouver to receive a cargo for delivery in
Finland. On March 15 the appellant instituted this
action in rem, causing the vessel to be arrested and
joining her owner as a defendant. In paragraph 4
of its amended statement of claim, the appellant
makes the following allegations:
4. Contrary to the requirements of the charter party, which is
annexed hereto and marked as Schedule "1", the Defendant
their servants or agents breached the terms of the contract, or,
in the alternative negligently:
(a) Prematurely dry-docked the vessel "DIDYMI" without
Notice to the Plaintiff whereby the Plaintiff lost a sub-fix
ture and had to charter another vessel for a total additional
cost of U.S. $81,760.72;
(b) Failure of the Defendant, its servants or agents to load
the vessel "DIDYMI" to the draft as instructed by sub-chart-
erers whereby there was a loss of freight revenue on the
shut-out cargo and a claim for loss of market value of the
goods by the consignees of the cargo which could not be
loaded on board the "DIDYMI" whereby the Plaintiff claims
the amount of U.S. $301,123.59;
(c) The Defendant, its servants or agents contrary to instruc
tions overloaded the vessel "DIDYMI", her arrival draft in
Port Said being 32' 7" against notified draft of 31' 10"
making it necessary to lighten the vessel by discharging cargo
to lighters rather than to dock wherein additional expenses
including discharge to lighter and off-hire expenses being
incurred in the amount of U.S. $60,000.00;
(d) In addition the Plaintiff claims the amount of U.S.
$55,000.00 for legal fees and incidental expenses arising out
of the Defendant's breach of contract or in the alternative
negligence as set forth herein.
In paragraph 5 of the same pleading, it is alleged
that "arbitration proceedings have been com
menced in London pursuant to the charter party
seeking damages as stated herein" for breach of
contract "and/or" negligence. There then appears
the following prayer for relief:
(a) Damages for breach of the March 26, 1979 charter
party;
(b) A declaration that the Plaintiff, Atlantic Lines & Navi
gation Company Inc. be indemnified by the Defendants in an
amount equal to any award that may be made against it in
any Court or arbitration proceedings;
(c) Interest; and
(d) Costs.
On March 16, 1984, the respondents moved to
strike out the amended statement of claim or to
stay the action and, in either event, to have the
vessel released from arrest. The application was
heard by Reed J. in the Trial Division (Atlantic
Lines & Navigation Company Inc. v. The Ship
"Didymi", [1985] 1 F.C. 240). She refused to
strike out the amended statement of claim or to
stay the action and ordered, instead, that the vessel
be released from arrest upon the respondents
giving appropriate security. It was her view, as
expressed at page 245, that the jurisdiction of the
Trial Division "has been invoked primarily to
obtain security for the claims being made" by the
appellant. That was accomplished by delivery of a
letter of undertaking given by the vessel's Protec
tion and Indemnity Club. No appeal has been
taken from the judgment of Reed J.
The respondents filed a statement of defence
and counterclaim on October 30, 1985. It contains
the following as paragraph 2:
2. The Defendants deny the allegations of fact contained in
paragraph 4 of the Plaintiff's Statement of Claim except that
the Defendants breached a term of the agreement referred to in
paragraph 3 of the Statement of Claim by prematurely dry-
docking the defendant ship as alleged in paragraph 4(a). The
Defendants say with respect to the allegations of fact contained
in paragraph 4(a) of the Plaintiff's Statement of Claim that
arbitrators appointed by the Plaintiff and Defendants have
rendered an interim award with respect to the said claim in the
amount of $54,793.06 (U.S.) together with interest and costs.
Except for the foregoing admission, the Defendants deny each
and every other allegation of fact contained in paragraph 4 of
the Plaintiff's Statement of Claim with [sic], without limiting
the generality of the foregoing, specifically deny that they
breached the terms of the contract (hereinafter referred to the
«Charterparty») by failing to load the defendant ship to a draft
as instructed by sub-charterers as alleged in paragraph 4(b) of
the Plaintiff's Statement of Claim; that they breached the
Charterparty by overloading the defendant ship such that her
arrival draft in Port Said made it necessary to lighten the
defendant ship as alleged in paragraph 4(c); or that the Plain-
tiff is entitled to legal fees or any other incidental expenses as
alleged in paragraph 4(d) or otherwise. [Emphasis added.]
Additionally, in the same pleading the respondents
put forward three different claims alleged to have
arisen under the charter party. They are that the
appellant is liable under the contract for damage
done to the vessel during its currency; that, in
breach of the contract, the appellant has failed to
pay an increase of charter hire flowing from the
vessel performing in excess of her warranted speed
capabilities; and, finally, that, in further breach of
the contract, the appellant has failed to pay an
increase in charter hire flowing from the vessel
consuming less than her warranted rates of fuel
and diesel oil. These claims were also referred to
arbitration in London pursuant to clause 53.
Nevertheless, the respondents assert they are en
titled in the action to set off the sum of these
claims against any amount adjudged to be owing
to the appellant. The prayer for relief in the
counterclaim reads as follows:
(a) damages for breach of Charterparty;
(b) a declaration that the Defendant Didymi Corporation be
indemnified by the Plaintiff Atlantic Lines & Navigation
Company Inc. in an amount equal, in Canadian currency, to
any awards that may be made against the said Plaintiff in
any Court or arbitration proceedings;
(c) interest;
(d) costs;
(e) such further and other relief as to this Honourable Court
may seem meet.
In its application pursuant to Rule 341(a), the
appellant asks for judgment "in the amount of
$94,216.29 in U.S. funds plus costs in the amount
of £6,144.78 pursuant to an Arbitration award" of
July 27, 1985, "those amounts being admitted by
the Defendants in the Statement of Defence and
Counterclaim". At the date the application was
heard by Collier J., only the claim in subparagraph
4(a) of the amended statement of claim had been
determined at arbitration. On July 27, 1985 the
arbitrators issued a "Final Interim Award" in
favour of the appellant in respect of that claim.
Paragraphs 6 to 10 of that award read in part:
6. NOW WE, the said Arbitrators ... having accepted the
burden of this arbitration and having carefully and conscien
tiously read the documents and listened to the contentions of
the parties, weighed the evidence, conferred and agreed with
each other, (so having no need of the Umpire)
DO HEREBY MAKE, ISSUE AND PUBLISH this our joint and
agreed INTERIM AWARD, which is FINAL of the matter deter
mined, as follows:-
7. WE FIND AND HOLD that for the reasons set out in Annexure
"A" which is attached to and forms part of this Award, the
Owners were in breach of the charterparty and Atlantic are
entitled to recovery of damages in the sum of US$54,793.06.
8. WE AWARD AND ADJUDGE that the Owners do forthwith
pay to Atlantic the sum of US$54,793.06 (fifty-four thousand,
seven hundred and ninety-three United States dollars and six
cents) PLUS interest on the said sum at the rate of 13 per cent
per annum from 1st August 1980 until the date of this our
Award.
9. WE ALSO AWARD AND ADJUDGE that the Owners do bear
and pay their own and Atlantic's costs in the reference to date
(the latter to be taxed if not agreed) and
WE FURTHER AWARD AND ADJUDGE that the Owners do bear
and pay the cost of this our Award which we hereby tax and
settle at £2,394.78 inclusive of our fees and charges (and the
fee of the Umpire).
10. ALWAYS PROVIDED that if Atlantic shall in the first
instance have paid for the cost of this Award they shall be
entitled to immediate reimbursement from the Owners of the
sum so paid.
These paragraphs are preceded by a number of
recitals, one of which, being paragraph 4, was
referred to and relied upon in argument. It reads:
4. The matter referred to us concerned a claim for damages
arising from the unexpected dry-docking of the vessel and
which Atlantic contended was in breach of the terms of the
charterparty by the Owners. The sum claimed was
US$54,793.06. The Owners denied liability.
We were given notice of a counterclaim by the Owners but it
was agreed by the parties that this issue should be left over for
adjudication at some future date.
At the hearing, the Court was informed of the
current status of the London arbitrations touching
the claims made in the amended statement of
claim and in the counterclaim. The costs allowed
to the appellant under the July 27, 1985 award are
yet to be quantified and paid. The claims asserted
in subparagraphs 4(b) and (c) of the amended
statement of claim also remain to be decided. On
the other side, the respondents' claim for damage
done to the vessel has been settled with costs to be
agreed upon, but the settlement remains unpaid.
Although agreement has been achieved on some
aspects of the claim for increase of charter hire
flowing from a saving of fuel, that claim remains
outstanding. Indeed, a question upon the interpre
tation of the charter party concerning that claim
has found its way into the English Commercial
Court and is pending a hearing on appeal. Appar
ently, the respondents' claim for increase of chart
er hire flowing from the vessel exceeding its war
ranted speed capabilities also remains outstanding.
It now appears that the respondents are asserting
an additional claim under the charter party. It is
referred to in the material as "a claim for balance
of charterparty accounts". It, too, was referred to
arbitration in London and was heard in February
of this year. In any event, that claim is not includ
ed among the claims asserted in the counterclaim.
It seems the parties have agreed that payment of
the damage settlement may await the outcome of
that arbitration proceeding.
In the meantime, as a means of gaining security
for the claims asserted in the counterclaim, the
respondents arrested a vessel in the appellant's
ownership or management. That security was
given in the form of a bank letter of guarantee in
the sum of $900,000 in United States currency.
With the settlement of the damage claim and an
agreed reduction in the fuel claim, the amount of
that guarantee has been reduced to little more
than $600,000 in United States currency.
The Issues
The appellant contends that the learned Judge
erred in refusing the judgment it requested and
also in refusing to dismiss or stay the counter
claim. There are two principal prongs to its attack.
First, it says that given the nature of the claims
asserted by the respondents, no basis in law exists
whereby they may be set off against the appel
lant's claim now represented by the arbitration
award of July 27, 1985. Secondly, it urges that the
Trial Division lacks jurisdiction to hear and deter
mine those claims which clause 53 requires be
disposed of by arbitration in London. The respon
dents contend that we ought not to interfere
because the decision below derives from the proper
exercise of a discretion conferred by Rule 341(a).
They also assert that the award of July 27, 1985
does not entitle the appellant to judgment under
that rule because it is merely an "interim" award.
In any event, they say that judgment was rightly
refused because, by virtue of the doctrine of equi
table set-off, they would be entitled to set off their
claims against those of the appellant upon final
adjudication.
Equitable Set-Off
I turn first to the issue of equitable set-off. The
learned Judge did not give reasons for refusing
judgment under Rule 341(a) or for refusing to
dismiss or to stay the counterclaim. On the other
hand, we are told that the respondents relied upon
the doctrine of equitable set-off as a ground for
denying the application. As entitlement to a set-off
is specifically pleaded in the statement of defence
and counterclaim, it may be fairly assumed that
the argument was a factor in the decision below.
On that basis, the discretion of the learned Judge
would not have been properly exercised if it can be
demonstrated that the doctrine of equitable set-off
cannot be invoked (see e.g. IBM Canada Ltd. v.
Xerox of Canada Ltd., [1977] 1 F.C. 181 (C.A.)).
The appellant contends that this case is not of a
kind of which the doctrine applies. It says that
while it is true the claims asserted in the counter
claim, like those in the amended statement of
claim, all arise out of the same time charter, that
is not a sufficient basis for invoking the doctrine.
The equity claimed, it is argued, must be shown to
impeach the legal title to the appellant's claim in
subparagraph 4(a) of the amended statement of
claim. The respondents reply in this way. It is
sufficient, they say, that their claims be so closely
related to the appellant's claims as to raise an
equity in favour of the respondents, making it
unfair that a judgment be rendered against them
on one of the issues raised in the amended state
ment of claim without also determining the claims
in the counterclaim.
A number of recent English cases have traced
the evolution of equitable set-off. Perhaps the most
thorough treatment of the subject is that of the
Court of Appeal in Hanak v. Green, [1958] 2 All
E.R. 141 where Morris L.J. describes the develop
ment of the three categories of set-off: set-off
under statute, abatement in certain cases at
common law, and equitable set-off. I shall describe
them briefly in that order.
The right of set-off was unknown to the common
law courts until its introduction by statute. The
Statutes of Set-Off, 2 Geo. 2, c. 22 of 1728 and 2
Geo. 2, c. 24 of 1734, provided for the set-off of
cross-claims arising out of separate transactions
where they consisted of liquidated debts or money
demands which could be ascertained with certainty
at the time of the pleading. However it was only in
1873 that the Supreme Court of Judicature Act,
1873 [36 & 37 Vict., c. 66] enabled the courts to
hear a counterclaim; until then a cross-claim had
to be advanced by a separate action. The Statutes
of Set-Off were repealed by the Civil Procedure
Acts Repeal Act, 1879 [42 & 43 Vict., c. 59] and
the Statute Law Revision and Civil Procedure
Act, 1883 [46 & 47 Vict., c. 49], but the former
Act saved established or confirmed legal princi-
pies, thus preserving the right of legal set-off. (See
Hanak v. Green, at pages 145, 149.)
The second category is known as abatement.
Enunciated in Mondel v. Steel (1841), 8 M. & W.
858; 151 E.R. 1288 (Exch.), it is sometimes
referred to as the rule in that case. It is not a true
set-off. Prior to the Act of 1873, it allowed a
defendant to answer a claim for the price of goods
sold or agreed to be supplied or for work and
labour done with an assertion that the goods or
work were of poor quality, without bringing a
separate action. Abatement operates as a pure
defence, rather than as a set-off, to diminish or
extinguish the price. Being in the nature of a
defence, it is not subject to a time bar. (See The
"Brede", [1973] 2 Lloyd's Rep. 333 (C.A.), at
pages 336-337.)
The third category originated with equity's
practice of intervening by interim injunction to
prevent a claim at law being carried to judgment,
or judgment being enforced, before any cross-
claim had been adjudicated upon. Like abatement,
equitable set-off functions as a defence. It is recog
nized in Rule 418 2 of the Federal Court Rules. In
the case of equitable set-off, however, the plain
tiff's wrongful act does not reduce the value of
goods sold or of work done but causes other dam
ages. In The `Brede", at pages 337-338, Lord
Denning offers the following illustration of its
effect:
2 Rule 418. Where a claim by a defendant to a sum of
money (whether of an ascertained amount or not) is relied on
as a defence to the whole or part of a claim made by the
plaintiff, it may be included in the defence by way of compen
sation or as a set-off against the plaintiffs claim, whether or
not it is also added as a counterclaim or cross-demand.
When the contractor sues for the contract price, the employer
can say to him: "You are not entitled to that sum because you
have yourself broken the very contract on which you sue, and
you cannot fairly claim that sum unless you take into account
the loss you have occasioned to me" .... So also with any
breach by the plaintiff of the self-same contract, the defendant
can in equity set up his loss in diminution or extinction of the
contract price. It is in the nature of a defence. As such it is not
subject to a time bar.
This form of set-off was available long before
legal set-off was established by statute in the
eighteenth century. In Ex parte Stephens (1805),
11 Ves. Jun. 24, at page 27; 32 E.R. 996 (Ch.), at
page 997, Lord Eldon L.C. intimated that the
doctrine is of ancient origin. He said:
As to the doctrine of set-off, it is not necessary to say much.
This Court was in possession of it, as grounded upon principles
of equity, long before the law interfered. (19 Ves. 467.) It is
true, where the Court does not find a natural equity, going
beyond the statute the construction of the law is the same in
equity as at law. (Stat. 2 Geo. II. c. 22; 8 Geo. II. c. 24 ....)
But that does not affect the general doctrine upon natural
equity.
The Act of 1873 enabled any equitable defence to
be raised in all circumstances in which, before
1873, it might have been raised either in equity or
to restrain an action at common law. (See Bankes
v. Jarvis, [1903] 1 K.B. 549 (C.A.), at page 552.)
However, in The Nanfri, [1978] 3 All ER 1066
(C.A.), at page 1078, Lord Denning points out
that the grounds of equitable set-off:
. were never precisely formulated before the Supreme Court
of Judicature Act 1873. It is now far too late to search through
the old books and dig them out. Over 100 years have passed
since the Supreme Court of Judicature Act 1873. During that
time the streams of common law and equity have flown to
gether and combined so as to be indistinguishable the one from
the other. We have no longer to ask ourselves: what would the
courts of common law or the courts of equity have done before
the Supreme Court of Judicature Act 1873? We have to ask
ourselves: what should we do now so as to ensure fair dealing
between the parties? (see United Scientific Holdings Ltd y
Burnley Borough Council ([1977] 2 All ER 62 at 68, [1977] 2
WLR 806 at 811-812) per Lord Diplock). This question must
be asked in each case as it arises for decision; and then, from
case to case, we shall build up a series of precedents to guide
those who come after us. But one thing is quite clear: it is not
every cross-claim which can be deducted. It is only cross-claims
that arise out of the 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. Such was the case with the lost vehicle in Morgan & Son
Ltd y Martin Johnson & Co Ltd ([1948] 2 All ER 196, [1949]
1 KB 107) and the widow's misconduct in Hanak v. Green
([1958] 2 All ER 141, [1958] 2 QB 9). [Emphasis added.]
I shall deal with the criteria for equitable set-off in
more detail later.
The treatment of freight is a significant and
well-established exception to the common law rule
of abatement. It is rooted in business convenience
and amounts to this. A claim for freight under a
bill of lading or a voyage charter, where the ship
per or the charterer has a cross-claim concerning
deficiencies in the services performed, cannot be
reduced or extinguished by way of abatement.
(See e.g. Meyer v. Dresser (1864), 16 C.B.(N.S.)
646; 143 E.R. 1280 (Com. P1.); The "Brede" and
Aries Tanker Corpn y Total Transport Ltd,
[1977] 1 All ER 398 (H.L.).) This Court applied
the principle in S/S Steamship Company Ltd. v.
Eastern Caribbean Container Line S.A., [1986] 2
F.C. 27; (1986), 66 N.R. 74. This treatment of
freight reflects the original state of the common
law and, in the words of Lord Simon of Glaisdale,
at page 406 of Aries Tanker, "stands uneroded,
like an outcrop of pre-Cambrian amid the detritus
of sedimentary deposits". It cannot even be dis
placed by equitable set-off. In Aries Tanker, Lord
Wilberforce disposed of an argument that the
doctrine of equitable set-off entitled a charterer to
set off a claim for short delivery of cargo against a
shipowner's claim for freight. He said at pages
404-405:
My Lords, a yet further argument was developed, that the
charterers' claim for short delivery might operate by way of
equitable set-off — this, on the assumption as I understood it,
that the right of deduction at law was not upheld. This conten
tion was given more prominence in this House than perhaps it
received in the Court of Appeal's judgments in The Brede
([1973] 3 All ER 589, [1974] QB 233) though in fact it seems
to have been given adequate consideration in that case. It does
not appear to me to advance the charterers' case. One thing is
certainly clear about the doctrine of equitable set-off com
plicated though it may have become from its involvement with
procedural matters—namely that for it to apply, there must be
some equity, some ground for equitable intervention, other than
the mere existence of a cross-claim: see Rawson y Samuel
((1841) Cr & Ph 161 at 178), per Lord Cottenham LC, Best y
Hill ((1872) LR 8 CP 10 at 15), and the modern case of
Hanak y Green ([1958] 2 All ER 141 at 147, [1958] 2 QB 9 at
19), per Morris LJ. But in this case counsel could not suggest,
and I cannot detect, any such equity sufficient to operate the
mechanism, so as, in effect, to override a clear rule of the
common law on the basis of which the parties contracted. It is
significant that in no case since the Supreme Court of Judica
ture Act 1873 or at a time before that Act when equitable
jurisdiction was available to a court dealing with the claim, was
any such equitable set-off or equitable defence upheld or, until
The Brede ([1973] 3 All ER 589, [1974] QB 233), suggested.
Indeed, if there is any equity in the present situation, it would
seem to be in favour of the owners, so as to hold the charterers
to their bargain in adopting art I11, r 6 of the Hague Rules. I
would dismiss this appeal. [Emphasis added.]
In The Nanfri, a majority of the English Court
of Appeal decided that the freight exception
applies only to "freight" payable under a bill of
lading or a voyage charter and that it does not
include a charge for the use or hire of a vessel
under a time charter, which is termed "hire". This
distinction enabled the Court to furnish partial
relief from the freight exception by making equita
ble set-off available. According to Lord Denning,
at page 1079 of The Nanfri, the doctrine may be
pleaded in such 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, such as
damage to cargo arising from the negligence of the crew.
It is, however, to be limited to these circumstances.
(See also The "Teno", [1977] 2 Lloyd's Rep. 289
(Q.B. (Com. Ct.)), at pages 296-297.)
On the authorities already referred to, a right of
equitable set-off relies on much more than the
mere existence of a cross-claim. As Lord Denning
put it in The Nanfri in a passage already recited, it
is only "cross-claims that arise out of the same
transaction or are closely connected with it" and
"which go directly to impeach the plaintiffs
demands" such as to render it "manifestly unjust
to allow him to enforce payment without taking
into account the cross-claim" that may be the
subject of an equitable set-off. That case furnishes
a practical illustration of circumstances in which
the doctrine may be invoked. A shipowner sought
to recover charter hire under a time charter. The
charterer sought to set off damages which flowed
from the shipowner having wrongly deprived the
charterer of the use of the vessel during the cur
rency of the charter party. The Court of Appeal
permitted the cross-claim for damages to be set off
against the claim for charter hire. The cross-claim
not only arose out of the same agreement but was
directly connected to the claim for charter hire and
thus, could be set up so as to reduce or extinguish
the shipowner's claim. It would be manifestly
unjust to compel the charterer to pay charter hire
without first permitting him to set up his cross-
claim for damages caused by the shipowner's
wrongful act of depriving the charterer of use of
the vessel during the period for which the charter
hire was claimed.
This need for a cross-claimant to show that his
claim goes directly to impeach a plaintiff's demand
was explained by Lord Cottenham L.C. in Rawson
v. Samuel (1841), Cr. & Ph. 161; 41 E.R. 451
(Ch.). At that time equity interfered on behalf of a
person asserting a right of equitable set-off by way
of injunctive relief against the prosecution of the
plaintiff's action. I refer to the following passage
in the judgment of the Lord Chancellor, at pages
179-180 Cr. & Ph.; 458-459 E.R.:
Several cases were cited in support of the injunction; but in
every one of them, except Williams v. Davies, it will be found
that the equity of the bill, impeached the title to the legal
demand. In Beasley v. D'Arcy (2 Sch. & Lef. 403, n.), the
tenant was entitled to redeem his lease upon payment of the
rent due; and in ascertaining the amount of such rent, a sum
was deducted which was due to the tenant from the landlord for
damage done in cutting timber. Both were ascertained sums,
and the equity against the landlord was that he ought not to
recover possession of the farm for non-payment of rent whilst
he owed to the tenant a sum for damage to that same farm. In
O'Connor v. Spaight (1 Sch. & Lef. 305) the rend paid formed
part of a complicated account; and it was impossible, without
taking the account, to ascertain what sum the tenant was to pay
to redeem his lease. In Ex parte Stephens (I1 Ves. 24) the term
equitable set-off is used; but the note having been given under a
misrepresentation, and a concealment of the fact that the party
to whom it was given was at the time largely indebted to the
party who gave it, the note was ordered to be delivered up as
paid. In Piggott v. Williams (6 Mad. 95) the complaint against
the solicitor for negligence went directly to impeach the
demand he was attempting to enforce. In Lord Cawdor v. Lewis
(1 Y. & Coll. 427) the proposition is too largely stated in the
marginal note; for, in the case, the action for mesne profits was
brought against the Plaintiff, who was held, as against the
Defendant, to be, in equity, entitled to the land.
Subsequent cases on the point have consistently
followed that principle. I refer, for example, to the
decision of the Privy Council in Government of
Newfoundland v. Newfoundland Railway Com
pany (1888), 13 App. Cas. 199. In that case, as
was pointed out by Lord Hobhouse at page 212,
the «two claims under consideration have their
origin in the same portion of the same contract,
where the obligations which gave rise to them are
intertwined in the closest manner." In the present
century we have the cases of Bankes v. Jarvis,
Morgan and Son, Ltd. v. Martin Johnson (S.) &
Co., Ltd., [1948] 2 All E.R. 196 (C.A.), Hanak v.
Green, Aries Tanker and The Nanfri as modern
illustrations of the need on the part of a cross-
claimant invoking the equitable doctrine to show
his claim goes directly to impeach the plaintiff's
demand. (See also The "Leon", [1985] 2 Lloyd's
Rep. 470 (Q.B. (Corn. Ct.)), at pages 474-475.)
Here in Canada, as well, the authorities appear to
be fully in harmony with the English decisions on
the point (see e.g. Kaps Transport Ltd. v.
McGregor Telephone & Power Const. Co. Ltd.
(1970), 73 W.W.R. 549 (Alta. C.A.); Abacus
Cities Ltd. v. Aboussafy (1981), 29 A.R. 607
(C.A.); United Chemicals Ltd. v. Prince Albert
Pulp Co. Ltd. (1981), 11 Sask. R. 320 (Q.B.);
Norbury Sudbury Ltd. v. Noront Steel (1981) Ltd.
(1984), 47 O.R. (2d) 548 (H.C.); Coba Indust.
Ltd. v. Millie's Hldg. (Can.) Ltd. (1985), 65
B.C.L.R. 31 (C.A.)).
It is true that the claims on both sides arose out
of the same charter party agreement. In that sense
they are closely connected. On the other hand, I
fail to see how it can be said that any of the
respondents' claims asserted by the counterclaim
go directly to impeach the appellant's claim assert
ed in subparagrah 4(a) of the amended statement
of claim. As charterer, the appellant was put to
additional costs by reason of being wrongly
deprived of the vessel's use. The cross-claims for
damage done to the vessel, and for increases in
charter hire due to a saving of fuel and the vessel
performing beyond her warranted speed capabili
ties, do not, in my view, go to impeach that claim.
They are each separate and distinct claims having
no bearing whatsoever upon it. I do not see how we
can interfere with the right asserted by the appel
lant to have judgment on that claim pursuant to
Rule 341(a) provided, of course, the appellant is
otherwise entitled.
In so concluding, I have not overlooked certain
views expressed by Lord Denning in The "Angelic
Grace", [1980] 1 Lloyd's Rep. 288 (C.A.). There,
the charterer claimed for the value of bunkers
remaining on board at the time the charter parties
terminated. The shipowner cross-claimed for
damage done to the ship during the currency of the
agreements. The claim and cross-claims were
referred to arbitration. The only issue before the
Court of Appeal was whether the arbitrators had
acted beyond their jurisdiction in imposing a con
dition that the charterer recover an interim award
provided it put up security for return of this
amount in case the owner's cross-claims were suc
cessful. In deciding that the arbitrators had gone
wrong, Lord Denning made certain remarks that
at first sight might possibly be construed as sup
porting the respondents' position. At page 293 he
said:
It seems to me that, in making an interim award, the
arbitrators can and should look at all the circumstances of the
case. They can look at the other two arbitrations as well as this
one. They can apply the principle of equitable set-off such as
was considered in The Nanfri (Federal Commerce v. Molena),
[1978] 2 Lloyd's Rep. 132; [1978] Q.B. 927.
In this case there were three charter-parties involving the
self-same vessel being chartered by the self-same charterers
over a continuous period. The claims and cross-claims under
each charter-party are so closely connected that it would be a
case for equitable set-off to be allowed if it was a claim in a
Court of Law.
In making these observations Lord Denning spoke
only for himself, his views not being necessary to
the decision. I doubt very much he intended to
reject the basic principle upon which the doctrine
of equitable set-off is founded, namely, that a
cross-claim must go to impeach the plaintiff's
claim. He recognized this principle and the limita
tions it imposed as recently as 1978 in The Nanfri.
I conclude that the respondents, as a matter of
law, cannot invoke the doctrine of equitable set-off
against the appellant's claim in subparagraph 4(a)
of the amended statement of claim.
The respondents contend that the appellant is
not entitled to judgment under Rule 341(a) in any
event. They say that the award of July 27, 1985 is
but an interim award and was admitted to be such
in the pleading. If that be the case, then I would
not regard paragraph 2 of the statement of defence
and counterclaim as containing the "admission"
required to found a judgment pursuant to the rule.
However, I cannot view the award as an interim
one. It appears that nothing further need be done
by the arbitrators for it to be made final. By its
own terms, the award "is FINAL of the matter
determined" (paragraph 6) and is to be paid
"forthwith" (paragraph 8). The remaining claims,
including the counterclaim of the respondents
alluded to in paragraph 4 of the award, were not
before the arbitrators. They involve additional dis
putes and different arbitration proceedings.
Jurisdiction
I must deal with two remaining points. The first
is that the Trial Division lacks jurisdiction to hear
and determine the claims asserted in the counter
claim. I cannot accept this submission. The appel
lant invoked the jurisdiction of the Trial Division
by suing the vessel and her owner to enforce
arbitration awards settling disputes referred pursu
ant to clause 53. The letter of undertaking by
which security was given required the respondents
to accept service of the amended statement of
claim and to file a defence. That was done.
It seems to me that the subject-matter of the
claims made in the counterclaim fall within a head
of jurisdiction enumerated in paragraph 22(2)(i)
of the Federal Court Act, R.S.C. 1970 (2nd
Supp.), c. 10:
22....
(2) Without limiting the generality of subsection (1), it is
hereby declared for greater certainty that the Trial Division has
jurisdiction with respect to any claim or question arising out of
one or more of the following:
(i) any claim arising out of any agreement relating to the
carriage of goods in or on a ship or to the use or hire of a ship
whether by charter party or otherwise;
In Cormorant Bulk-Carriers Inc. v. Canficorp
(Overseas Projects) Ltd. (1984), 54 N.R. 66, at
page 78, this Court gave the words "arising out of
any agreement" a broad construction. In my view,
they are broad enough to embrace the subject-
matter of the claims asserted in the counterclaim.
The substance of those claims is damages for
alleged breaches of the contract. Arbitration is
merely the agreed upon mechanism for their deter
mination. (See Eurobulk Ltd. v. Wood Preserva
tion Industries, [1980] 2 F.C. 245 (T.D.).)
It is true, of course, that the appellant is a
foreign corporation having no residence in Canada
or other business connection with this country.
However, by bringing this action in the Trial
Division and submitting to the jurisdiction, the
appellant must be taken to have submitted to the
jurisdiction not only for that purpose but also for
the purpose of enabling the respondents to ade
quately defend themselves. This, it seems to me,
includes asserting cross-claims by way of counter
claim when those claims arise out of the self-same
charter party upon which the appellant bases its
claims for breach of contract. The governing prin
ciple was enunciated in England and has been
applied there in admiralty proceedings (see e.g.
The Cheapside, [1904] P. 339 (C.A.)). I think the
principle is applicable in this case, seeing that the
appellant has come within the jurisdiction to
prosecute its claims against the respondents and
that the cross-claims arise out of the same
contract.
Finally, it was argued that the counterclaim
should have been stayed as required by section 1 of
the Arbitration Act (U.K.), 1975, c. 3:
1.—(l) If any party to an arbitration agreement to which
this section applies, or any person claiming through or under
him, commences any legal proceedings in any court against any
other party to the agreement, or any person claiming through
or under him, in respect of any matter agreed to be referred,
any party to the proceedings may at any time after appearance,
and before delivering any pleadings or taking any other steps in
the proceedings, apply to the court to stay the proceedings; and
the court, unless satisfied that the arbitration agreement is null
and void, inoperative or incapable of being performed or that
there is not in fact any dispute between the parties with regard
to the matter agreed to be referred, shall make an order staying
the proceedings.
That statute, as its long title states, gave "effect to
the New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards." With
respect, I do not see how the Federal Court of
Canada could be regarded as "the court" invested
with authority to act pursuant to that provision.
Disposition
For the foregoing reasons, I would allow this
appeal with costs. In my opinion, the appellant is
entitled to judgment for damages for breach of the
charter party found to be recoverable under the
arbitration award of July 27, 1985. However,
having regard to the provisions of section 11 of the
Currency and Exchange Act, R.S.C. 1970, c.
C-39:
11. All public accounts throughout Canada shall be kept in
the currency of Canada; and any statement as to money or
money value in any indictment or legal proceeding shall be
stated in the currency of Canada.
we are prevented from pronouncing judgment in
the foreign currencies in which the award is
expressed. (See e.g. Baumgartner v. Carsley Silk
Co. Ltd. (1971), 23 D.L.R. (3d) 255 (Que. C.A.);
Batavia Times Publishing Co. v. Davis (1978), 88
D.L.R. (3d) 144 (Ont. H.C.), affirmed without
reasons, Ont. C.A. January, 1979; Am-Pac Forest
Products Inc. v. Phoenix Doors Ltd. (1979), 14
B.C.L.R. 63 (S.C.).) The foreign currency figures
will have to be converted to their Canadian curren
cy equivalents. Perhaps the parties can agree to
the same. In the circumstances I think that pursu
ant to Rule 337(2)(b), the appellant should pre
pare a draft of an appropriate judgment to imple
ment the above conclusion and move for judgment
accordingly.
MAHONEY J.: I agree.
LACOMBE J.: I agree.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.