Resource New Zealand Limited v Mediterranean Shipping Co S.A. [2014] NZHC 292 (26 February 2014)

Last Updated: 17 March 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2013-404-003509 [2014] NZHC 292

BETWEEN RESOURCE NEW ZEALAND LIMITED Applicant

AND MEDITERRANEAN SHIPPING CO S.A.

Respondent

Hearing: 7 October 2013

Appearances: A R Gilchrist for applicant

C M Hanafin for respondent

Judgment: 26 February 2014

_{JUDGMENT OF ASSOCIATE JUDGE ABBOTT}

This judgment was delivered by me on 26 February 2014 at 3pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date...............

Solicitors:

Patel Nand Legal, Auckland

Lowndes Jordan, Auckland

Counsel

A R Gilchrist, Auckland

RESOURCE NEW ZEALAND LIMITED v MEDITERRANEAN SHIPPING CO S.A. [2014] NZHC 292 [26

February 2014]

[1] This application to set aside a statutory demand arises out of a shipping contract affected by the grounding of the cargo ship M V Rena off the east coast of New Zealand in October 2011. The essential question is whether the applicant, Resources New Zealand Ltd (Resources NZ), is legally obliged to pay the respondent, Mediterranean Shipping Co S.A. (MSC), agreed charges for freight given that the goods did not reach their destination.

[2] MSC has made a demand on Resources NZ for payment of the agreed freight charges, claiming that payment is due under the express terms of the contract. Resources NZ has applied to set the demand aside, contending that it would be unjust to require it to make this payment given that the goods were not delivered.

[3] The facts are not in dispute. The issue for the Court is whether Resources NZ has shown that there is a dispute over its obligation to pay the freight charges, or an arguable basis for a counterclaim in respect of them, notwithstanding the terms of the contract to the contrary.

[4] For the reasons I will now give I find that Resources NZ has not established that there is a genuine and substantial dispute as to whether the demanded debt is payable, nor that it has a set-off or counterclaim which makes it unjust to allow MSC to pursue its demand.

Background

[5] Resources NZ exports sawn timber from New Zealand. It contracted with MSC to transport timber from Napier, New Zealand to destinations in the Middle East. The contract was based on MSC’s standard bill of lading. The bill of lading provided expressly for freight charges to be due when the carrier received the goods.

[6] MSC arranged for the timber to be shipped on the M V Rena. It was loaded on 3 and 4 October 2011 at Napier. MSC issued invoices for the freight in the sum of $101,306.26 on 3 October 2011.

[7] M V Rena left Napier on route for Tauranga, but early on the morning of 5

October 2011 struck and grounded on Astrolabe Reef. A salver was appointed. Resources NZ subsequently abandoned all interest in the cargo to the salvers.

[8] When Resources NZ did not pay the invoices, MSC pointed out (initially in late 2011) that the contract provided that the freight costs were due upon receipt of the goods by the carrier, and were payable despite the grounding of the vessel. Resources NZ queried whether this term applied in this case (the carrier sinking and the goods becoming undeliverable). MSC confirmed in early February 2012 that this was its position.

[9] MSC sent account reminders over ensuing months, but when Resources NZ had not paid by December 2012, MSC reiterated that the freight costs were payable irrespective of the grounding and salvage issues, and advised that proceedings would be issued to recover the costs if payment was not made by 14 December 2012. A director of Resources NZ responded to that letter to advise that he was overseas and asking that he be able to discuss the demand with MSC on his return. It appears that there was no discussion, and in July 2013, MSC had its solicitors serve the statutory

demand that is the subject of this application.¹

[10] Resources NZ’s solicitors responded to the demand, advising that the debt was disputed on the basis that the goods had never reached their destination and contending that it was an implied term of the contract that the goods be delivered safely before MSC could claim to have legally earned its freight. They requested a copy of the bill of lading. MSC’s solicitors responded denying the alleged implied term, and pointing to the clause in the bill of lading dealing with freight and

charges,² which provided expressly that freight was due upon receipt of the goods,

was payable in all circumstances (including where the ship or cargo were lost), and was to be paid without set-off, counterclaim or deduction.

¹ The demand included the amount owing under two smaller invoices, totalling $644, which MSC says should not have been included – the dispute is in respect of the balance of the demand, namely $101,306.26.

² Clause 16 of the bill of lading.

[11] Resources NZ brought the present application, applying to set aside the demand or, in the alternative, extending time for compliance. It says both that there is a substantial dispute as to whether or not the debt is owing or due and that it has a set-off against MSC’s demand by virtue of the fact that the contract for carriage of the goods was never completed.

Legal principles

[12] The application is brought under s 290(4) of the Companies Act 1993:

(4) The Court may grant an application to set aside a statutory demand if it is satisfied that—

(a) There is a substantial dispute whether or not the debt is owing or is due; or

(b) The company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or

(c) The demand ought to be set aside on other grounds.

[13] The principles that the Court applies in determining applications under s

290(4) are well established,³ and are not in dispute in this application. Given that there is no dispute on material facts, the relevant principles on this application are:

(a) The applicant must show there is arguably a genuine and substantial dispute as to the existence of the debt.

(b) Where a dispute is alleged, the task of the Court is not to determine whether there is a substantial dispute rather than to resolve it.

(c) If the applicant puts material before the Court sufficient to support a claim of a dispute, the dispute will normally be resolved in a form

_{other than the Companies Court.}

³ Refer, for example, Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 (CA) and Queen City

Residential Ltd v Patterson Co-Partners Architects Ltd (No. 2) (1995) 7 NZCLC 260, 936 (CA).

(d) The applicant must establish that any set-off or counterclaim is reasonably arguable in all the circumstances.

(e) There must be clear and persuasive evidence of the existence of a counterclaim,⁴ but once there is evidence to show that there is a real basis for the set-off or counterclaim, that can give rise to a genuine and substantial dispute about the company’s indebtedness.⁵

(f) An equitable set-off can also be taken into account where a counterclaim so affects the demand that it would be unjust to allow the party making the demand to proceed without bringing the counterclaim into account.⁶

Resources NZ’s underlying contentions

[14] The underlying basis for Resources NZ’s application is that its timber was never delivered. It contends that this gives rise both to a dispute as to whether it is liable for the freight charges, and to an arguable set-off, notwithstanding terms in the bill of lading. Although counsel tended to conflate the two in his submissions, I will deal with each in turn as they are separate grounds under s 290(4). Before doing so I will look at authorities where the courts have had to determine when freight becomes

payable in advance of delivery.⁷

Authorities as to when freight is payable

[15] Although the proper construction of a contract ultimately depends on its own terms, it is nevertheless helpful to consider the approach of the courts when considering the construction of similar clauses, particularly in similar circumstances. Counsel referred to the following cases where the courts have considered a party’s entitlement to freight charges when the contract has not been completed, either because the ship carrying goods has sunk or for some other reason the contract of

_{carriage was not completed:}

⁴ _{Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at [11].}

⁵ _{Taxi Trucks Ltd v Nicholson, above n 3, at [299].}

⁶ _{Grant v New Zealand Motor Corporation Ltd [1989] 1 NZLR 8 (CA).}

7. The common law position is that, in the absence of contractual terms to the contrary, freight is payable on delivery: Halsbury Laws of England (5^th ed, 2008) vol 7 at [590].

(a) In Smith v Pyman,⁸ the ship owner sought payment of freight notwithstanding that the cargo was lost when the ship sank after commencement of the voyage. The English Court of Appeal held that the charterer was not liable to pay freight in that case because freight was only payable in advance “if required”. The Court took the view that the charterer had only to insure himself against the risk arising from payment of freight in advance if he was in fact required to pay, and by the time demand was made the ship had sunk and the charterer was no longer able to insure himself for the loss.

(b) The Oriental Steamship Company Ltd v Tylor⁹ was a further decision of the English Court of Appeal, shortly after the decision in Smith v Pyman. The charterparty included a clause that one third of the freight was to be paid on signing the bills of lading, and the remainder on unloading. The bills of lading were signed within 24 hours of the cargo being loaded. The Court found that this imposed an obligation to sign and deliver the bills of lading before the ship sailed, and that the advanced freight was payable under the contract, notwithstanding that the charterer had not presented the bills of lading before the ship sank. The Court took into account, in its reasoning, the respective abilities of the shipper of the goods and the ship owner, noting the ability of the shipper to insure for advance freight paid from the point that the obligation to pay arose.

(c) In The Lorna 1,¹⁰ the contract provided for part of the freight to be paid within five days after signing of bills of lading, and the balance after delivery. The vessel sank within five days of signing and the cargo was lost. The English Court of Appeal held that the charterer was not obliged to pay freight because the entitlement to freight had not arisen before the vessel sank and the contractual basis of the

_{obligation had been undermined.}¹¹

⁸ _{Smith v Pyman [1891] 1 QB 742 (CA).}

⁹ _{The Oriental Steam Ship Company Ltd v Tylor [1893] 2 QB 518 (CA).}

¹⁰ _{Compania Naviera General SA v Kerametal Ltd, The Lorna 1 [1983] 1 Lloyd’s Rep 373 (CA).}

¹¹ At 375.

(d) In The Karin Vatis¹² the English Court of Appeal had to decide whether a balance of agreed freight charges was payable after the vessel was lost on the voyage, and the cargo was not discharged. This required the Court to construe a clause which provided that freight was “deemed earned as cargo loaded”. Lloyd LJ commented that this and other such clauses meant that the ship owners had done all that they had to do to earn their freight once the cargo was loaded. He noted that although they might have other contractual obligations to perform, the failure to perform those obligations would sound in

damages, and did not affect the ship owners accrued right to freight.¹³

He commented that the provision cast the risk in relation to freight on to the charterer.¹⁴ Slade LJ also commented that the phrase was well known to practitioners in the field, and demonstrated the parties’ intentions that the charterers had an obligation for the freight as soon as the cargo was loaded, whatever risks might subsequently prevent arrival.¹⁵

(e) In The Dominique,¹⁶ the House of Lords had to construe a clause which deemed full freight to be earned on signature of bills of lading, irrespective of whether the vessel or cargo was lost. The vessel was arrested before reaching its destination and the charterers had to incur the cost of on-transport. When the ship owners subsequently claimed the freight, the charterers argued that the contract had been terminated before the freight became due, and alternatively that they were entitled to set off. The House of Lords held that the freight was payable (the right to it having accrued on the signing of bills of

_{lading) and that the charterers were not entitled to set-off.}

¹² _{The Karin Vatis [1988] 2 Lloyd’s Rep 330 (CA).}

¹³ _{At 332.}

¹⁴ _{At 332.}

¹⁵ _{At 336.}

¹⁶ Bank of Boston Connecticut v European Grain & Shipping Ltd, The Dominique [1989] AC 1056,

[1989] 1 Lloyd’s Law Rep 431 (HL).

Is there a substantial dispute?

[16] MSC seeks payment of the freight charges on the basis that they became due and payable as soon as the timber was loaded on M V Rena, pursuant to clause 16.2 of the bill of lading:

16.2 All Freight is earned and due upon receipt of the Goods by the Carrier, whether the Freight is prepaid or collect and the Carrier shall be entitled to all Freight due under all circumstances, ship and/or cargo lost or not lost or the voyage abandoned. All Freight shall be paid when due without any set- off, counter claim, or deduction.

[17] Counsel for MSC relied on the “trite law” that once freight is earned, it is payable regardless of whether the cargo reaches its destination.¹⁷ Counsel submitted that it was a matter of construction of the contract as to the point at which freight became due and payable, and that clause 16.2 was clear and unambiguous: the freight was earned, due and payable when Mediterranean received the timber.

[18] Counsel for Resources NZ accepted that this clause was sufficient to overtake the position at common law that in the absence of contractual provisions to the contrary, freight becomes payable on delivery.¹⁸ However, he submitted that it is still arguable that the freight charges are not due where there is a repudiation of contract (and that this was the case given MSC’s failure to deliver the goods). In support of this he relied on:

(a) An observation by the learned authors of Garrow and Fenton’s Law of Personal Property in New Zealand,¹⁹ that where there is a total failure to deliver (as opposed to short delivery) freight does not become payable at all (citing Bank of Boston Connecticut v European Grain &

_{Shipping Ltd, The Dominique)}²⁰_{; and}

¹⁷ Relying on The Karin Vatis, above n 12, and its underlying case authorities including The

Oriental Steam Ship Company Ltd v Tylor, above n 9; Smith v Pyman, above n 8; and The Lorna

_{1, above n 10.}

¹⁸ _{See above, n 7.}

¹⁹ _{Roger Fenton and James Garrow Garrow and Fenton’s Law of Personal Property in New}

_{Zealand: Personal Property (7}^th _{ed, LexisNexis, Wellington, 2010), [7.23] at fn 47.}

²⁰ Bank of Boston Connecticut v European Grain & Shipping Ltd, The Dominique, above n 16.

(b) A submission that clause 16.2 is an exclusion clause, and MSC cannot avail itself of that clause where there is a fundamental breach of the contract or otherwise complete non-performance.²¹

(c) Article 8 of the Hague-Visby Rules:²² counsel submitted that it expressly declares null and void any contract of carriage which purports to relieve the carrier or ship from liability arising from negligence, fault or failure, (this appears to be another aspect of the argument that clause 16.2 is an exclusion clause).

[19] Counsel submitted that these arguments raised complex matters of law which were not suitable for summary determination in an application to set aside a statutory demand.²³

Discussion

[20] The starting point is the wording of clause 16.2, and its context. I accept the argument for MSC that the clause is clear and unambiguous that MSC’s entitlement to the freight charges arose when it received the timber, and therefore before MV Rena struck the reef causing the loss of its cargo. The context is also important. These were commercial parties, familiar with contracts of carriage such as this. It can be taken that they were aware of the risks inherent in these contracts, and how risks can be managed (for example, by taking appropriate insurance). There is no suggestion that the contract of carriage, represented by the bill of lading, was not

_{entered into freely.}

²¹ Relying on John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (4^th ed, Lexis Nexis, Wellington, 2012) at [7.4.1], citing Lord Wilberforce in Suisse Atlantique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 (HL) at

_433.

²² The International Convention for the Unification of Certain Rules of Law Relating to Bills of

Lading (signed 25 August 1924, entered into force 2 June 1931) as amended by the 1968

Brussels Protocol (signed 23 February 1968) and by the 1979 Protocol (signed 21 December

1979) (originally known as the Hague Rules, but after the 1979 Protocol referred to as the Hague-Visby Rules) have the force of law in New Zealand by virtue of s 209(1) Maritime Transport Act 1994.

²³ Relying on Industrial Group Ltd v Bakker [2011] NZCA 142, (2011) 20 PRNZ 413 at [24] –

[25].

[21] In the present case, MSC’s entitlement to the freight charges arose before MV Rena left port (with the timber on board). Clause 16.2 is clear that that freight is payable. As a matter of construction there cannot be any dispute about that.

[22] I do not accept the argument for Resources NZ that the law in relation to liability for advance freight is qualified by repudiation in the form of non- performance of the contract (at least as a result of loss of the ship) when the entitlement to the freight has accrued. The passage in Garrow and Fenton²⁴ containing the footnote on which Resources NZ relies, refers to a limited exception to “a rule of long standing that freight is payable without deduction” in the case of a cross-claim raising an equitable set-off. However, the passage from The Dominique cited in support makes clear that this limited exception does not apply where the right to advance freight has accrued.²⁵

[23] Similarly, I do not accept that there can be a dispute on the basis that clause

16.2 (in that it expressly precludes set-off) is an exclusion clause which cannot be relied upon because the timber was not delivered (treating it as total failure of consideration). First, clause 16.2 is not an exclusion clause, at least in so far as it provides that freight is earned on receipt of goods, and therefore does not need to be construed contra proferentum when deciding whether the debt is due. Secondly, the passage on which counsel for Resources NZ relies from Burrows, Finn and Todd, Law of Contract in New Zealand does not assist. The learned authors go on to make

clear²⁶ that the concept of fundamental breach no longer exists, and whether an

exclusion clause applies to a breach of contract is a question of construction of the clause.²⁷ Thirdly, even if that was not the case, this is not a case of non-performance, but rather the occurrence of a recognised risk (loss of the ship and cargo) in the course of performance. Lastly, I do not accept that Art 8 has any application in this case. First, if it does not read as counsel submitted. Secondly, and although this

_{probably applies more to the set-off argument, I also accept the submission of}

²⁴ _{Fenton and Garrow, above n 19, at 700.}

²⁵ Bank of Boston Connecticut v European Grain & Shipping Ltd, The Dominique, above n 16.

This is the ratio of the decision to reject a claim of equitable set-off, as evident from the speech of Lord Brandon of Oakbrook at 1105 (because mere loss of the ship on the voyage cannot be said to impeach the shipper’s title to the freight charges).

²⁶ _{Burrows, Finn and Todd, above n 21, at [7.4.3 – 7.4.4].}

²⁷ See DHL International (NZ) Ltd v Richmond Ltd [1993] 3 NZLR 10 (CA).

counsel for MSC that the Hague Rules themselves provide a well-established scheme for carriers’ obligations and exemptions in the event of loss, and MSC is acting within its entitlements under those rules.

Is there an arguable counterclaim, set-off or cross-demand?

[24] The claim for set-off lies at the heart of Resources NZ’s application. Counsel for Resources NZ accepted that a contractual “no set-off” clause would usually result in the Court exercising its discretion against setting aside a demand on the basis of a set-off or counterclaim, but argued that this was not a hard and fast rule, and the discretion to set aside could still be exercised if warranted by the circumstances of a case.²⁸ The circumstances advanced for contending that this was an exceptional case were first that it was inequitable that freight could be demanded whilst MSC was not required to deliver the timber (due to the loss of MV Rena), and secondly that

Resources NZ would have been able to pursue a set-off and counterclaim had MSC

“not sat on its hands” in making its demand.

[25] I have already referred to, and rejected, Resources NZ’s argument that it has a claim for equitable set-off that remains available notwithstanding the express “no set-off” provision in clause 16.2. In The Dominique, the House of Lords addressed the availability of an equitable set-off in the face of a contractual provision, and observed that it would only be available if it was of such a nature as to impeach title to the freight being demanded. The circumstances of this case (loss of the ship, after MSC has commenced performance of its obligations under the contract) do not amount to an impeachment of title in the freight charges, meaning that there is an insufficient claim for an equitable set-off.

[26] Having rejected the availability of a direct set-off, I turn to consider whether there is an independent cross-claim for the freight which the Court can take into account. Arguments were advanced for and against the application of the one year limitation period under art 3(6) of the Hague Rules, carried over into clause 10.2 of

_{the bill of lading. MSC argued that this extinguished all claims. Resources NZ said}

²⁸ Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425, (2010) 20 PRNZ 141 at [17], as applied in Bountiful Holdings Ltd v University of Auckland [2012] NZHC 1076, particularly at [17] and [20] and Simply Logistics Ltd v Real Foods Ltd HC Auckland CIV-2011-

404-3497, 14 September 2011.

that it applied only to claims for the value of lost goods, and did not apply to recovery of freight charges. The claim appears to be answered by the decision of the House of Lords in The Aries,²⁹ where the House of Lords allowed a claim for freight that had been withheld because of short delivery, holding that the charterer’s claim (whether a cross action or a set-off) had ceased to exist by virtue of application of the same time bar in the (then) Hague Rules.

[27] This takes me to the second aspect of Resources NZ’s argument, namely that there is something intrinsically unfair in allowing MSC to recover these freight charges, or to do so at this stage because a counter-claim would have been open if MSC had pursued a claim under art 3(6).

[28] This argument has to be put in context. As already mentioned, these were commercial parties with experience in this kind of contract. The advance payment of freight is a common feature of contracts for carriage of goods, as is a “no set-off” clause. The risks of the transaction (such as loss of the ship or cargo) were known, as was the ability of the parties to ameliorate those risks with insurance. The circumstances of the grounding of MV Rena and loss of its cargo were unfortunate, but did not make this transaction, or the claim for freight and the “no set-off” clause, extraordinary, so as to make it unfair to require Resources NZ to adhere to the terms of the contract, including clause 16.2.

[29] It is material that MSC made known to Resources NZ from the outset that it was seeking to recover the freight, notwithstanding the loss of MV Rena, and did not later give Resources NZ any reason to believe that it was not intending to pursue that claim. I also observe that Resources NZ did not contend that it had any basis to resist MSC’s claim, or bring a counter-claim, for the freight charges, until it was served with the statutory demand.

[30] I take the view that the correct approach on this application is that of the

_{Court of Appeal in Browns Real Estate Ltd v Grand Lakes Properties Ltd: exercise}

²⁹ Aries Tanker Corporation v Total Transport Ltd (The Aries) [1977] 1 WLR 185, [1977] 1 Lloyds Law Rep 334 (HL). There is support for this approach, albeit in a different context, in Heinz- Wattie Ltd v Hamburg Sudamerikanische Dampfschiffahrtsgesellschaft (1999) 14 PRNZ 227 (HC).)

of the Court’s discretion should recognise the “no set-off” provision expressly agreed

by the parties:³⁰

....In our view a contractual no set-off provision of the type at issue in this case would normally result in the Court’s discretion being exercised against an applicant if the sole grounds for an application to set aside a statutory demand was the existence of a set-off, counterclaim or cross-demand which a party had expressly agreed could not be raised. We consider that commercial parties should be required to honour the bargain they have made, absent other grounds that tell against the recognition of a statutory demand....

[31] Resources NZ has the onus of persuading the Court to depart from the general requirement of holding parties to their agreement.³¹ It has not done so.

[32] I have not overlooked the argument of counsel for Resources NZ that there are issues of law that should not be determined on this application. I do not accept that submission. In my view the law is clear and its application sufficiently certain in this case to allow a determination.

Decision

[33] Resources NZ’s application to set aside the statutory demand is dismissed. I extend the time for it to comply with the statutory demand to 15 working days from today’s date.

[34] MSC is entitled to its costs on this application. Counsel were agreed that standard costs are appropriate. I order Resources NZ to pay MSC its costs on this

_{application on a scale 2B basis together with disbursements as fixed by the Registrar.}

_{Associate Judge Abbott}

³⁰ _{Browns Real Estate Ltd v Grand Lakes Properties Ltd, above n 28 at [17].}

³¹ Bountiful Holdings Ltd v University of Auckland, above n 28, at [17].