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01 July 2015
The general rule regarding set-off under Norwegian law is that a party which disputes a declaration of set-off must initiate legal proceedings in order to establish that there is no basis for set-off and that its claim shall be paid in full. But what happens where the two claims are subject to different limitation periods – such as cargo claims and freight claims? The answer to this question is far from clear, but the existence of legal uncertainty implies that a charterer offsetting its cargo claim against the carrier's claim for outstanding freight should be cautious.
Imagine the following scenario. An alleged cargo claim under a voyage charterparty is declared to be offset against the carrier's claim for outstanding freight. The charterer relies on the claim having been paid by way of set-off and does not initiate legal proceedings within the one-year limitation period as required under Section 501(7) of the Maritime Code. The carrier disputes the set-off, but does not initiate legal proceedings. After the cargo claim has become time barred, will the carrier be able to recover the full freight claim through legal proceedings or will the charterer still be able to use its time-barred claim as a defence?
This question arises as a result of the strict time bar rules in Section 501 of the code, which originates from the Hague-Visby Rules. According to the code, the limitation period for cargo claims is one year following delivery of the goods. However, the carrier's claim for freight is not subject to this limitation regime, but follows the ordinary time bar rules in the Limitation Period Act, which provides for a three-year limitation period.
The question then arises of whether Section 501 of the code should be understood as establishing a procedural rule only or as to a rule which has the substantive effect of extinguishing the claim. In the former case, the charterer's counterclaim can still be used as a defence if suit is initiated by the carrier. In the latter case the counterclaim will be time barred.
The Maritime Code provides specific limitation periods for certain maritime claims, but does not regulate the effects of limitation. Instead, reference is made to the general limitation rules in the Limitation Period Act (in Section 502 of the Maritime Code).
Section 26 of the Limitation Period Act sets out as a general rule that the time bar of a claim does not imply that the creditor loses its right to offset its claim, provided that the claim against which set-off is made derives from the same legal relationship as the time-barred claim and arose before the claim became time-barred. This is based on the general rule of mutual performance in contractual relations: one party should not be able to claim performance under an agreement while the counterparty is barred from doing the same.
However, the Hague-Visby Rules contain wording which is hard to reconcile with the rule of using a time-barred claim as a defence. According to Article 3(6)III, the carrier shall be "discharged from all liability whatsoever" in respect of the goods if suit is not commenced within one year.
In English case law there are several examples of Article 3(6)III of the Hague-Visby Rules being interpreted in the way that a time-barred claim cannot be used as set-off. The same interpretation is found in several other jurisdictions (eg, Germany).
The international preparatory works to the Rotterdam Rules (the successor to the Hague-Visby Rules) also state that the Hague-Visby Rules establish a limitation period rule which completely extinguishes the claim.
Therefore, it can be established that Article 3(6)III of the Hague-Visby Rules is a material rule which does not permit the use of time-barred cargo claims in set-off. The question is whether the fact that the Maritime Code is meant to implement the Hague-Visby Rules thus implies that this also is the rule under Norwegian law, even though the code makes general reference to the Limitation Period Act (where such set-off is permitted).
Few legal sources deal with the relationship between the Maritime Code and the Limitation Period Act. However, some guidance may be found in the preparatory works to the future Norwegian implementation of the Rotterdam Rules.
The implementation of the Rotterdam Rules will involve an amendment to the Maritime Code through the introduction of a two-year limitation period and an explicit reference to the time bar rule as a rule regarding time for suit, and not an extinguishing of the underlying rights.
The commentary to the legislation proposal states that: "In Norwegian law, there is in any event a certain right to set off even after the limitation period has expired cf. the Limitation Period Act section 26." However, it is unclear whether this is meant to refer to this being the rule according to the Maritime Code or simply a reference to the Rotterdam Rules not introducing a rule that is unfamiliar to Norwegian law in general.
As for the existing position based on the Hague-Visby Rules, without the Rotterdam Rules amendment to clarify the position, there is scope to argue that the substantive time bar rule in the Hague-Visby Rules should apply under the Maritime Code – not least because it is a general rule regarding all modes of transport (in the Convention on Contracts for the International Carriage of Goods by Road, the Convention concerning International Carriage by Rail and the Warsaw Convention). The rule is also set out explicitly in the implementing Norwegian codes on road, rail and aviation transport.
Even though several arguments suggest that the time bar rule in the Maritime Code is a substantive rule extinguishing US Carriage of Goods by Sea Act-type cargo claims, it could be questioned whether the rationale of the rule is still applicable. Times have changed and the need for such a firm limitation affecting all rights appears to have changed with them. After all, the limitation was relaxed in the Rotterdam Rules in order to keep the rules in line with the Convention on the Limitation Period in the International Sale of Goods, as well as avoiding unnecessary litigation.
The legal uncertainty relating to this question will be solved by the Rotterdam Rules when they eventually enter into force. In the meantime, a clear answer to the question cannot be given. Therefore, charterers should exercise considerable caution in relying on a set-off against a claim with a longer limitation period than their cargo counterclaim.
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