This case arose from damage to cargo carried from China to Texas, United States, in 1984. On 29 September 1986, the plaintiff, Distribution Services Ltd, filed a claim against the defendant, Eddie Parker Interests Inc, for breach of the contract for carriage. On 12 December 1986, the defendant counterclaimed, by way of recoupment, for damage to the goods.

The District Court found that the Carriage of Goods by Sea Act (COGSA), 46 USC § 1303(6) applied to the counterclaim. It was barred in light of evidence that the defendant had first made a claim for damage on the plaintiff on or about 8 June 1984. The defendant appealed.

Held: Reversed and remanded to be dealt with in line with the appeal opinion.

The thrust of the defendant’s argument was that in the case of recoupment, ie where it was claiming in defence for an offset against the claim filed by the plaintiff, its counterclaim was not barred by the time limit in COGSA.

As a purely defensive procedure, recoupment is available to the defendant so long as the plaintiff’s claim survives even though an affirmative action by defendant is barred by limitation: see Pennsylvania R Co v Miller 124 F 2d 160 (5th Cir 1941). Where a carrier files suit against a shipper for breach of contract, a counterclaim for damage to cargo is not time-barred, even though it is asserted after COGSA’s one-year time period: see Shipping Corp of India Ltd v Pan Am Seafood Inc 583 F Supp 1555 (SDNY 1984); Puerto Madrin SA v Esso Oil Co 1962 AMC 147 (SDNY 1962). The rationale is that, because recoupment is in the nature of a defence, it is never barred by the statute of limitations, so long as the plaintiff’s claim is timely.

Referring to the language of COGSA, the Court of Appeals found that the language does not preclude recoupment. The Court relied on United States v Western Pacific RR 352 US 59 (1956), which involved a suit by a carrier for overdue freight charges. In that case, the Supreme Court permitted the defendant to reduce the plaintiff's recovery to the extent that such freight charges were unreasonable under the Interstate Commerce Act. A suit for overdue freight charges had a six-year limitation period, while a suit for unreasonable freight charges had a two-year limitation period. In that case, the Supreme Court recognised that, although an affirmative action for recovery of unreasonable freight charges would presumably be barred since the counterclaim was filed after the two-year time period had elapsed, the limitation period could not be used to bar this action as a defence. The Court stressed that 'only the clearest congressional language could force us to a result which would allow a carrier to recover unreasonable charges with impunity merely by waiting two years before filing suit'. Like COGSA, the language in the Interstate Commerce Act prohibited 'all actions' unless brought within the limitation period. Thus, if this language did not evidence clear congressional intent under the Interstate Commerce Act, it could not do so for COGSA.

The plaintiff argued that COGSA extinguishes the cause of action itself and not merely the remedy. In Midstate Horticultural Co v Pennsylvania R Co 320 US 356 (1943), the Supreme Court stated that the limitation period in the Interstate Commerce Act bars not only the remedy, but also destroys the basis for liability. The plaintiff argued that since the recoupment action for cargo damages inheres in COGSA, the basis for liability is also extinguished once the limitation period expires.

The Court of Appeals distinguished the plaintiff's case from the cases cited above by differentiating between an affirmative action, which is clearly barred, and an action in recoupment, citing United States v Western Pacific, where the Supreme Court distinguished Midstate Horticultural Co v Pennsylvania R Co stating 'The teaching of the Midstate case ... is that the running of the statute destroys the right to affirmative recovery as well as the remedy, so that the period of limitations cannot be waived by the parties. But here the [defendant-shipper] is not asserting a right to affirmative recovery. It is only seeking to have adjudicated questions raised by way of defense.'

The Court of Appeals further stated that the policy behind statutes of limitations has no relevance to recoupment actions:

The purpose of such statutes is to keep stale litigation out of the courts. They are aimed at lawsuits, not at the consideration of particular issues in lawsuits. Here the action was already in court and held to have been brought in time. To use the statutes of limitations to cut off the consideration of a particular defense in the case is quite foreign to the policy of preventing the commencement of stale litigation. We think it would be incongruous to hold that once a lawsuit is properly before the court, decision must be made without consideration of all issues in the case and without the benefit of all the applicable law. If this litigation is not stale, then no issue in it can be deemed stale.

The plaintiff also argued that the underlying policy of COGSA is to discourage rate discrimination. It contended that uniformity in the rates which a carrier charges could be undermined if recoupment for damages were allowed. In an action by a carrier for freight charges, a shipper cannot set off a claim for injuries to the goods for the freight can be paid only in cash, and such set-offs would open the door to fraud and discrimination: see Johnson Brown Co v Delaware L & W RR 239 F 590 (SD Ga 1917); Chicago & NW RR v William S Stein Co 233 F 716 (D Neb 1915).

The Court of Appeals pointed out that neither of these cases involved statutes of limitations, but rather the issue whether a shipper can bring a counterclaim for cargo damages in an action initially brought by a carrier for freight charges. In Chicago & NW Ry v Lindell 281 US 14 (1930), the Supreme Court rejected the approach of both these cases, and held that the law prohibiting a carrier from refunding or remitting any portion of the rate does not prevent a shipper from filing a counterclaim for damages to the shipment. The Supreme Court noted that it was difficult to determine how the opportunity for collusion or fraud would be lessened by abolishing counterclaims when a separate action for cargo damages was permitted. Similarly, the Court of Appeals found it difficult to conceive how in the present case the opportunity for collusion and discrimination would be lessened by abolishing recoupment when affirmative actions are permitted prior to the expiration of the limitation period.