Eric Eyo Partner
Court considers scope of charterparty provision restricting deductions from hire
Fastfreight Pte Ltd v. Bulk Trident Shipping Ltd (Anna Dorothea)  EWHC 105 (Comm)
The Court recently considered the following question: “Where a charterparty clause provides that no deductions from hire (including for off-hire or alleged off-hire) may be made without the shipowner’s consent: is non-payment of hire a ‘deduction’ if the Vessel is off-hire at the instalment date?”
The Court held that the clear language used in the charterparty meant that non-payment of hire was a deduction even when the vessel was off-hire on the due date of the hire instalment.
The background facts
Pursuant to a fixture recap incorporating a heavily amended NYPE ’93 form, the Owners chartered the vessel on a trip time charter basis for the carriage of iron ore pellets from East Coast, India to China.
Payment of hire was to be in instalments five days in advance. Clause 11 of the NYPE form included the following wording at Line 146:
“Notwithstanding of the terms and provisions hereof no deductions from hire may be made for any reason under Clause 17 or otherwise (whether/or alleged off-hire underperformance, overconsumption or any other cause whatsoever) without the express written agreement of Owners at Owners’ discretion. Charterers are entitled to deduct value of estimated Bunker on redelivery. Deduction from the hire are never allowed except for estimated bunker on redelivery…”
Clause 17 of the charterparty was the off-hire clause.
A dispute arose as to whether the vessel was off-hire from 4 May 2021, when the vessel arrived at the discharge port but was unable to obtain a berth, to 28 August 2021 when the vessel was redelivered, due to three crew members testing positive for Covid-19 on 1 May 2021.
With the exception of a five day period between 22 and 26 May 2021, the Charterers did not pay any hire instalments for the alleged off-hire period on the basis that hire had ceased to accrue under the off-hire clause and that this was distinct from a deduction from hire that was due. The Owners contended that this was a breach of the charterparty and that, pursuant to the ‘no deductions’ wording, the Charterers remained obliged to pay the hire on the instalment date whether or not the vessel was off-hire unless agreed otherwise in writing by the Owners.
The arbitration award
The arbitrators found in favour of the Owners. The wording at Line 146 was sufficiently clear and meant that the Charterers were only entitled to cease paying hire with the Owners’ express agreement. This included any off-hire periods (whether actual or alleged) as specifically referred to in the Line 146 wording, and even in the situation where the vessel was alleged to be off-hire at the time the instalment fell due. The arbitrators also thought that the Owners had reasonable grounds for disputing the Charterers’ off-hire claim and were right to refuse to give their express written agreement to the off-hire deductions to be made.
Therefore, the arbitrators awarded the Owners the outstanding hire being claimed without prejudice to the Charterers’ right to counterclaim for the whole or partial amount in respect of the disputed off-hire period.
The Commercial Court decision
On appeal, the Court considered whether hire remained payable (absent the Owners’ written agreement), even if it was later determined or agreed that the vessel was off-hire.
The Charterers argued among other things that the wording of Line 146 pre-supposed that there was a sum due in the first instance from which the Charterers could make a deduction (such as port expenses, for example). Line 146, therefore, was akin to an ‘anti-set off’ provision and did not apply where a hire instalment would otherwise be due but the Charterers’ obligation to pay did not accrue as the vessel was off-hire on the due date.
The Charterers relied on Tradax Export v. Dorada Compania Naviera (The Lutetian)  2 Lloyd's Rep. 140, in which the Court held that the relevant charterparty clause meant that the charterers were not obliged to make payment while the vessel was off-hire. However, the Court distinguished that decision on the basis that the subject charterparty did not include wording to the effect of Line 146 and there was no dispute in that case as to whether the vessel was off-hire.
Here, the wording of Line 146 specifically applied it to Clause 17, which did not primarily address the mechanics of offsetting overpaid hire. That was dealt with under Clause 23 which provided the Charterers with a lien over the vessel “for all monies paid in advance and not earned, and any overpaid hire or excess deposit to be returned at once…”.Furthermore, Line 146 did not limit its application to the part of Clause 17 which dealt with deductions from hire. Therefore, read as a whole and in context, the restrictions on “deductions” in Line 146 clearly applied to any rights as would otherwise arise under Clause 17 to refuse to make a hire payment.
The Court also thought that the words “whether/or alleged off hire…” (considered to be a typographical error and should have read “whether for alleged off hire”) indicated that the provision should apply where the off-hire status of the vessel was in dispute requiring a “pay now, argue later” approach.
However, whilst the effect of the wording at Line 146 significantly limited the effect of the off-hire provision, the Charterers were not left without remedies and protection under the charterparty. The Owners’ discretion whether or not to give written agreement to deductions was not unfettered. There must be a genuine dispute as to whether the vessel was off-hire or not, and the Owners had to exercise their discretion rationally. Additionally, there were mechanisms in the charterparty which dealt with the overpayment of hire, including a cross-claim in debt under Clause 23 for which the Charterers had security in the form of a potential lien over the vessel.
The Charterers’ appeal was, therefore, dismissed.
As noted by both the arbitrators and the Court, there are cogent commercial reasons for ‘no deduction’ provisions within charterparties: primarily to protect owners’ income stream from spurious off-hire allegations. Furthermore, a ‘no deductions’ clause does not strip charterers of other remedies available to them under the terms of a charter, such as cross claims in debt and potential liens over the vessel.
Whilst this judgment was specific to the wording incorporated into this particular charterparty, ‘no deduction’ provisions are becoming more common. Given that owners are often afforded the draconian measure of withdrawing the vessel for non-payment of hire under the terms of the charter, charterers should carefully consider the situations in which the wording is triggered and whether they are in fact permitted to deduct from (or perhaps more accurately “withhold”) hire payments when the vessel is off-hire.
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