Anti-deduction clauses: Can a charterer withhold hire without an owner’s consent?

Anestis Dimitriadis, Senior Claims Executive, Lawyer at Skuld, has written on the case of Fastfreight Pte Ltd v Bulk Trident Shipping Ltd (The ‘Anna Dorothea’) [2023] EWHC 105 (Comm).

The Court found that, where a charterparty provides that no deduction from hire may be made without owners’ consent, non-payment of hire is a “deduction” if the vessel is allegedly off-hire at the instalment date. This precludes charterers from making unilateral deductions.

Dimitriadis observed that, although the case was fact specific, it constituted a welcome analysis of how provisions limiting charterers’ rights to withhold hire payments are interpreted by the courts.

Under a charterparty dated April 13th 2021, on an amended NYPE 1993 form, owners chartered the Anna Dorothea to charterers for a time trip charter from India to China.

Clause 11 provided hire to be paid in advance to owners every five days continuously throughout the charterparty. Owners were entitled to withhold performance if hire was outstanding.

Upon loading its cargo the vessel was ordered to sail to the discharge port, where it arrived on May 4th. Due to Covid-19 related issues with the crew, it was not allowed to berth. The cargo was not discharged. The vessel was not redelivered to the owners until August 28th 2021.

Charterers argued that the vessel went off-hire on May 4th. It did not pay any hire until August 28th 2021 other than for a period of five days between 22nd and 26th May.

Owners commenced arbitration and applied for a Partial Interim Award of just over $2.14m. The owners invoked clause 11 and contended that line 146 meant that charterers could not deduct or withhold payment in relation to periods of alleged off-hire without owners consenting to such deduction.

That line read:

“Notwithstanding of the terms and provisions hereof no deductions from hire may be made for any reason under Clause 17 [off-hire clause] 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. Deductions from the hire are never allowed except for estimated bunker on redelivery…”

The tribunal agreed with owners, and awarded them the full sum claimed, together with interest and costs. The tribunal said that the clause should be interpreted thus:

  • The word “deduction” did not mean “deduction from what is due”. If this were true, then it would suffice for charterers to simply assert off-hire in order to justify any deductions from hire.
  • Commercial parties would have understood “deduction” to mean “withholding payment”.
  • Charterers were only allowed to deduct or withhold payment of hire if two conditions were satisfied: (1) the vessel was actually off-hire; and (2) owners agreed in writing that the vessel was off-hire.

Charterers obtained permission to appeal to the High Court, on the following question of law:

“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?”

On appeal, charterers argued that the Tribunal erred because the use of the word ‘deduction’ presupposed that hire was due. Consequently, they argued, a charterer only makes a ‘deduction’ when it subtracts a sum from an instalment that has fallen due for payment, not when it does not pay hire which has not fallen due.

Charterers asserted that a deduction had not been made because the vessel was off-hire, so there was nothing to deduct from.

Charterers further argued that the clause in question was an ‘anti set-off’ provision, solely restricting their ability to set off against an accrued obligation to pay hire.

As such, charterers contended that, where the vessel was off-hire on a date when an instalment would have fallen due, the obligation to pay hire did not accrue (and/or was suspended), with or without owners’ consent. They cited the case of The Lutetian [1982].

The Commercial Court dismissed the appeal. It also laid out settled principles which were keystone to the payment of hire under a time charter:

  1. The obligation to pay hire is absolute. In the absence of express contrary provision, owners are entitled to claim the full amount of any advance instalment of hire on the day it falls due.
  2. Charterers remain liable to pay hire unless relieved of their obligation under an off-hire provision.
  3. An off-hire clause was a form of exception clause, the burden being on charterers to prove the clause is applicable. Ambiguity as to the meaning of an off-hire event should be interpreted in owners’ favour.
  4. Charterers could only make deductions where it could be established that these were made both in good faith and on reasonable grounds (The Eleni P [2019]).

The Court found that the purposes of the line in question was to restrict charterers’ rights further; to make deductions as would otherwise arise under the off-hire clause (as well as any other cause expressly referred in the charterparty, e.g. underperformance).

The restriction on deductions applied equally to both actual and alleged off-hires. The Commercial Court recognized that there were good commercial reasons for the insertion of such provisions

The Court concluded that, absent a similar provision, owners would not have been adequately protected by the right to bring a claim like the one in this case for a Partial Final Award. The Court recognized that it would have taken months or longer before owners could receive payment following an award.

Comment

Dimitriadis commented that, while in a time charter scenario the risk of delay falls on charterers, the decision demonstrated that Courts would be sympathetic and would try to uphold contractual provisions which sought to offer additional protection to owners against unilateral deductions by charterers.

The rationale behind using and upholding similar provisions was clear, and was recognized by Hensaw J.

Nevertheless, despite the conclusion in this case, the arguments articulated by charterers and the judgment itself illustrated the importance of using clear and unambiguous language in charterparties, as well as the correct analysis of the effect of such clauses in the context of the contract as a whole.

Dimitriadis said that the decision was helpful for owners, illustrating that when a ‘no deduction’ clause was incorporated in the charter, owners would most likely succeed in an application for a Partial Final Award, and would most likely be able relatively quickly to recover hire, unilaterally subtracted from charterers.

Inclusion of such a clause in a charter can therefore be very helpful to owners in preventing deductions from hire – whether unlawful or otherwise.

For charterers, when such wide ‘no deduction’ clauses are incorporated, they should take great care before making unilateral deductions, because this may not only trigger owners’ right to apply to the Tribunal for a quick decision, but could also lead owners to take more draconian steps, such as withdrawing the vessel from service or withholding services.

“Depending on their bargaining power when fixing, charterers would be well advised to resist against the inclusion of ‘no deduction’ clauses if possible and/or at least restrict their application to specific claims, e.g., underperformance, if owners insist”, Dimitrades concluded.

https://www.skuld.com/topics/legal/pi-and-defence/anti-deduction-clauses-can-a-charterer-withhold-hire-without-an-owners-consent/