"Pay now, argue later"
The English High Court considers hire anti-deduction clauses
In Fastfreight Pte Ltd v Bulk Trident Shipping Ltd (The Anna Dorothea) [2023] EWHC 105 (Comm) the Commercial Court considered an appeal under section 69 of the Arbitration Act 1996 of a partial final award in which the Tribunal awarded Owners’ claim for unpaid hire under a time charter.
Sofia Chatzinikolaou
Published: April 21, 2023
The Charterparty
Clause 11 stated as follows:
“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…”
(Our emphasis and the words referred to as Line 146 in the award/decision on appeal)
The Charterparty also included clauses 17 (Off-hire), 23 (Liens) and a rider clause 67:
“ ……in the event any member of the crew ….. on board the vessel is found to be infected with a highly infectious or contagious disease and the vessel has to (i) ……., or (iii) barred from entering any port, all time lost, delays and expenses whatsoever shall be on owners’ account and the vessel shall be off-hire.…”
The Award
The tribunal noted a dispute on the underlying facts, specifically the duration of the crew’s illness. The Owners contended that three crew members tested positive, three days before the vessel arrived off China, but two weeks after she had arrived at India. It followed, as per Owners’ argument, that if the crew members had Covid-19 (lateral low tests not being wholly reliable) they had recovered by no later than 13 May, as their temperature records for that day and subsequent days showed.
The tribunal awarded Owners their hire in full without prejudice to Charterers’ right to claim back hire paid:
- Charterers could not withhold payment of hire without Owners' agreement. Clause 11 allowed Charterers to withhold payment of hire not only if the Vessel was actually off-hire as at the date when the relevant instalment fell due, but also only where Owners agreed in writing that the vessel was off-hire.
- The clause was so clearly drafted as to limit the effect of the Off-hire clause and any other off-hire provisions, so as to affect the question of actual payment of hire, without preventing Charterers from later claiming that the vessel was off-hire and seeking a refund of any hire that they might have been obliged to pay because Owners had failed to give written consent to a deduction.
- Such a conclusion was consistent with other Charterparty provisions, such as the Owners' right to withdraw the vessel failing the punctual and regular payment of the hire.
- In any event, where there was a genuine dispute, Owners were entitled to withhold their written consent; in this present case, there was a genuine dispute as Charterers claimed the vessel was off-hire from 4 May to 28 August 2021, the evidence having indicated that the problem was over by at least 13 May.
The High Court Judgment
The Charterers were granted leave to appeal the award on a question of law under section 69 of the Arbitration Act 1996. The appeal failed but the issue on appeal was:
“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 key point was how the word "deduction", in the context of line 146 and the charterparty as a whole, should be interpreted.
Charterers’ argued the word 'deduction' in clause 11 pre-supposed that a sum was due in the first place, in which case a 'deduction' can be made from an instalment of hire that has fallen due for payment. In effect the clause was an 'anti set-off' provision, restricting Charterers' ability to set off, against an accrued obligation to pay hire, sums owed to them. It would not restrict Charterers' right not to pay hire on the grounds that the obligation to pay hire has not accrued.
When deciding the appeal the Judge outlined:
- The basic principles in relation to payment of hire under a time charter, and in particular, that “under a time charter the risk of delay is fundamentally on the charterer, who remains liable to pay hire unless relieved of the obligation under an off hire provision” (see Eleni P - Interpreting an Off-Hire Clause).
- The principles applicable to the construction of commercial contracts (see A More Literal Approach to Construction).
- Noted that, as a matter of construction:
- Line 146 was embedded in the middle of the hire payment clause, and that it was reinforced by its opening words "Notwithstanding of the terms and provisions hereof".
- Line 146 singled out clause 17, the off-hire provision, as one which it qualified but did not limit its application to the part of the off-hire clause dealing with deductions from hire. Both clauses, i.e. 11 and 17, read as a whole and in context, indicate that line 146 was intended to restrict such rights as would otherwise arise under clause 17 to refuse to make a hire payment.
- The use of the words "whether/or alleged off hire …" was designed to apply to situations where a dispute exists about whether the Vessel was off-hire or not, and to address the situation by requiring the hire to be paid, leaving the argument for later.
- Charterers would retain important remedies:
- under line 146 Owners would have to show that there would have to be a genuine dispute to refuse deductions to hire;
- the Charterparty provided for a cross-claim in debt for any overpaid hire ("any overpaid hire or excess deposit to be returned at once"); and
- that cross-claim is secured by a lien on the vessel because it would fall within the words "monies paid in advance and not earned" under the Lien clause.
Comment
The court agreed with the tribunal that there are good commercial reasons for “no deductions” clauses in charterparties to protect Owners from losing income based on potentially spurious allegations that the vessel was off-hire. These clauses are increasingly common but this case underlines both the importance of the need for clear and unambiguous drafting of such a clause, and the need for charterers to give careful consideration before making deductions from hire.
It is worth noting that the Charterers sought to rely on The Lutetian [1982] 2 Lloyd's Rep 140; in that case, the court had reached the conclusion that when a vessel is off-hire at the date on which a hire instalment would otherwise fall due, the effect of the NYPE Off-Hire clause would be that the obligation to pay hire is suspended. The court considered this and agreed with the arbitrators that The Lutetian did not apply; there was no equivalent provision to Clause 11 in The Lutetian and, in the present case, there was an actual dispute about whether or not the vessel was off-hire. It would appear that the effect of Clause 11 was to place upon Charterers the obligation to pay hire even if, by reason of the standard NYPE clause, the obligation to pay hire may have otherwise stopped before/at a given instalment date.
