Disbursements and Equitable Set Off

October 2017

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15 Disbursement and Equitable Set Off

In the recent London Arbitration 11/17, which considered an amended NYPE 93 charter incorporating the BIMCO Piracy and Conwartime clause, the vessel was ordered to call at a range of ports in Yemen carrying wheat in bulk.

Although the sums claimed by Owners included alleged off-hire deductions made by Charterers, the award related only to Owners’ claim for reimbursement of various disbursements incurred during the voyage.

In accordance with Charterers’ orders the vessel had crossed the Indian Ocean to call at Yemen and as a result Owners incurred increased premiums ("APs") under the vessel’s War Risks and LOH Insurance policies. Charterers were required under the charter to reimburse these costs but alleged Owners had been guilty of culpable delay during the early stages of the voyage, which they said amounted to a breach of the charter. There had been significant increases in the premiums for vessels calling in Yemen during the alleged delays and but for the delay Owners would have had to pay less by way of APs.

Owners argued that the relevant clauses in the charterparty - the BIMCO Piracy clause and the Conwartime clause - were not dependent upon fault or breach of contract and, therefore, so long as the APs covered the periods in question Charterers were liable to pay the increased APs. The tribunal agreed. The disbursements/charges were provided for under the charterparty and, therefore, were due to Owners by way of a debt. Charterers’ remedy, if any, was in damages.

Charterers had asserted an equitable set off arising from their counter claim for hire (which they had withheld) and bunkers. Whilst the tribunal did not agree with Owners that their expenses claim was analogous to a claim for hire – such that the Charterers could not set off their claim for damages based on an alleged breach of the charter against Owners’ claim for expenses – the tribunal nonetheless declined to allow the debt to be set off as there was no express contractual or implied right to equitable set-off to such a debt.

The decision is of interest because of the apparent reliance placed by Charterers on a right to set off their counter claim against Owners’ claim – a right often misunderstood.

Where then lies the line that separates cross claims that can be set off and those that have to be brought separately?

Under English law, and so far as hire is concerned, Charterers have a right to make deductions from hire on three grounds. These are:

(a) where the Charterers have an express right of deduction under the terms of the charter;
(b) where Charterers are entitled to an adjustment of hire following a period of off-hire; and
(c) where Charterers have claims for damages which they are permitted to set off against hire.

A discussion on the right to set off, or as it often referred ‘equitable set off’, is too detailed for the purpose of this article but in broad terms arises if Charterers have been deprived of, or are prejudiced in, the use of the whole or part of the vessel (The Nanfri [1978] 2 Lloyd's Rep.132).

"...it is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it. And it is only cross-claims which go directly to impeach the plaintiff's demands, that is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross- claim..." (Lord Denning at p.140)

If available it is a right (i) to withhold monies pending a final adjudication of the charterers’ claim, and (ii) which can only be exercised in good faith and on reasonable grounds – “it is to be remembered that although a right of set-off is a defence, with all the legal consequences which follow from it, in practice the exercise of a right of deduction or set-off is essentially a provisional act. It decides nothing finally… For the exercise of the right does not prevent either party from subsequently proving his claim or cross-claim, and so does not affect the final resolution of the fundamental dispute…” (The Kostas Melas [1981] 1 Lloyd’s Rep. 18 - Robert Goff, J at p.26).

In the Nanfri Charterers deducted a sum of money from hire payable in respect of an alleged loss of speed. A clause of the chartererparty allowed for deductions of hire “If upon the voyage the speed is reduced by defect in… machinery ..”. The deductions were made based on a reasonable assessment (with reference to the information Charterers acquired) as well as in good faith, but whilst the unanimous decision in the Court of Appeal was that the clause allowed Charterers to make such deductions without Owners’ consent the question how much could be deducted was left open. Lord Denning’s view was that provided the deduction had been quantified by a reasonable assessment made in good faith Charterers could deduct that sum (and if too much is deducted the Owner will be able to recover that amount but “that is all” (Lord Denning)), but Goff, L.J.’s judgment differed in that he said that in deciding to make a deduction the Charterers act at their peril.

Subsequent decisions, however, support the view that Charterers are not in breach of charter if they deduct on the basis of a reasonable assessment made in good faith. Furthermore, where the deduction is based on equitable set-off, Charterers cannot deduct more than the amount of the hire paid or payable in respect of the period during which they have been deprived of the use of the ship

There are though limits to what claims can be set off. In the Nanfri Lord Denning also said “I would not extend it to other breaches or default of the shipowner, such as damage to cargo arising from the negligence of the crew.”

The question to be asked is assuming a breach of contract by Owners is whether that breach is one that deprives Charterers of part of the consideration for which hire has already been paid. In the Li Hai [2005] 2 Lloyd’s Rep. 389, it was decided that a cancellation fee charged by a bunker supplier could not be set off against hire. Such transactions do not constitute loss of earnings or impede the vessel’s trading and, therefore, Charterers had not been deprived of the vessel’s use.

In contrast, cases which involve alleged breaches of speed warranties (Chrysovalandou Dyo [1981] 1 Lloyd’s Rep. 159), or Owners’ alleged failure to properly clean the holds, can more easily be linked to the payment of hire as Charterers may well be denied the use of the vessel. Charterers have been deprived of some of the consideration for which they already paid.

An additional matter arising from London Arbitration 11/17 was that the Owner could not insist on the crew proceeding to Yemen. The charterparty required Owners to employ crew on terms that were acceptable to the ITF Collective Bargaining Agreement (“CBA”). The CBA allowed the crew to refuse such an instruction and, therefore, when they refused to continue the voyage the crew had to be changed. However, by ordering the vessel to Yemen, Charterers were not only responsible for the expense of the crew change, but also to pay for the pre-agreed bonuses. Furthermore, the tribunal concluded that the timing of Charterer’s orders meant that the crew change could not have taken place any earlier.

Given how widely used the Conwartime and Bimco Piracy clauses are, the decision importantly demonstrates how these standard charterparty clauses can protect Owners. No doubt commercial parties on both sides take this into consideration when negotiating fixtures and when there is the possibility that the vessel might be ordered to such high-risk areas.

  In Geldof v Carves [2011] 1 Lloyd’s Rep. 517 (C.A), and whilst endorsing the need for a close connection between the right and the cross-claim,  Rix, L.J said the reference to impeachment (“an unhelpful metaphor in the modern world”) should now be dropped.

Article by Emily Florou
Syndicate Executive
Eastern Syndicate