Sub Charter - Deductions from Freight - Owner's Recourse

December 2001

(Sea Venture Volume 20)

When a shipowner time charters his vessel to another party he does so with the expectation of making a profit out of the hire that he earns, but the venture is fraught with danger, particularly when the time charterer becomes insolvent and defaults on his hire payment obligations.

The reverse side of this coin is when a voyage charterer of the vessel or the owner of a cargo carried on board it, finds that he may be obliged to pay more than he expected to for the use of the vessel and carriage of the cargo.

Such competing interests were considered by the Court of Appeal in "the Spiros C" ¹. The vessel was time chartered by her owner to a time charterer who, in turn, sub chartered the vessel to a voyage charterer.

The time charter was on the NYPE form and included a provision conferring upon the owner a lien on cargoes and sub freight for amounts due under the time charter.

The voyage charter contained the following relevant provisions:-

1. Freight was payable in full to a nominated bank account, less three specified allowable deductions, for commissions, loading despatch and the charterer’s contribution to extra insurance (clause 46).

2. The cargo was to be loaded at the expense and risk of "shippers/charterers" and discharged at the expense and risk of "receivers/charterers" (clause 5)

A bill of lading was issued in respect of a cargo of wheat to be carried from Constanza to Morocco. Under the terms of the bill of lading freight was payable "as per charterparty" (meaning the voyage charter) all terms of which were incorporated. The shipper under the bill of lading was an associated company of the sub charterer.

Following the issuance of a bill of lading for the cargo, two separate agreements were struck between the charterer and the sub charterer: First, the sub charterer would pay by way of advance the vessel’s disbursement account at the loadport, which it would be entitled to deduct from the freight payment. Second, the sub charterer would advance a cash sum of US$10,000 to the master, which it would also be entitled to deduct from the freight payment.

Freight was paid by the sub charterer to the charterer less the deductions expressly permitted pursuant to clause 46 and also those deductions separately agreed between them. The charterer defaulted in the payment of hire to the owner and the owner gave notice of the exercise of a lien on sub freights.

The English High Court was asked to decide whether the owner was entitled to claim payment of freight from the shipper under the bill of lading. In particular, whether the sums deducted by the sub charterer from the freight payment pursuant to the two agreements constituted a failure to pay freight under the bill of lading. It was held that, to the extent that these deductions had been made, freight had not been paid under the bill of lading and that the shipper would have to pay these amounts to the owner even though they had already been paid by its associated company (the sub charterer) under the terms of the agreement with the charterer.

The first instance decision was appealed. The Court of Appeal held that the payment of the disbursement account and cash advance to the master in the context of the agreements between the charterer and the sub charterer constituted valid performance of the freight payment obligations under the bill of lading.

It had been argued on behalf of the owner that these collateral amendments to the freight payment terms of the voyage charter had to be approved by the owner as they impacted on the owner’s rights under the bill of lading contract. This argument was rejected on the grounds that under the terms of the time charter, the owner had allowed the charterer liberty to fix the amount of bill of lading freight and the manner of its payment, and there was no reason why any arrangements made accordingly, even if different from those originally envisaged, should fall outside the scope of the delegated authority.

The owner’s arguments, if accepted, could have led to many uncommercial situations arising. For instance, a shipper/sub charterer could not comply with a request from a time charterer to pay freight to a different account to the one specified in the voyage charter, as this could amount to a breach of his bill of lading contract with the owner. If the owner’s arguments in this case were correct, a shipper who paid the correct amount of freight to the correct party, but to a different account, at the request of the time charterer, could end up liable to pay the freight again to the owner.

The Owner had also advanced a claim against the shipper for discharge port demurrage under the bill of lading contract. At first instance, it was held that, unless otherwise specified, a term could be implied into a bill of lading contract that the shipper would discharge the cargo from the vessel in a reasonable time. This aspect of the High Court’s findings was also appealed. The Court of Appeal reversed the first instance decision, and held that such an obligation would only be implied against the holder of the bill of lading presenting it in order to obtain delivery. Having delegated authority to his charterer to fix bill of lading terms, it was inconsistent for the owner to argue that it was necessary and reasonable to imply such a term against the shipper, particularly where, as in this case, it ran contrary to clause 5 of the voyage charter.

The decision of the Court of Appeal in this case runs in line with the commercial reality of shipping contracts and supports the need for flexibility. It recognises that situations often arise in the shipping world where agreements are reached for the payment of freight in a manner, mode or form different to the terms originally agreed. It would not be a reflection of commercial reality to say that such changes always have to be approved by owner.

Similarly, in declining to imply into a bill of lading contract, where it is otherwise silent, an obligation upon a shipper to ensure that discharge takes place within a reasonable time, the Court of Appeal has recognised that such a term can only be implied in respect of the person seeking delivery of the cargo.

¹ [2000] 2 Lloyd’s Rep 319