London Arbitration 11/26 is a useful recent reminder that charterers should exercise caution before making deductions from hire where a relevant performance issue may be connected with risks or operational measures which they have themselves requested or accepted. The award concerned an amended NYPE 1993 form, whereby a letter of undertaking was issued in relation to deck cargo, and charterers’ subsequent deductions from hire based principally on alleged underperformance and off-hire.
Although the dispute was decided under the LMAA Small Claims Procedure, the reasoning provides a practical warning for charterers. Where additional arrangements are agreed during the course of a charter, particularly in relation to non-standard cargo carriage, those arrangements may qualify the parties’ ordinary charterparty rights.
Charterers should not assume that an LOU, or similar document is merely collateral or security related. Depending on its wording and commercial context, it may affect the extent to which charterers can later rely on performance warranties, off-hire clauses or rights of deduction.
Background
The vessel was chartered by the claimant owners to the respondent charterers on an amended NYPE 1993 form for one time charter trip of about 50 to 70 days in charterers’ option. A dispute arose after charterers made deductions from hire, with owners seeking recovery of sums said to have been deducted or withheld. The claim was reduced to US$50,000 for the purposes of proceeding under the LMAA Small Claims Procedure. Charterers denied liability and counterclaimed US$691.01 for allegedly overpaid hire.
During the charter, charterers requested that owners carry cargo on deck. Owners’ position was that this involved operational and/or regulatory risk considerations, and the parties entered into a letter of undertaking. Owners contended that the purpose of the LOU was to regulate the consequences of carrying the deck cargo and to protect owners against the financial consequences reasonably required for its safe carriage.
Owners argued that the LOU varied or qualified the charterparty by recognising that the vessel’s speed and performance might be affected by the agreed cargo and that operational measures, including reduced speed, might reasonably be required in the interests of safety and cargo preservation. Charterers, by contrast, argued that the LOU did not deprive them of their ordinary charterparty rights in respect of underperformance, off-hire or deductions from hire.
The deductions included hire, extra war risks insurance and communications, victuals and entertainment charges. Owners’ case was that those deductions were contrary to the charterparty as qualified by the LOU. Charterers maintained that they were entitled to rely on their ordinary rights and brought a small counterclaim for allegedly overpaid hire.
Legal Effect of the LOU
The issue was whether the LOU was merely collateral, or whether it formed part of the contractual arrangements between the parties and qualified charterers’ ordinary rights under the charterparty.
The Tribunal held that, construed objectively and in its commercial context, the LOU was intended to supplement and qualify the parties’ pre-existing rights and obligations under the charterparty in the circumstances contemplated by the parties. The LOU did not entirely displace charterers’ ordinary rights in respect of performance or deductions from hire. However, it did contemplate that carriage of the deck cargo might require operational adjustments, including reduced speed and other protective measures reasonably connected with the safe carriage of that cargo.
The commercial purpose of the LOU was therefore important. The Tribunal accepted that the LOU was designed to protect owners against deductions arising from operational consequences reasonably associated with the agreed deck cargo carriage. On that basis, the proper and commercially coherent construction was that the LOU qualified the exercise of charterers’ rights where any reduction in performance arose from operational measures reasonably connected to the agreed cargo risk.
This is a significant point for charterers. The Tribunal did not find that charterers had abandoned all performance protections under the charterparty. In the absence of clear wording, the LOU did not remove charterers’ rights generally. However, charterers could not rely on those rights in a way that was inconsistent with the commercial allocation of risk reflected in the LOU.
Deductions from Hire
Charterers relied principally on allegations of underperformance and offhire. They sought to bring themselves within clause 17 of the charterparty and relied on the master’s noon reports and a weather routing company’s report when advancing their performance case.
Owners argued that charterers had not established any relevant deficiency or default of crew, any qualifying defect or breakdown, or any distinct performance deficiency falling outside the operational consequences contemplated by the LOU.
The Tribunal held that even if a performance reduction was assumed, the critical question was whether charterers had proved an entitlement to place the vessel off hire or to deduct hire in circumstances falling outside the scope of the LOU. On the material before the Tribunal, charterers had failed to establish such entitlement.
Accordingly, charterers were not contractually entitled to place the vessel offhire, withhold or deduct hire, or recover the US$691.01 allegedly overpaid. Owners were awarded US$50,000, together with interest, legal costs assessed at the Small Claims Procedure maximum of £6,000, and reimbursement of the arbitrator’s and LMAA administrative fees.
Key Takeaways from a Charterers’ Perspective
The award is a reminder that charterers should be careful when requesting cargo arrangements which may give rise to operational or regulatory risks. Where charterers ask owners to carry cargo on deck, or otherwise accept arrangements that may affect speed, consumption, the overall performance or the vessel’s operation, any related LOU or agreement should be reviewed carefully before deductions are made.
Charterers should not assume that an LOU is merely a security document. If the wording and commercial context show that it was intended to regulate the consequences of a particular arrangement, it may qualify charterers’ ability to rely on underperformance, offhire or deduction provisions.
The decision also highlights the need to distinguish between ordinary underperformance and performance consequences arising from agreed operational measures. If reduced speed or other measures are reasonably connected with the safe carriage of cargo which charterers requested, charterers may face difficulty deducting hire unless they can show that the relevant loss falls outside the risk allocation agreed between the parties.
Charterers should therefore ensure that any LOU or related agreement expressly preserves their rights where that is intended. If charterers wish to retain full performance, offhire and deduction rights notwithstanding the agreed carriage of deck cargo, this should be stated clearly. Conversely, if the LOU recognises that reduced speed or other operational measures may be necessary, charterers should expect owners to argue that deductions arising from those measures are precluded.
The award further underlines the importance of evidence. In this case, charterers relied on the master’s noon reports and a weather routing company’s report, but the Tribunal found that charterers had not established an entitlement to deduct hire in circumstances falling outside the LOU qualification. Charterers considering deductions should therefore ensure that the evidential basis is sufficient not only to show reduced performance, but also to show that the reduction is unrelated to any operational measures or risks contemplated by any LOU or side agreement.
For owners, the award demonstrates the potential value of carefully drafted LOUs where charterers request cargo arrangements that may affect the vessel’s operations. For charterers, it is a reminder that operational flexibility requested during the charter may carry financial consequences if the contractual documentation allocates that risk back to them.
Ultimately, the award reinforces the importance of clear drafting and contemporaneous risk allocation. Charterers should ensure that LOUs and agreements made during the course of a charter are not treated as routine documents. Their wording may have real contractual consequences, particularly where later deductions from hire are sought in connection with the very risks those documents were intended to address.
