This case concerns an appeal under s.69 of the Arbitration Act 1996 and the proper construction of a bespoke ‘anti-deduction’ clause under a time charter.
The question of law considered 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 appeal lay against the decision of an arbitral tribunal to make a partial final award of hire in favour of the owners. On the basis of ‘The Kostas Melas’ [1981] 1 Lloyd’s Rep. 18, the owners applied to the tribunal seeking an early determination of their claim for unpaid hire. This application allows the tribunal to issue an award requiring payment of the sums claimed, until such time as the underlying dispute between the parties is resolved. The underlying issues, which related to Covid-19 and off-hire were accordingly not required to be primarily considered.
Whilst specific to a bespoke clause, this decision shows how provisions limiting charterers’ rights to withhold payment of disputed hire payments are interpreted. It also serves as a reminder that where similar clauses are incorporated, owners will have the option to apply for a partial final award and will likely succeed in recovering hire unilaterally deducted by charterers.
Facts
Bulk Trident Shipping Ltd (“owners”) of the Anna Dorothea (“the vessel”) chartered the vessel to Fastfreight Pte Ltd (“charterers”) under a trip time charter for the carriage of bulk cargo from India to China. The charterparty was on New York Produce Exchange (NYPE) 1993 form incorporating substantial amendments. Hire was to be paid to the owners’ bank account every five days in advance.
Clause 11 included the following in line 146:
“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. Deduction from the hire are never allowed except for estimated bunker on redelivery…”
Upon loading of her cargo, the vessel was ordered to sail to the discharge port where she arrived on 4th May 2021, but because of Covid-19 issues with the crew was unable to berth and discharge her cargo. Charterers argued that the vessel was off-hire from 4thMay 2021 until re-delivery on 28th August 2021 save for a period of 5 days.
Arbitration Award
Owners commenced arbitration and sought recovery of ~US$ 2.1M in hire (together with interest and costs). Under clause 11, owners disputed that the vessel was off-hire and contended that charterers could not deduct or withhold payment in relation to periods of alleged off-hire without owners’ consent.
Charterers alleged the vessel was off-hire and that clause 11 ‘deductions from hire’ meant ‘deductions from hire that is due’ (whereas hire was not due as the vessel was in fact off-hire), and therefore the exclusion clause did not apply to hire that had not accrued.
The tribunal rejected this. ‘Deduction’ in clause 11 meant ‘withholding payment’ and there were commercial reasons for including this. Owners were awarded the full sum claimed.
Commercial Court
On appeal of the award by charterers, they contended clause 11 was an anti set-off clause in that ‘deduction’ presupposed that hire was due. They also argued where the vessel was off-hire on a date where an instalment was due, the obligation to pay hire was suspended – The Lutetian [1982] 2 Lloyd’s Rep.140.
The arbitrator’s decision was found to be correct in law. Clause 11 was not limited to set-off only as it related to any exercise of rights under the off-hire clause. The Lutetian case did not contain a similar ‘anti deduction’ provision.
There were sound commercial reasons for clause 11, it protected the owners from being deprived of hire based on allegations which may be spurious. However, owners did not have an unfettered discretion as there had to be a genuine dispute and their discretion had to be exercised for a contractually appropriate purpose and rationally.
Comments
Clauses of this nature are becoming increasingly common, due to the tendency of charterers to withhold hire on grounds which not infrequently turn out to be spurious. This is why the court refers to their having seen numerous applications on ‘The Kostas Melas’over the last forty years, most of which have succeeded.
Owners benefit by the addition of ‘anti deduction’ clauses, as they put charterers in a position of having to “pay now argue later”. That is, absent an agreement by owners to deduct, charterers must first pay hire and then bring their claim against owners in arbitration, if owners refuse to accept the claim.
It will generally be in charterers’ interests to avoid the incorporation of clauses of these sorts. In practice, they may have little choice, in which case they may attempt to narrow the scope of the clause to particular classes of claims, for example speed and performance claims.
Courts and tribunals are unlikely to have any sympathy for charterers who are trying to circumvent ‘anti deduction’ clauses with arguments as to interpretation unless the wording of the clause is clearly in their favour.
