In The Anna Dorothea, the Court found that where a charterparty provides that no deduction from hire may be made without owners’ consent, non-payment of hire is a “deduction” if the vessel is allegedly off-hire at the instalment date, thereby precluding charterers from making unilateral deductions. Whilst the case is fact specific, this is a welcome analysis of how provisions limiting charterers’ rights to withhold hire payments are interpreted by the courts.
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Under a charterparty dated 13 April 2021 on an amended NYPE 1993 form, owners chartered the vessel Anna Dorothea to charterers for a trip time charter from India to China.
Clause 11 provided hire to be paid to owners every five days in advance, continuously throughout the charterparty. Owners were entitled to withhold performance if hire was outstanding. Clause 11 included the following wording 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. Deductions from the hire are never allowed except for estimated bunker on redelivery…”
Upon loading her cargo, the vessel was ordered to sail to the discharge port where she arrived on 4 May 2021, but, due to covid-19 related issues with the crew, was not allowed to berth, the cargo was not discharged, and the vessel was not redelivered to the owners until 28 August 2021.
Charterers argued that the vessel went off-hire on 4 May 2021 and did not pay any hire until 28 August 2021, other than for a period of five days, between 22 and 26 May 2021.
Owners commenced arbitration and applied for a Partial Interim Award, under s. 47 of the Arbitration Act 1996, seeking payment of hire of US$ 2,147,717.79. Invoking clause 11, owners disputed that the vessel was off-hire and contended that line 146 meant that charterers could not deduct or withhold payment in relation to periods of alleged off-hire without owners consenting to such deduction.
The tribunal agreed with owners, and awarded them the full sum claimed together with interest and costs, holding that line 146 should be interpreted as follows:
(a) The word “deduction” did not mean “deduction from what is due”. If this were true, then it would suffice for charterers to simply assert off-hire in order to justify any deductions from hire.
(b) Commercial parties would have understood “deduction” to mean “withholding payment”.
(c) Charterers were only allowed to deduct or withhold payment of hire if two conditions were satisfied: (1) the vessel was actually off-hire; and (2) owners agreed in writing that the vessel was off-hire.
Charterers obtained permission to appeal to the High Court, on the following question of law:
- “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 Commercial Court judgment
On appeal, charterers argued that the Tribunal erred because the use of the word ‘deduction’ presupposed that hire was due. Consequently, a charterer only makes a ‘deduction’ when it subtracts a sum from an instalment that has fallen due for payment, not when it does not pay hire which has not fallen due, because, for example, the vessel is off-hire, as alleged in this case. Charterers further argued that line 146 was an ‘anti set-off’ provision, solely restricting their ability to set off against an accrued obligation to pay hire. As such, charterers contended that where the vessel was off-hire on a date when an instalment would have fallen due, the obligation to pay hire did not accrue and/or was suspended, with or without owners’ consent (The Lutetian ).
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Dismissing charterers’ appeal, the Court set out settled principles which are keystone to the payment of hire under a time charter:
- The obligation to pay hire is absolute, and in the absence of express contrary provision, owners are entitled to claim the full amount of any advance instalment of hire on the day it fell due.
- Charterers remain liable to pay hire unless relieved of their obligation under an off-hire provision.
- An off-hire clause was a form of exception clause, the burden being on charterers to prove the clause is applicable; ambiguity as to the meaning of an off-hire event should be interpreted in owners’ favour.
- Charterers could only make deductions where it could be established that these were made both in good faith and on reasonable grounds (The Eleni P ).
Considering the effect of line 146, the Court found that it was intended to further restrict charterers’ rights to make deductions as would otherwise arise under the off-hire clause (as well as any other cause expressly referred in the charterparty, e.g. underperformance). The restriction on deductions applied equally to both actual and alleged off-hires and the Court recognised that there were good commercial reasons for the insertion of such provisions (para 19):
“… such provisions are in our experience becoming increasingly common, no doubt because of the very frequent tendency of time charterers to withhold hire whenever they can on grounds which not infrequently turn out to be spurious”.
The Court concluded that, absent a similar provision, owners would not have been adequately protected by the right to bring a claim like the one in this case for a Partial Final Award. The Court recognised that it would have taken months if not more before owners could receive payment following an award.
Whilst in a time charter scenario, the risk of delay falls on charterers, the decision demonstrates that Courts will be sympathetic and will try to uphold contractual provisions which seek to offer additional protection to owners against unilateral deductions by charterers.
The rationale behind using and upholding similar provisions is clear, and was recognised by Hensaw J. Nevertheless, despite the conclusion in this case, the arguments articulated by charterers and the judgment itself illustrates the importance of using clear and unambiguous language in charterparties, as well as the correct analysis of the effect of such clauses in the context of the contract as a whole.
The decision is helpful for owners, illustrating that when a ‘no deduction’ clause is incorporated in the charter, owners will most likely succeed in an application for a Partial Final Award based on The Kostas Melas case and will most likely be able to recover hire, unilaterally subtracted from charterers, relatively quickly. Inclusion of such a clause in a charter can therefore be very helpful to owners in preventing deductions from hire – whether unlawful or otherwise.
Conversely, when such wide ‘no deduction’ clauses are incorporated, charterers should take great care before making unilateral deductions, because this may not only trigger owners’ right to apply to the Tribunal for a quick decision, but could also lead owners to take more draconian steps, like withdrawing the vessel from service or withholding services.
Depending on their bargaining power when fixing, charterers would be well advised to resist against the inclusion of ‘no deduction’ clauses if possible and/or at least restrict their application to specific claims, e.g., underperformance, if owners insist.