Can Charterers withhold hire without Owners’ consent, even if the vessel was off hire on the hire due date and where they had agreed deductions from hire would not be allowed without Owners’ written agreement?
Key facts
Under a charterparty dated 13 April 2021 on a heavily amended NYPE 1993 form, Bulk Trident Shipping Ltd (”Owners”) trip time chartered the “Anna Dorothea” (the “Vessel”) to Fastfreight Pte Ltd (“Charterers”) for the carriage of a bulk cargo from East Coast, India to China (the “Charterparty”).
Clause 11 said:
“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…”
The Vessel loaded iron ore pellets in India and was ordered by Charterers to sail to China for discharge. The Vessel arrived at the discharge port on 4 May 2021 but was not able to reach berth; the cargo was not discharged, and the Vessel was not redelivered to Owners until 28 August 2021.
Save for a period of five days, Charterers did not pay hire between 4 May and 28 August 2021 arguing that the Vessel went off hire on 4 May 2021 and remained so given that three crew members had tested positive for Covid-19 on 1 May 2021.
Invoking Clause 11, Owners disputed that the Vessel was off hire for that period and applied in arbitration for a Partial Final Award of hire under s.47 Arbitration Act 1996.
The Arguments
Owners disputed the facts underlying Charterers’ claim for off-hire and argued that, under Clause 11, Charterers could not rely on periods of alleged off-hire to avoid payment if that had not first been agreed by Owners in writing.
Charterers said that the Vessel was off hire for the relevant period and argued that “deduction from hire” at Clause 11 meant “deduction from hire that is due” so that the exclusion of Clause 11 did not apply to hire that had not accrued (i.e. if the Vessel was actually off hire). Charterers also submitted that Clause 11 only covered cross-claims and set-offs.
The Decision
The Tribunal held that:
(a) Owners had reasonable grounds to dispute the claim that the Vessel was off hire, and therefore for refusing permission to withhold hire.
(b) It was clear that commercial parties such as Owners and Charterers, without legal advice, would have understood “deduction” to mean simply “withholding payment”.
(c) The language of Clause 11 made it clear that Charterers were allowed to withhold hire not only where the Vessel was actually off hire when the relevant instalment fell due but also where Owners had agreed in writing that the Vessel was off hire. The key wording was:
- “Notwithstanding of the terms and provisions hereof …”;
- “for any reason under Clause 17 [off-hire] or otherwise”;
- “(whether/or alleged off hire […] or any other cause whatsoever”);
- “without the express written agreement of Owners at Owners’ discretion”;
- “Deduction from the hire are never allowed except for estimated bunker on redelivery.”
(d) Given its reference to Clause 17 [off-hire] and to “alleged” off-hire, Clause 11 could not be construed as being limited to the context of set-offs or cross-claims.
(e) This construction did not prevent Charterers from ultimately claiming that the Vessel was off hire at any particular time, and seeking a refund of hire paid where Owners had failed to give written consent to a deduction.
(f) This approach was consistent with the provision in the Charterparty for Owners’ right to withdraw the Vessel “failing the punctual and regular payment of the hire”.
On this basis, the Tribunal awarded full hire to Owners for the period in question, without prejudice to Charterers’ right thereafter to counterclaim the whole or any part of that sum.
High Court Appeal
Charterers appealed the Award on the following question of law under s.69 of the Arbitration Act 1996:
“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?”
Specifically, Charterers argued that:
(a) The Tribunal had erred in grounding its analysis on the parties’ assumed commercial objective rather than the wording of the Clause;
(b) “Deduction” at Clause 11 presupposed that hire was due and so this was in fact an “anti set-off” provision;
(c) Clause 11 must be construed against Owners because “if set-off is to be excluded by contract, clear and unambiguous language is required” (FG Wilson (Engineering) Ltd v John Holt [2012]);
(d) Where a vessel is off hire on the hire due date, the obligation to pay hire is suspended: Tradax Export v Dorada Compania Naviera (The “Lutetian”) [1982] 2 Lloyd’s Rep. 140;
(e) A further provision in the Charterparty that “any overpaid hire or excess deposit was to be returned at once” suggested that Clause 11 was directed at deductions for overpaid hire;
(f) The Clause did not seek to prevent a charterer from withholding payment on spurious grounds because, were it to do so, the owner would still be entitled to bring a claim of this type .
Contractual interpretation
The Court first set out to construe Clause 11 of the Charterparty by applying the following usual principles of construction:
(a) Its meaning was to be assessed in the light of (i) its natural and ordinary meaning, (ii) any other relevant provisions of the contract, (iii) the overall purpose of the clause and the contract, (iv) the facts and circumstances known or assumed by the parties at the time that the contract was made, and (v) commercial common sense (Arnold v Britton [2015]);
(b) The Court must ascertain the objective meaning of the language used with the wider context of the contract and depending on the nature, formality and quality of the contract, give more or less weight to the wider context (Wood v Capita Insurance Services [2017]);
(c) Sophisticated and complex agreements or those negotiated and prepared with the assistance of skilled professionals should be interpreted principally by textual analysis (Wood v Capita).
Payment of hire under a time charter
The Court then reiterated the following principles applicable to payment of hire:
(a) The risk of delay is fundamentally on the charterer who must pay hire unless relieved of the obligation under an off-hire provision (The Eleni P [2019]);
(b) An off-hire provision is an exception clause and so a charterer must bring itself within its ambit in order to be excused from payment (The Eleni P);
(c) The charterer’s obligation to pay hire is absolute. If hire is not paid punctually, the owner has the right to withdraw the vessel;
(d) Absent contrary provision:
- The owner can claim the full amount of any advance instalment of hire on the day it falls due, even if it is obvious that it will never be fully earned;
- A charterer cannot withhold hire on the basis that the vessel will be off hire during the period covered by the advance payment;
(e) Absent contrary provision, if hire is disputed a charterer may make deductions on an interim basis only where it can establish that they were made in good faith and on reasonable grounds at the time of deduction.
Dismissing the appeal, the Court held that:
(a) On a proper construction, the restriction on “deductions” in Clause 11 applied to any exercise of rights that would otherwise arise under or by reason of the off-hire provision (Clause 17) to reduce (wholly or partly) a hire payment based on the Vessel being off hire. This was not limited to set-off for overpaid hire.
(b) This was the case whether off-hire was actual or alleged: the word “alleged” at Clause 11 connoted a situation where the Vessel was said to be off hire, but that may or may not ultimately have been found to have been the case.
(c) There were good commercial reasons for the insertion of such a clause and without disproportionally prejudicing Charterers: Owners’ discretion when deciding whether or not to agree to an alleged off-hire was not unfettered but rather had to be exercised for a contractually appropriate purpose and rationally. Further, Charterers had a cross-claim in debt for overpaid hire which could be secured by a lien on the Vessel.
(d) Absent Clause 11, properly construed, Owners would not have been adequately protected by the right to bring a claim like the one brought here: it would have taken months before Owners could receive payment following issue of an Award.
(e) The Lutetian, on which Charterers had relied to support the proposition that hire had been suspended on the basis that Vessel was actually off-hire, must be distinguished because there was no equivalent provision to Clause 11 nor was there a dispute that the vessel was indeed off hire on the relevant date. The Judge therefore resisted considering it further.
Comment
This judgment illustrates the importance of clear and unambiguous language when parties to a charter seek to tailor their contractual rights and obligations. In a time charter, the risk of delay fundamentally falls on the charterer and the Courts will be sympathetic to an owner who drafts additional protections to shield its hire income from spurious deductions by charterers. Such “no deduction” clauses are becoming increasingly common in time charters. Conversely, if charterers manage to negotiate less owner-friendly provisions, they should resist the inclusion of clauses like Clause 11 in respect of all off-hire payments and/or restrict their application to specific claims eg. for overpaid hire, while eliminating language that may suggest a wider application.