February, 2023 - Pay now, claim later: Commercial Court considers the effect of anti-deduction clauses

In the recent case of Fastfreight Pte Ltd v Bulk Trident Shipping Ltd [2023] EWHC 105, the Commercial Court held that where a charterparty contained a clause providing that no deductions were to be made without an owner’s consent, a charterer was required to pay hire in full, even in circumstances where the ship was off-hire on the date when hire was due.

The facts

Pursuant to a charterparty dated 13th April, 2021, on an amended NYPE 1993 form, Bulk Trident Shipping Ltd (“the owner”) trip time chartered the “ANNA DOROTHEA” (“the ship”) to Fastfreight Pte Ltd (“the charterer”) for the carriage of a bulk cargo from India to China.

The agreed hire rate of $20,000 per day was payable by the charterer every five days in advance.

The charterparty contained the following provision, at clause 11:

“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 ship loaded iron ore pellets in India and was ordered to sail to China to discharge. On 1st May, 2021, three days before arrival at her discharge port, three crew members tested positive for Covid-19. As a result, the ship was unable to berth on her arrival at the discharge port on 4th May, 2021, the cargo could not be discharged, and the ship was not redelivered to the owner until 28th August, 2021.

Save for a period of five days, the charterer did not pay hire from 4th May to 28th August, 2021, arguing that the ship was off-hire due to the presence of Covid-19 on board. The owner relied on clause 11 to dispute the deductions made by the charterer, and commenced arbitration for a partial final award of the unpaid hire pursuant to s47 of the Arbitration Act 1996.

The owner’s position was that the anti-deductions clause at clause 11 of the charterparty prevented the charterer from deducting any periods of alleged off-hire unless it was first agreed by the owner in writing.

The charterer argued that the ship was off-hire as the phrase “deduction from hire” at clause 11 meant “deduction from hire that is due”. As such, the anti-deductions clause did not apply in circumstances where the ship was actually off-hire, as hire had not accrued.

The tribunal awarded full hire to the owner, finding that the anti-deductions clause only permitted the charterer to withhold from hire with the owner’s express agreement, even where the ship was alleged to be off-hire at the time when the hire instalment fell due.

Challenge to the Arbitration Award

The charterer challenged the arbitration award under section 69 of the Arbitration Act 1996, referring the following question of law to the court:

“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 charterer argued that the anti-deductions clause was akin to an “anti set-off” provision, as it presupposed that hire was due.  Therefore they said it did not apply where a hire instalment would otherwise be due but where the charterer’s obligation did not accrue as the ship was off-hire on the due date. As such, the charterer argued that they were entitled to make the relevant deductions from hire for the time they alleged the ship was off-hire.

Commercial Court judgment

Applying the usual principles of contractual construction, the court found that the restriction on “deductions” in the anti-deductions clause applied to any exercise of rights that would otherwise arise by reason of the off-hire provision in the charterparty. It was not limited to set-off for overpaid hire, as alleged by the charterer. This was the case whether or not off-hire was proven, or merely alleged. In both circumstances, the charterer was not permitted to deduct from hire without the owner’s express written agreement. The court noted that the owner’s discretion when deciding whether or not to agree to an alleged off-hire event was not unfettered, but had to be exercised rationally and for a contractually appropriate purpose.

The charterer’s appeal was accordingly dismissed, and hire remained payable. This did not, however, preclude the charterer from bringing a cross claim in debt for overpaid hire.

This decision highlights the importance of clear and unambiguous language when negotiating and agreeing contractual rights and obligations. Anti-deductions provisions are designed primarily to protect an owner’s income stream from artificial or spurious deductions from hire, and are becoming increasingly common. As such, a charterer should consider their position carefully before making deductions or withholding from hire, to ensure that they do not find themselves in breach of charterparty by doing so.

As always, Members are invited to contact their usual Club contact for further advice in relation to the issues discussed above.