UK: The Power Of Deduction (Or Not …) In Relation To The Payment Of Hire

Fastfreight Pte Ltd v Bulk Trident Shipping Ltd ("Anna Dorothea") [2023] EWHC 105 (Comm)

In this decision, the Commercial Court was tasked with considering the following question of law on an appeal pursuant to section 69 of the Arbitration Act 1996 ("the 1996 Act"):

Henderson J held that it was, upholding the decision of an arbitral tribunal ("the Tribunal") that the charterers, Bulk Trident Shipping Ltd ("Charterers"), had not been entitled to withhold hire on the basis of an alleged off-hire period.

The dispute arose in the following circumstances. Fastfreight Pte Ltd ("Owners") had chartered their vessel "ANNA DOROTHEA" ("the Vessel") to Charterers for a trip time charter for the carriage of a bulk cargo from East Coast, India, to China ("the Charterparty"). Pursuant to the Charterparty, hire was payable every 5 days in advance and Clause 17 was an off-hire clause in relatively standard form. Clause 23 was a lien clause which provided (amongst other things) for Charterers to have a lien on the Vessel for all monies paid in advance and not earned "and any overpaid hire or excess deposit to be returned at once". Clause 11, which was the key clause in issue, further provided as follows:

The Vessel loaded iron ore pellets in India and was ordered by Charterers to sail to China for discharge. She arrived at her discharge port on 4 May 2021 but was not able to obtain a berth. In the event, the cargo was not discharged and the Vessel was not redelivered to Owners until 28 August 2021.

With the exception of a five day period between 22 and 26 May 2021, Charterers did not pay any hire for the Vessel between 4 May and 28 August 2021, contending that the Vessel was off-hire due to a number of crew members testing positive for Covid on 1 May 2021. That was disputed by Owners, who applied to the Tribunal for a partial final award of hire under section 47 of the 1996 Act.

Owners' application succeeded before the Tribunal, with the Tribunal holding (in summary) that: (i) Charterers' failure to pay hire constituted a 'deduction' within the meaning of Clause 11 (even where the Vessel was alleged to be off-hire at the time an instalment fell due); and (ii) Owners had reasonable grounds to dispute Charterers' claim that the Vessel was off-hire and thus for refusing written permission to withhold hire pursuant to Clause 11. The Tribunal accordingly awarded Owners the hire claimed, without prejudice to Charterers' right thereafter to counterclaim the whole or any part of that sum.

Charterers sought and obtained the Commercial Court's permission to appeal the Tribunal's Award pursuant to section 69 of the 1996 Act. As set out above, the particular question before the Court was whether, pursuant to Clause 11, hire remained payable (absent Owners' written agreement to the contrary) even if it was later determined or agreed that the Vessel was off-hire (see [26]).

Charterers' main arguments on appeal were that (see [28]): (i) the word 'deduction' in Clause 11 presupposed that a sum was due in the first place (for a deduction can only be made where there is something to deduct from); (ii) Clause 11's prohibition of 'deductions' was, thus, an 'anti set-off'provision; it did not restrict Charterers' right not to pay hire on the grounds that the obligation to pay hire had not accrued; (iii) any ambiguity in Clause 11 should be construed against Owners because clear and unambiguous language was required to exclude a right of set-off; (iv) where a vessel is off-hire on the hire due date, the obligation to pay hire is suspended (in reliance on The "Lutetian" [1982] 2 Lloyd's Rep 140); (v) the wording of Clause 23 (as quoted above) suggested that Clause 11 was directed at deductions for overpaid hire; and (vi) the Tribunal had been wrong to suggest that clauses such as Clause 11 are seen as necessary 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 the type brought in the present case.

Henshaw J dismissed Charterers' appeal. In doing so, he applied the usual principles of contractual construction (see [21]-[22]) and reiterated a number of well-established principles in relation to the payment of hire under a time charter (see [23]). Applying those principles to the Charterparty before him, Henshaw J held that (see [32]-[42]):

• On its true construction, the restriction on 'deductions' in Clause 11 applied to any exercise of rights that would otherwise arise under or by reason of Clause 17 to reduce (wholly or partly) a hire payment based on the Vessel being off-hire. The restriction was not limited to set-off for overpaid hire as Charterers alleged and that was the case whether or not the off-hire was proven, or merely alleged.
• There were good commercial reasons for a clause such as Clause 11 to be inserted, to protect Owners from losing critical hire income based on potentially spurious allegations that the vessel was off-hire. Conversely, Charterers retained important remedies (e.g. under Clause 23) and Owners' discretion when deciding whether or not to agree to an alleged off-hire was not unfettered: their discretion had to be exercised for a contractually appropriate purpose and rationally.
• Charterers' approach to Clause 11 would substantially undermine it, for an alleged off-hire period of any significant duration would quickly lead to the cession of hire payments on their due dates and, as the present case demonstrated, even with an expedited procedure, it may take months for the Owners to obtain any award in respect of the unpaid hire.
• Finally, and whilst it was not necessary for the Judge to reach any conclusion on the point, the Judge indicated that The "Lutetian" was distinguishable on the grounds that the charterparty in that case contained no equivalent to Clause 11 and there was no dispute that the vessel was off hire on the date on which a hire instalment would otherwise have fallen due.

Charterers' appeal was accordingly dismissed. Whilst the decision turned on the specific wording of Clause 11, similarly worded ' no deduction' clauses are a common feature of many charterparties and serve the valuable commercial purpose of protecting the owner's income stream from spurious off-hire allegations. The Judgment highlights the importance of the parties paying close attention to the wording of such clauses and the need to use clear and unambiguous language when negotiating and agreeing to them.

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