The risks of hire deductions and reductions in a booming market

Dr Arun Kasi, a Malaysian solicitor and author of The Law of Carriage of Goods by Sea, writes for Splash today on a pertinent topic given the sky high box and dry bulk freight rate environment at the moment.

In time charters, a charterer periodically pays hire to an owner. The charterer may have crossclaims against the owner for breach of performance warranty, loading less cargo, etc. A charter may pay less hire on account of off-hire.

Crossclaims/off-hire claims can be classified into three categories. First, the vessel is off-hire, meaning no hire is due for the period. Second, the vessel is not off-hire, but deduction for certain expenses is contractually allowed.

Third, the vessel is not off-hire and there is no contractual provision for deduction, but the charterer is entitled to deduct by the principle of equitable set-off.

A vessel will go off-hire only upon the happening of an event that the charterparty specifically classifies as an off-hire event. An off-hire clause in the charterparty will list the off-hire events like breakdown. When off-hire, no hire is payable for the time lost by the off-hire event, i.e. hire payable is reduced as opposed to deduction from the hire payable.

Usually, charterparties will provide that all additional bunkers consumed and expenses incurred upon the off-hire instance are on the owner. The charterparty may expressly allow the charterer to deduct the costs of these bunkers consumption and expenses from the hire payable. If not, still the charterer can deduct them as equitable set-off. To make an equitable deduction, there must be close proximity between the primary claim and the crossclaim – there is such proximity between performance claims and hire claim.

Take this example based on a modified SHELLTIME 4 form. A charterparty provides that the vessel will go off-hire when judicially detained for a fault attributable to the owner. The charterparty also provides that when the vessel is off-hire, additional bunkers consumed and expenses incurred are on the owner. However, the charterparty does not provide that the charterer may ‘deduct’ the costs of such bunkers consumed and expenses incurred from the hire.

The vessel has completed the charter service in 10 days. In between, the vessel was arrested and kept detained for a day because the master negligently damaged a pier there. During the one day, the bunkers consumed and expenses incurred costed the charterer $20,000. Hence, hire is payable only for nine days, i.e. $270,000. This is the effect of the off-hire clause. From that, the charterer will deduct $20,000 as equitable set-off, hence a net payment $250,000.

A charterer paying hire after deduction or reduction may run a risk in a booming market. Suppose a charterer assesses an underperformance claim at $20,000. The owner assesses it at $15,000 or denies in totality. The owner withdraws the vessel and enters into a ‘without prejudice’ agreement for continued service at a higher hire. If a tribunal later decides the $20,000 was not an over-deduction, then all the additional hire paid under the ‘without prejudice’ agreement will be refunded to the charterer and original hire will be put back.

However, if the tribunal decided that there was an over-deduction, the matter can be complex. There are two schools of thought. One is that if there is an over-deduction, then, irrespective of whether it was made on a reasonable estimate, the owner had the right to withdraw. Hence, the ‘without prejudice’ agreement will stand good, unless the charterparty allows deductions on a reasonable estimate basis. Another school is that if the over-deduction quantified by reasonable assessment is made in good faith, then the owner should not be entitled to withdraw. Lord Goff LJ in the Court of Appeal in The Nanfri seems to lend support to the first school, while Lord Denning MR seems to lend support to the second school. The view of Lord Denning seems to have gained popularity, despite the conceptual difficulty with it in that it seems to rewrite the parties’ contract.

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