Monday, July 15, 2024

Ice-bound port: under performance and deductions from hire

Some frequent issues arise from trading in ice ports concerning navigation, tugs, pilotage, insurance, dead freight, laytime, off-hire or damages, indemnities, and many others. For example, a previous post in this blog discussed a decision of a London tribunal on whether the ‘frozen ballast’ is sufficient to interrupt laytime (Frozen ballast: is it sufficient to suspend laytime? – Charter Party Disputes).

In a previous arbitration decision, some elements of the parties’ claims and counterclaims concerned a breach of the performance warranties, whether the vessel was seaworthy, and whether the Charterers were entitled to make deductions from hire about off-hire & damages.

The issues

The vessel was chartered on an amended NYPE form for an extended period. The charter contained additional clauses concerning the payment of hire (grace period, deductions from hire, etc.), the vessel’s speed and consumption warranties, trading limits- intended voyage, while clause 25 of the printed form was deleted.

The vessel arrived at the first loading port on 29 January. She left for the 2nd loading on 31 January to load additional cargo, but she never reached that port. Having become beset by ice and asked the assistance of an ice-breaker, it was decided to return to the first port to complete loading, given the poor performance experienced when following the ice-breaker.  Accordingly, on 14 February, she started her voyage for the discharging ports.

Later, the Charterers failed to pay hire instalments saying that they were entitled to make deductions about off-hire and damages due to ship’s deficiencies. Finally, on 22 March, the Owners withdrew the ship. The Charterers treated the owners’ withdrawal as a repudiation, and the Owners argued the Charterers had repudiated the contract.

The decision

  1. Inability to reach the second loading port

One of the engines stopped on the vessel’s way to the second loading port since the camshaft had sustained bearing damage. The one operating engine produced limited brake horsepower, and after the ice-breaker freed her, the vessel experienced difficulties following the ice-breaker up the channel.

The Owners submitted that: (1) even if the engines were capable, the ship could not make the passage safely. Alternatively, (2) even if the ship could make the passage with the engines producing their design output, there was no obligation of performing the ship’s engines at any output power than that required to satisfy the speed warranty in the charter. The printed warranties of efficiency and fitness were subject to the typewritten performance clauses.

The tribunal rejected the Owners’ arguments. If the vessel had two engines producing the design output, the ship would get to port safely.

  1. The tribunal considered the below: The ship’s Ice-Class (class 3) was irrelevant when proceeding under the escort of the ice-breaker. The Ice Class related to strengthening the ship’s hull with the view where some forcing ice might be involved. The Ice-breaker broke up the ice into pieces of a size that would likely not cause any material danger to a ship.
  2. Ice class 3 ships did transit at that time.  Although one vessel was damaged, the Owners have implicitly accepted such risks by trading to that ports.
  3. An opinion from the locals, who had a great experience and the charterers’ expert, supported the charterers’ position.

The tribunal also rejected the Owners’ second argument basis the proper construction of the charter party. Based on the agreed intended voyage in the charter and looking at the contract as a whole, the seaworthiness & fitness obligations were fundamental to this charter.

2. Deductions from hire

The Charterers did not pay two hire instalments on 7 & 22 February. Instead, they presented an invoice showing a balance due to them by deducting (1) loss of profits and (2) withholding freight some $60,000 by shippers on cargo loaded at 1st port. As a security of their claim, shippers withheld freight payment because the Owners failed to load the additional cargo at the 2nd port and sued both parties.

The Charterers argued that the deductions were made bona fide and on reasonable grounds. Even if Charterers made deductions on a false basis, it could be shown that the Charterers were entitled to withhold hire on other grounds and could rely on that to justify and defeat Owners’ right to withdraw the ship. 

The tribunal rejected the Charterers’ argument. An Owner had to be entitled to rely upon a Charterers’ overt declaration of reasons for his action. He cannot then seek to change them. The Charterers were not allowed to make these deductions. Thus it could not be made on reasonable grounds. Since this was a period charter, and the Charterers offered to arbitrate the disputes, the tribunal could not conclude that the Charterers’ conduct was repudiatory.


Deductions in good faith and on reasonable grounds

Deductions of hire had to be made in good faith and on reasonable grounds, and a charterer could be called upon at short notice to show that its deductions were so made. If it failed in that respect it was liable to have an award made against it (The Kostas Melas [1981] 1 Lloyd’s Rep 18).The ‘Kostas Melas test’ recently applied in:

London Arbitration 5/19 that the charterers’ defence to the owners’ application amounted to no more than saying that as long as they asserted that they had cross-claims and said what those were in broad terms, then no partial final award should be made. That was wholly to misunderstand the decision in The Kostas Melas. 

London Arbitration 1/22 (speed claim deduction) where the tribunal explained that to meet the ‘Kostas Melas test’, the Charterers had to show a prima facie case for why their deduction was made bona fide and on reasonable grounds.

For speed claims ( as damages or as off-hire), many other arbitration decisions deal with the deductions from hire: London Arbitration 26/19, 9/18, 4/11, 5/08, 9/07, 17/02, 10/16, 17/19, 17/14,6/06 ( See Speed and Consumption Claims: A practical perspective and statistics – Charter Party Disputes  page 10)

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