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Partial Final Award- hire deductions without “owners prior approval”

The subject vessel was chartered on an amended NYPE Form 1946 to carry grains from Black Sea to Bangladesh. The owners claimed for hire allegedly due and owing USD 2,116.353.11, and the charterers denied liability. As a result, the matter came before two LMAA Arbitrators to determine the owners’ application for a partial final award under section 47 of the Arbitration Act 1996 that the charterers resisted in full. To determine this application and without pre-judging the counterclaims, the question that the tribunal had to determine at this stage of the arbitration was whether, and if so, to what extent, the charterers were entitled to withhold hire on the basis that they had counterclaims which gave rise to a right of equitable set-off against hire.

The charterparty terms

Clause 46 read as follows:

“Charterers to pay 15 days hire within three banking days of delivery.

Charterers to pay for bunker value on delivery with first hire payment.

Charterers are not allowed to make any deductions from the hire except with Owners’ prior approval.”

Clause 15 as amended:

“That in the event of the loss of time from deficiency and/or default of owners, men or stores or fire,breakdown or damages to hull, machinery or equipment, grounding, detention by average accidents to ship or cargo, dry docking for the purpose of examination or painting bottom, or by any other cause unless such causes are due to charterers and/or their agents and/or their servants (including pilots,linesmen, boatmen, mooring men) preventing the full working of the vessel, the payment of hire shall cease for the time thereby lost… and all direct and proven extra expenses shall be deducted from the hire, fully documented with supporting evidence.”

The tribunal also considered clauses 4, 5, 18 “Lien clause”, and 55 “suspension”.

The scope of clause 46

The owners maintained that clause 46 prohibits deductions from hire (except with their consent). In response, the charterers argued that this only applied to the first hire payment (since clause 46 dealt with first hire payment) and, in any event, clause 46 could not prohibit deductions made from hire permitted by the terms of the Charter party and as a matter of English law.  Further, the charterers contended that, as a matter of principle, an agreement by the parties to prevent deductions from hire was unenforceable under English law.

The owners’ interpretation of clause 46 was that (a) it was not obvious what (if any) deductions could ever be made legitimately from the first payment of hire, and (b) there was no obvious reason for requiring the Owners’ prior approval for deductions from the first payment of hire but not for deductions from any other payments of hire.

Held,

Clause 46 dealt with hire and bunkers generally, and there was nothing in the wording of the prohibition on deductions to suggest that it had a limited effect. The charterers cited no authority in support of their proposition, and there was no reason why the parties to a charter party should not enter into a legally binding agreement that the charterers will not be entitled to exercise a right of equitable set-off against hire.

Clause 46 does not purport to interfere in any way with the entitlement of the charterers to bring counterclaims against the owners; it merely provides in effect that, unless and until the charterers make good any such counterclaims, the owners are entitled to the hire due to them under the charter party. In short, it addresses cash flow and nothing else.

The tribunal preferred the owners’ interpretation of clause 46, viewing also the typed amendment of clause 5 that made it clear that the owners’ prior authority has to be obtained even for cash advances to the Master. This reinforced the conclusion that the parties’ intention was the charterers’ obligation was to pay the full amount of hire unless owners gave their prior approval to deductions being made.

The tribunal concluded that clauses 46 and 15 could be read together.  Clause 15 contains the mechanism for deciding when and if a vessel was off-hire, and this must be fully documented with evidence, as produced by the charterers with their off-hire claim. If owners agreed under clause 46, the relevant period was treated as off-hire. If all else failed, including negotiations, arbitration would have to follow. This might seem unusual and possibly harsh on the charterers, but it was what the parties agreed by specific amendments to Clause 15 and the inclusion of Clause 46. This was also consistent with clause 5.

The Charterers counterclaims

It was appropriate to consider whether, in the exercise of their discretion to make a partial award, the charterers should be given the benefit of the doubt so far as the hire due in respect to any periods falling within clause 15.

The charterers’ case in response to the application was that owners were responsible for cargo contamination as rejected by the receivers because foreign material had been found and that prejudiced the charterers in their ability to discharge the cargo from holds 2 and 4 and were entitled to deduct by way of equitable set-off a counterclaim equivalent to the value of hire and bunkers consumed on the relevant period.

The charterers’ further and alternative case was that they had been deprived of the vessel’s services for several periods due to the owners’ purported exercise of a lien over the cargo – and then due to their arrest of the vessel and cargo. The periods that the lien was exercised were:

(i) 22nd May to 25th May, 2018;

(ii) 7th June to 14th June, 2018; and

(iii) 25th July to 13th August, 2018.

The charterers asserted that the owners’ lien was wrongful and unlawful and that they had a claim for damages which would extinguish the Owners’ claim for hire during the periods in question. The charterers’ position was that owners had no proprietary interest in the cargo since the bills of lading were freight pre-paid, and clause 8 of the sub-charter (as incorporated) limited any lien over cargo for outstanding freight and demurrage.

Also, due to the owners’ refusal to discharge the cargo, the charterers were facing substantial claims for cargo damage due to the deterioration in the cargo’s condition over the delay period. The claim for cargo was based on a notice received under the sub charter party and charterers would seek indemnity from owners but no particulars were given.

To determine this application and without pre-judging the counterclaims, the question that the tribunal had to determine at this stage of the arbitration was whether, and if so, to what extent, the charterers were entitled to withhold hire on the basis that they had counterclaims which gave rise to a right of equitable set-off against hire.

Held,

In respect to the alleged cargo contamination claim, a cargo claim cannot give rise to a right of equitable set-off against hire (see The “Nanfri ” [1978] at page 144). Even if the charterers’ counterclaims were a consequence of claims by the sub charterers and /or cargo interests they could not therefore give rise to a right of equitable set-off against hire (The Lok Manya (1979], Time Charters (7th edn) 16.70).

Concerning the charterers’ case that they were deprived and/or prejudiced in their ability to discharge the cargo in no. 2 hold from 0930 on 7th June to 2nd August 2018 “as a result of the cargo contamination”, the charterers were not entitled to withhold hire for that period.

Tuning to the above periods that owners purported to exercise a lien over the cargo, on the evidence, there could be no doubt that at all material times, there was a significant balance due and owing by way of hire to the owners, and they were entitled under clause 55 to exercise a lien over the cargo. Even if they were not entitled to do so, they were still entitled to withhold performance since the hire was outstanding.

Therefore, the tribunal did not have to consider whether, on the authorities, the purported exercise of the lien was in line with the charter party terms. However, as noted, if charterers were correct and the lien clause in the sub-charter only provided for lien over outstanding freight then on their own case they were in breach of clause 18 of the NYPE since they have failed to safeguard the owners’ right to exercise a lien over the cargo (The “Aegnoussiotis” [1977])

About the period that the vessel was under arrest as a result of steps taken by the owners, as a matter of English law, it is difficult to make good a claim for damages for wrongful arrest. According to Bangladeshi law, there was no suggestion that the arrest was wrongful. During the period of arrest, no hire was paid, and the owners were entitled to withhold performance. Therefore, the charterers could not prove damages since the withdrawal of the vessel was a direct consequence of charterers’ failure to pay hire.

Accordingly, the owners were entitled to the hire claimed, including interest and costs.

Partial Final Award, 4 December 2018

This website removes the names of the parties involved in this or other awards. The reader can find more details on Jus Mundihttps://jusmundi.com/en/.These awards mostly come into the public domain through enforcement under the NYC 1958.

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