Fasterfreight Pte Ltd v Bulk Trident Shipping Ltd

INTRODUCTION

This is an appeal on a question of law under section 69 of the Arbitration Act 1996, relating to a Partial Final Award dated 20 December 2021 (“the Award”) under which two maritime arbitrators awarded the Owners US$2,147,717.79 (together with interest and costs) in respect of unpaid hire under a time charter.

The question of law on which permission to appeal was granted by Andrew Baker J is:

“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?

Having considered the Award and counsel’s written and oral submissions, I have concluded that, at least on the charterparty terms and facts in the present case, the answer is ‘yes’; that the arbitrators were correct to make their award in favour of the Owners; and that the appeal must be dismissed.

BASIC FACTS AND KEY CHARTERPARTY TERMS

The Owners chartered their vessel, the “Anna Dorothea”, to the Charterers by a trip time charter for the carriage of a bulk cargo from East Coast, India to China. The contractual documents comprised a fixture recap email dated 13 April 2021, which set out the main terms of the contract and incorporated a heavily amended New York Produce Exchange (NYPE) 1993 form wording, with certain additional clauses attached.

The Charterers agreed to pay hire for the use of the vessel at the rate of US$20,000 per day, with instalments of hire to be paid every five days in advance (§ 11 of the recap). Further details concerning hire were set out in clauses 10 and 11 of the incorporated NYPE form.

Clause 10 was headed “Rate of Hire/Redelivery Areas and Notices”. So far as relevant, it provided that:

“The Charterers shall pay for the use and hire of the said Vessel at the rate of [US$20,000] per day pro rata… Charterers to pay first 20 days hire without value of bunker within 3 banking days of vessel’s delivery and thereafter every 5 days in advance or up to redelivery which ever is earlier. U.S. currency, commencing on and from the day of her delivery…until the hour of the day of her redelivery…”.

Clause 11 was headed “Hire Payment” and provided:

“(a)

Payment

Payment of Hire shall be made so as to be received by the Owners or their designated payee in cash in to Owners’ bank account in Germany…

Notwithstanding of the terms and provisions hereof no deductions from hire may be made for any reason under Clause 17 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…

in United States Currency, in funds available to the Owners on the due date [5 days in advance] … Failing the punctual and regular payment of hire…the Owners shall be at liberty to withdraw the Vessel from the service of the Charterers without prejudice to any claims they (the Owners) may otherwise have on the Charterers.

At any time while the hire or any amount is outstanding … the Owners shall, without prejudice to the liberty to withdraw, be entitled to withhold the performance of any and all of their obligations hereunder … and hire shall continue to accrue …

…

(b)

Grace Period

Where there is failure to make punctual and regular payment of hire due to oversight, negligence, errors or omissions on the part of the Charterers or their bankers, the Charterers shall be given by the Owners 3 banking days written notice to rectify the failure, and when so rectified within those 3 banking days following the Owners’ notice, the payment shall stand as regular and punctual. …”

(my emphasis)

The paragraph underlined above was printed at line 146 of the amended NYPE terms and is referred to as “line 146” in the Award and the parties’ submissions.

Clause 17, headed “Off Hire” stated:

“In the event of loss of time from deficiency and/or default … of officers or crew … or by any other similar cause preventing the full working of the Vessel, the payment of hire and overtime, if any, shall cease for the time thereby lost. Should the Vessel deviate .. during a voyage, contrary to the orders or directions of the Charterers, … the hire is to be suspended from the time of her deviating .. until she is again in the same or equidistant position from the destination and the voyage resumed therefrom. …

If upon the voyage the speed be reduced by defect in, or breakdown of, any part of her hull, machinery or equipment, the time so lost, and the cost of any extra bunkers consumed in consequence thereof, and all extra provide directly related and actually paid expenses (always limited to one shift maximum) expenses [sic] … may be deducted from the hire only after having reached an agreement with the Owners on the figures (costs, times, bunkers).”

Clause 23 was headed “Liens” and dealt, among other things, with overpaid hire:

“The Owners shall have a lien upon all cargoes and all sub-freights and/or sub-hire and/or all demurrage and/or all dead freight and/or all damages detention and/or all other amounts due to Charterers for any amounts due under this Charter Party, including general average contributions, and the Charterers shall 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. …”

The charterparty also incorporated a set of Additional Clauses, including this one:

“Clause 67. BIMCO terms

Notwithstanding anything within this charter party, the riders, the recap, and/or the "BIMCO infections or contagious disease clause for time charter parties" and/or its equivalent, in the event any member of the crew or persons (except those on charterers' behalf) on board the vessel is found to be infected with a highly infectious or contagious disease and the vessel has to (i) deviate, (ii) be quarantined, or (iii) barred from entering any port, all time lost, delays and expenses whatsoever shall be on owners' account and the vessel shall be off-hire.

…

Owners are fully aware that vessel is fixed for one trip via East Coast India to China.”

The vessel loaded a cargo of iron ore pellets at Visakhapatnam, India for carriage to China, and was ordered by the Charterers to sail to Lanqiao for discharge. It arrived off that 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 by the Charterers to the Owners until 28 August 2021.

Except for a period of five days between 22 and 26 May 2021, the Charterers did not pay any hire for the vessel between 4 May and 28 August 2021. They contended that the vessel went off-hire on 4 May 2021 and remained off-hire thereafter on the basis that three crew members had positive rapid lateral flow tests for Covid on 1 May 2021. The Charterers relied in this regard on clause 67 quoted above.

The Owners disputed that the vessel was off-hire for any of the period at issue, relying in particular on line 146, and applied for a partial final award of hire under section 47 of the Arbitration Act 1996 in the sum of US$2,147,717.79.

THE AWARD

The Owners and the Charterers respectively appointed two very experienced maritime arbitrators, Michael Baker-Harber (now, sadly, deceased) and Bruce Harris.

The arbitrators noted that there was a dispute about the underlying facts:

“9.

There is a dispute as to the precise situation on board the vessel concerning infection, and the facts in that regard will have to be investigated later in the arbitration if it proceeds. The owners contend that 3 crew members tested positive with rapid lateral flow tests on 1 May, 3 days before the vessel arrived off Lanquiao [sic], but 2 weeks after she had arrived at Visakhapatnam, which the owners said indicated that the crew in question were not infected when the vessel had arrived at that port.

10.

It was impossible to arrange for PCR testing of those crewmembers, but on the owners’ case if they had Covid-19 (lateral low tests not being wholly reliable) they had recovered by no later than 13 May, as their temperature records for that day and subsequent days showed. Meanwhile, the charterers asserted that the vessel went off hire on 4 May and remained off hire thereafter. They relied on clause 67, quoted above. This situation continued – subject to a brief excepted period referred to below – until 28 August when, the owners said, the agreed trip was completed, and the vessel redelivered. …”

The arbitrators noted that the Owners’ position was that the Charterers could not rely on periods of alleged off hire to avoid paying hire if that had not been agreed by the Owners in writing: in other words, if it was disputed by the Owners.

The core of the arbitrators’ reasoning was this:

“15.

Fundamental to the charterers’ case was their contention that “deduction” in the line 146 insertion must mean “deduction from hire that is due”. Were that limited, literal, meaning to be given to the word it seems to us that it would largely, if not entirely, emasculate the insertion, for it would be sufficient for a charterer simply to assert off-hire in order to justify non-payment. That, in our view, cannot be right. The clear intention, to our minds, is that charterers cannot withhold payment of hire without the owners’ agreement. Commercial parties such as the owners and charterers here would understand “deduction” in this sense, and without the input of lawyers would be most unlikely to use a word such as “withhold” in their contract.

16.

We have no doubt that the owners are right when they argue that, reading all the relevant terms of the charter together, as must plainly be done, line 146 only allows charterers to withhold payment of hire not simply if the vessel is actually off hire as at the date when the relevant instalment falls due, but also only where the owners agree in writing that the vessel is off hire. The terms of the insertion at line 146 in our view make the position entirely clear.

17.

First there are the opening words “Notwithstanding of the terms and provisions hereof …”. Then there is the express prohibition against deductions “for any reason under Clause 17 or otherwise”. If that were not sufficiently clear, the parties agreed that it should apply whether there was actual or only alleged off hire: “(whether/or alleged off hire”). And they capped all that with “or any other cause whatsoever)”; all “without the express written agreement of Owners at Owners’ discretion”. Finally, the position was put beyond doubt by the words quoted at the end of paragraph 4 above [viz. “Deduction from the hire are never allowed except for estimated bunker on redelivery.”]

18.

The intention of this provision could hardly be clearer: if anything, it might be said to suffer from overkill. What is clear is that it considerably limits the effect of clause 17 and any other off-hire provisions in the charterparty so as to affect the question of actual payment of hire in accordance with the other provisions of clause 11, without of course preventing the charterers from ultimately claiming that the vessel was off hire at any particular time, and seeking a refund of any hire that they might have been obliged to pay because the owners had failed to give written consent to a deduction.

19.

The charterers suggested that this consequence would be surprising, as it would mean that charterers have to pay hire, essentially by way of security, for a period when no hire might be due. However, whether or not it is surprising, that is what the parties agreed. And, contrary to the charterers’ submissions, it is not hard to see why rational commercial actors would reach such a result. Indeed, such provisions are in our experience becoming increasingly common, no doubt because of the very frequent tendency of time charterers to withhold hire whenever they can on grounds which not infrequently turn out to be spurious. That is why, over the last forty years or so, we have seen numerous applications based on The Kostas Melas, most of which in our experience have succeeded.

20.

This conclusion is also consistent with what follows in the charter, namely the owners’ right to withdraw “failing the punctual and regular payment of the hire”. The provision eliminates the uncertainty that would otherwise prevail in the event of a non-payment and the owners having to consider whether they were entitled to withdraw or not.

21.

The charterers also argued that line 146 only covers cross-claims and set-offs. We agree with the owners that this cannot be right given the references to clause 17 and to alleged off-hire, for off-hire does not operate by way of a set-off or cross-claim.

22.

The charterers said that whatever the position in relation to line 146, there had to be a genuine dispute in the light of the decision in The C Challenger [2020] EWHC 3448 (Comm). Assuming, without deciding, that this is correct, in our view there is nothing in this argument because there was in any event a genuine dispute, so the owners were entitled to withhold their written consent. Indeed, as things stand it is somewhat difficult to see on what basis it can be said that there was an off-hire situation for at least most of the period relied on by the charterers: disputing that position is certainly reasonable.”

(my interpolation in quoted § 17 above)

The arbitrators proceeded to explain why it was reasonable for the Owners to dispute the Charterers’ position on the facts. They noted that whilst the Charterers claimed that the vessel was off-hire for almost four months, from 4 May to 28 August 2021, the evidence so far indicated that the problem was over by at least 13 May. They concluded that the Owners had reasonable grounds for disputing the claim that the vessel was off hire, and thus for refusing written permission to withhold hire.

The arbitrators distinguished Bingham J’s decision in Tradax Export v Dorada Compania Naviera (The “Lutetian”) [1982] 2 Lloyd’s Rep. 140, on which the Charterers relied, as a case raising a different issue and where the contract contained nothing equivalent to line 146.

The arbitrators accordingly awarded the Owners the sum claimed by way of hire, without prejudice to the Charterers’ right thereafter to counterclaim the whole or any part of that sum, and reserved jurisdiction accordingly as well as jurisdiction to decide all other undetermined matters that had been referred to them.

GENERAL PRINCIPLES TO BE APPLIED

Arbitration awards are to be interpreted in a reasonable and commercial way, rather than with a meticulous legal eye endeavouring to find inconsistencies and faults (MRI Trading v Erdenet Mining Corp [2013] EWCA Civ 156 § 23).

The charterparty itself is to be interpreted applying ordinary principles of contract interpretation. In brief summary:

The Charterers also highlight the statement in Arnold § 17 that:

“… the reliance placed in some cases on commercial common sense and surrounding circumstances (e g in Chartbrook [2009] AC 1101, paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision.”

and the statement of Patten LJ in Warborough Investments v Lunar Office SARL [2018] EWCA Civ 427 that:

“…it is normally safe to assume that the parties intended to give the words they chose their natural meaning. In particular, there is a danger in approaching the construction of the document with pre-conceived ideas about what the parties, acting commercially, are likely to have intended and to allow those ideas to subvert the clear language of the document”. (§ 19)

The following principles are generally accepted in relation to payment of hire under a time charter:

As to the effect of a clause similar to line 146, in SK Shipping Europe v Capital VLCC 3 Corporation (The “C Challenger”) [2020] EWHC 3448 (Comm), Foxton J considered a clause providing that “[c]harterers shall not deduct any monies from hire/earnings without Owners’ written confirmation”. He accepted the charterer’s argument that this created a contractual discretion which had to be exercised by the owner for a contractually appropriate purpose (viz a genuine dispute as the amount of any deduction) and rationally (§ 300). On the facts, he found that it would not have been rational for the owner to withhold its written confirmation to reasonably calculated deductions from hire in the circumstances that had arisen.

Finally, in relation to the impact (if any) of the decision in The Lutetian, “the modern practice is that a judge of first instance will as a matter of judicial comity usually follow the decision of another judge of first instance unless he is convinced that that judgment was wrong”: Lornamead v Kaupthing [2011] EWHC 2611 (Comm), § 53, Coral Reef v Silverbond [2016] EWHC 3844 (Ch) § 47. In Lornamead, Gloster J followed an earlier first instance decision despite doubts as to its correctness (see §§ 49-56).

APPLICATION TO PRESENT CASE

The Owners submit that the question of law on which permission was given, quoted in § 2 above, does not arise out of the facts found by the arbitrators, because the arbitrators made no finding that the vessel was off hire at the date when the hire instalment fell due. I do not accept that submission. The essential question raised in the appeal is whether hire remains payable (absent owners’ written agreement) even if it may later be determined, or agreed, that the vessel was off hire. The construction of the charterparty which the Owners advance must, therefore, be shown to be valid even if the vessel is in fact off hire at the relevant date, albeit the matter is disputed at the time.

The Owners also object that the Charterers’ appeal wrongly focusses on the meaning of a single word, “deduction”, divorced from its context; that the meaning of an individual word is a question of fact (Chitty on Contracts 34th ed., § 15-050); and that the Charterers cannot by an appeal on a question of law challenge the arbitrators’ finding of fact that the word “deduction” in line 146 is wide enough to encompass both (i) deducting a sum from a larger sum of hire that was due; and (ii) withholding a hire instalment altogether. I do not accept that contention. As the Owners naturally accept, the legal effect of a clause in a contract is a question of law. The arbitrators’ decision, properly construed, is as to the legal effect of line 146 as a whole, considered in its full context; and the Charterers’ appeal is admissible as raising the question of law as to whether arbitrators’ construction is correct.

Turning to the substance, the Charterers’ criticisms of the arbitrators’ approach can be summarised as follows.

In further support of point (ii) above, the Charterers point out that “deduction” has been used in the sense for which they contend in the context of charterparties. For example:

Conversely, the word “withholding”, which would have fitted the meaning for which the Owners contend, is not uncommonly used in contracts. For example:

As to point (iv) in § 28 above, Bingham J held in The Lutetian that, under the printed version of the NYPE 1946 form (similar in relevant respects to the current printed form), a hire instalment is not payable if the vessel is in fact off hire on the due date for payment of the instalment. There was no wording in the charterparty there equivalent to line 146. There was also no dispute in The Lutetian that the vessel was off hire on the relevant date.

I begin with points (i)-(iii) in § 28 above, focussing on the language used by the parties, read in the context of the terms of the charterparty as a whole.

Line 146 is embedded in the middle of the hire payment clause, § 11, which tends to underline its importance in the scheme of the charterparty payment provisions, as reinforced by its opening words “Notwithstanding of the terms and provisions hereof”. It is notable that, whilst making clear its overall breadth of application, line 146 singles out § 17, the off hire provision, as one which it qualifies. That is significant because § 17 is not primarily directed at allowing the offsetting of overpaid hire: it is, rather, § 23 that states the Charterers’ right to have any overpaid hire returned at once, and to a lien on the vessel for all monies paid in advance and not earned. § 17 is mainly directed at the prior question of whether hire accrues or ceases to accrue at all.

The only part of § 17 specifically directed at the making of deductions in the sense of subtractions from hire payments otherwise due is the last portion:

“If upon the voyage the speed be reduced by defect in, or breakdown of, any part of her hull, machinery or equipment, the time so lost, and the cost of any extra bunkers consumed in consequence thereof, and all extra provide directly related and actually paid expenses (always limited to one shift maximum) expenses [sic] … may be deducted from the hire only after having reached an agreement with the Owners on the figures (costs, times, bunkers).”

However, that portion of § 17 clearly includes its own bespoke provision requiring the Owners’ written agreement.

The wording of line 146, “no deductions from hire may be made for any reason under Clause 17 or otherwise (whether … alleged off-hire underperformance, overconsumption or any other cause whatsoever) …”, indicates that it is directed at the whole of § 17: not merely at deductions under the portion quoted in § 34 above (which would make little sense anyway given that that portion already contains its own prohibition on deductions without the Owners’ consent), and not merely at deductions pursuant to the right to recover overpaid hire provided for in § 23.

In other words, read as a whole and in context, the restriction on “deductions” in line 146 applies to any exercise of rights that would otherwise arise under or by reason of § 17 to reduce (wholly or partly) a hire payment based on the vessel being off hire. The fact that § 17, as a whole, is a primary target of line 146 clearly indicates that line 146 is intended to restrict inter alia such rights as would otherwise arise under § 17 to refuse to make a hire payment.

For completeness, that view is also at least consistent with the use of the words “whether/ or alleged off hire …” (which I suspect to be a typo for “whether for alleged off hire”, though it does not matter). The word “alleged” connotes a situation where the vessel is said to be off hire, but that may or may not ultimately be found to have been the case. It underlines the point that line 146 is designed to cater for situations where a dispute exists about whether the vessel is off hire or not, and to address the situation by requiring the hire to be paid, leaving the argument for later. It seems unlikely that the parties intended to deal in this way with disputes about whether an off hire period gave rise to a right to make a deduction from a future hire payment, but not disputes about whether a current or anticipated alleged off hire situation gave rise to a right to refrain from paying a hire instalment in the first place.

As the arbitrators pointed out, there are good commercial reasons for such a clause to be inserted, to protect owners from losing critical hire income based on potentially spurious allegations that the vessel is off hire: see Award § 19. Conversely, charterers retain important remedies, as the Owners point out. The Owners do not have an unfettered discretion when deciding whether or not to agree to an alleged off-hire: as noted earlier, they have to exercise their discretion for a contractually appropriate purpose (so there has to be a genuine dispute about the deduction) and rationally. Further, under § 23 the Charterers have a cross-claim in debt for any overpaid hire (“any overpaid hire or excess deposit to be returned at once”), and that cross-claim is secured by a lien on the vessel because it would fall within the words “monies paid in advance and not earned” in § 23.

Turning to other points made by the Charterers against the arbitrators’ approach,

The Owners raised the further point that the Charterers did not originally (when the vessel was said to be off hire) rely on § 17 but only on § 67, which states that “the vessel shall be off-hire” but does not include the wording considered in The Lutetian about the payment of hire ceasing. The Charterers respond that where § 67 applies, the vessel is also off hire under § 17; and the arbitrators considered both clauses. Given my conclusions above, which are adverse to the Charterers even if they would be entitled to rely on § 17, it is unnecessary to consider this point further.

The conclusions I have reached make it unnecessary to consider whether or not I should follow the decision in The Lutetian that where the vessel is off hire at the date on which a hire instalment would otherwise fall due, the effect of what is now § 17 of the charterparty is that the obligation to pay hire is suspended.

The Lutetian clearly cannot be dispositive of the present case, because it contained no equivalent to line 146. Indeed, it might be thought that one of the reasons for including line 146 is to address the effect that § 17, as interpreted in The Lutetian, would otherwise have: though it is unnecessary to reach any such conclusion in order to decide the present case.

The Charterers note that Bingham J observed at p.149 rhc of that case that there is “a contrast between deduction from the hire in this instance and cessation of payment in the other”, which they say supports their view that the word “deduction” in line 146 does not include cessation of payment pursuant to § 17 based on the vessel being off hire. I do not agree. That passage of the judgment concerned a point made about the last portion of § 15 of the 1946 NYPE form, which was in terms similar to the final portion of current § 17 and stated:

“and if upon the voyage the speed be reduced by defect in or breakdown of any part of her hull, machinery or equipment, the time so lost, and the cost of any extra fuel consumed in consequence thereof, and extra expenses shall be deducted from the hire.”

The submission made to Bingham J by Mr Anthony Evans QC was presumably to point out that the example of a mere partial off hire event indicated that § 15 did not envisage the charterer being allowed to decline to pay hire. Bingham J stated:

“Mr. Evans drew attention to the closing words of cl. 15, dealing with loss of time due to reduction in speed. But I do not think these words help him. The clause is there concerned with a partial, not a complete, loss of service over a period. This could only practically be dealt with by deduction. There is, however, a contrast between deduction from the hire in this instance and cessation of payment in the other.”

Thus Bingham J used the word ‘deduction’, in the sense of subtraction from an amount otherwise due, to refer to the reduction/offsetting process provided for in the last portion of what is now § 17, and ‘cessation of payment’ to refer to the effect (as he found it to be) of the preceding part of § 17. It would, however, be fallacious to conclude that the word ‘deduction’ in line 146 must be similarly restricted. As I have already explained, line 146 is clearly intended to qualify § 17 as a whole; and, moreover, it would make little sense to confine it to the last portion of § 17 since that portion already makes provision for owners’ agreement. Line 146, construed in the context of the charterparty in the present case, in my judgment has the effect for which the Owners contend.

As to the decision in The Lutetian itself, its essential reasoning was that there was no reason to confine the words “the payment of hire shall cease for the time thereby lost” in § 15 (now § 17) to the accrual of hire under § 4 (now § 10) to the exclusion of the payment of hire under § 5 (now § 11). The judge considered that that terminology would be surprising if the draftsman intended to convey that, whilst hire would cease to accrue, actual payment of hire would continue. Further, the judge rejected the submission that the words “for the time thereby lost” merely meant ‘in respect of the time thereby lost’ as distinct from ‘during the time thereby lost’. Bingham J indicated at p.150 rhc that he did not find the construction of § 15 free from difficulty, but found the charterers’ construction to accord more closely with the language used; adding that it was “not, to my mind, in any way unlikely that the parties intended the owners to be secured by payment in advance in respect of hire which he would or might earn but not in respect of hire which he could never earn”.

This last passage might be taken to suggest, as the Owners here submit, that The Lutetian does not apply where, as in the present case, there is a dispute about whether or not the vessel is off hire. The Charterers respond that the contractual wording cannot have different meanings depending on whether or not the owners dispute that the vessel is off hire. The Owners also point out potential difficulties with the decision in The Lutetian as applied, for example, to situations where a vessel is only partially off hire (for instance, due to breakdown of one of its cranes or other equipment). Such instances, the Owners submit, show that the words “for the time thereby lost” mean ‘in respect of the time thereby lost’. More generally, § 17 compensates the charterer for net loss of time, which may not be a period of complete delay and can often be assessed only retrospectively. Further, it is suggested, the word “cease” § 17 applies more naturally to the concept of accrual of hire than to the obligation to make hire payments. The Owners add that The Lutetian has been the subject of criticism or doubt in Time Charters (§ 16.18) and Carver (§ 7-454 footnote 932).

In my view these issues are better explored in a case where they are decisive or material to the outcome. I therefore prefer not to express a view on them.

CONCLUSION

For the reasons given above, I consider that the arbitrators’ decision was correct in law, and that the appeal must be dismissed.

I am most grateful to both counsel for their clear and cogent submissions, both in writing and at the oral hearing.