Deductions from Freight

Any deductions from freight should be made only if there is express agreement in the charterparty, for example, Address Commission or Brokerage Commission, Cash to Master etc. Under English law there is a rule known as equitable set-off where claims may be deducted from monies being under a contract, this rule does not apply to freight and was firmly established in The Aries [1977]. This case covered a cargo of oil, where freight was payable on the intaken quantity on delivery of the cargo. The charterer deducted $30,000 from freight, without owners consent, in respect of a claim for damages for short delivery. The charterers, presumably feeling that their loss had been recovered, did not actually lodge a claim for the short delivery, which would have in some measure justified the deduction. Two years after delivery the owners started proceedings to claim the balance of freight. The charterers argued that the ordinary rules of set-off should apply and that freight should not be treated as a special case. The case reached the House of Lords who found in favour of owners. Briefly the judgment stated: ‘that the rule with regard to freight was so firmly established, it would be wrong to depart from it. In addition, since the 12 month time limit in the Hague Rules did not merely bar the remedy, but extinguished the claim, there was no claim the charterers could set-off, even where there were a set-off permissible. The deduction made by the charterer, to which the owners had not agreed, had no legal significance and did not relieve the charterer of the need to commence suit within 12 months, if he wished owner’s liability for the cargo damage to remain in existence.’ The simple rule for the charterer then is to pay the freight as agreed and commence proceedings against the owner to recover losses. Address Commission is typically dealt with in charter parties as an agreed deduction from freight, some charterers argue that the Address Commission is used to ‘pay for’ their shipping department therefore there is no industry standard as to what the level of Address Commission will be. In the dry cargo trades we see some as high as 5% and in the tanker trades frequently 1.25% but sometimes higher. A simple example of how this would affect the freight payable is: Vessel loads 32,000 mt of cargo at US$40.00per mt. Address Commission 2.5% is payable by owners. Freight on 32,000mt x US$40.00per mt = $1,280,000.00. Less 2.5% Address Commission = $32,000.00. Net freight payable =$1,248,000.00. Some would argue that this is simply a discount granted by owners to charterers and to achieve a lower cost it would be better to do away with the Address Commission altogether. In practice when fixtures are reported on the market it is the ‘headline rate’ that is reported and little, if any, information is known about the commission structure. The result is that it is very unlikely that the charterer who does not take an Address Commission will pay a lower freight rate than the charterer who does. In tanker charterparties covering the crude oil and dirty product trades, where the nature of the cargo is a heavy or sticky liquid containing sediment such as sand, it is common to include a Cargo Retention Clause, which gives the right to the charterer to make a deduction from freight. A typical clause would read as follows: In the event that any cargo remains on board upon completion of discharge, Charterer shall have the right to deduct from freight an amount equal to FOB port of loading value of such cargo plus freight due with respect thereto provided that the volume of cargo remaining on board is liquid, pumpable and reachable by vessel’s fixed pumps as determined by an independent surveyor. Any action or lack of action in accordance with this provision shall be without prejudice to any rights or obligations of the parties. The clause above gives the charterer the right deduct from freight an amount equal to the FOB value of the cargo at the port of loading plus the freight due thereon, providing the cargo remaining is in a liquid state (not sediment), pumpable that is to say the pumps would be able to pump the liquid (it is not too high viscosity) and reachable that is to say that the liquid cargo can reach the vessels cargo (usually located at the starboard after corner of the tank) can reach the liquid. This may at first glance seem reasonable but in practice there is sometimes a discussion as to how much cargo is liquid, pumpable and reachable. On some occasions the only surveyor available in a timely fashion is employed by the receiving terminal or the charterer, leading to the allegation that the surveyor could not have been ‘independent’ . A similar clause giving the charterer the right to deduct an amount from freight on a tanker charter party is the ‘In Transit Loss Clause’ which is sometimes included in charterers terms. An example of the clause is given here: ‘(A) In transit loss not to exceed 0.5% of the Bill of Lading quantity. In transit loss shall be calculated as the difference between: (1) The gross volume calculated as on board at the completion of loading and (2) The gross volume calculated as on board prior to commencement of discharge (B) In the event a shortage exceeding 0.5% is found then charterers have the right to deduct from freight the value of the quantity in excess of the 0.5%’. There are two points to note from the above clause; there is an industry standard loss of 0.3% which is deemed acceptable for the carriage of bulk liquids thus 0.5% is seen as a generous allowance. The term ‘gross’ volume is calculated by measuring the distance from the top of the cargo to the top of the tank, this is known as the ullage, as you will appreciate the measurement will not differentiate between the constituents of the liquid in the tank and crude oil will contain a certain amount of gas, water and sediment. During an ocean passage with the ship’s movement and vibration of the main engine the oil and water will separate under such a situation the volume of the oil is known as the ‘net’ volume. Therefore owners and operators of tankers will be reluctant to agree that ‘gross volume’ after loading be compared with ‘net volume’ prior to discharge. In tanker as well dry cargo charters there is frequently a clause which refers to the insurance premium payable by the charterers (if they are the cargo owners) for loading the cargo on a specific age, class, flag or ownership of vessel as follows:”EXTRA INSURANCE ON CARGO Any extra insurance on cargo, incurred owing to Vessel’s age, class, flag or ownership to be for Owners’ account up to a maximum of and may be deducted from the freight in the Charterers’ option. The Charterers shall furnish evidence of payment supporting such deduction. Whereas one argument for including such a clause is that it allows the charterer to treat modern and older vessels on a level playing field (e.g. a 5 year old vessel is asking $40 and a 16 year old vessel is also asking $40) the charterer will know that additional costs, associated with fixing the 16 year old ship, will be paid by the owners. On the other hand the shipowner will be concerned at agreeing such a clause because they cannot have any input with respect to the premium paid, they do not know the insured value of the cargo and will query whether there is any incentive for the cargo owner to negotiate a cheaper premium if this will be paid by another party. These concerns may be reduced by the agreement of a maximum amount, say us$2,000 and such an agreed amount can be allowed for in the voyage estimate and hopefully the freight as agreed. It is perhaps worth pointing out that this is a charterparty clause and therefore covers the agreement between the owner and charterer. Note that, as is alluded to in the final sentence of the clause, if the cargo has been sold, the bill of lading holder will have the right to lodge a claim for short delivery against the owner under the contract of carriage contained in the bill of lading, leading to two claims for the same loss. Though not strictly the charterers’ obligation it is good practice to ensure that the voyage charter includes a comprehensive freight payment clause which should include. How funds will be remitted to the owner, for example, ‘By Telegraphic Transfer to Owner’s designated bank’, charges account remitter. That is, not by ‘Cheque in the Post’. NB to be ‘PAID’ they must be in owner’s bank free for his use … ! In essence the charterparty should specify the fullest possible details of the owner’s bank account with the purpose of reducing the risk of fraud. It is easily understood that a freight paid by the charterer to the wrong account will cause a number of problems, not least a delay in the delivery of the cargo. All chapters looked at in this module cover general points leading the student to realise the pitfalls to look for when reviewing the charterparty and remember: Always Read the Charter party