Deductions From Ship Hire

Ship Hire under a time charterparty is normally payable in full, in advance, and on the exact due date stated in the charter. The obligation to pay hire is one of the central commercial obligations of the charterer. At the same time, a charterer may sometimes be entitled to deduct sums from hire where the charterparty expressly allows deduction, where the ship is off-hire, or where the charterer has a legally recognized right of equitable set-off arising from the shipowner’s breach.

The subject is important because an incorrect deduction can have serious consequences. If hire is underpaid without a valid contractual or equitable basis, the shipowner may be entitled to withdraw the ship from the charter service, claim damages, or exercise other remedies. Conversely, if the deduction is valid, the shipowner cannot treat the short payment as ordinary non-payment of hire. Therefore, every deduction from ship hire must be considered carefully against the wording of the charterparty, the facts of the incident, and the applicable law.

Ship Hire may be subject to deduction by a charterer for several common reasons:

Nonpayment of address commission and/or brokerage by the shipowner. Where commission or brokerage is contractually payable and not otherwise settled, the charterer may seek to account for it through the hire payment mechanism if the charterparty allows this treatment.
Port Disbursements. Time charterers may advance funds to the master or the ship’s port agent for expenses incurred on the shipowner’s behalf. These may include cash to master, chandlery bills, crew joining or leaving expenses, local charges, and other incidental ship expenses. Where the time charterparty permits such advances, the charterer may deduct the amount from hire. Many time charter forms, including provisions similar to those found in ASBATIME clause 5, may also allow a commission on advances, often around 2.5 percent, subject to the agreed wording.
Domestic Bunkers: Charterers may negotiate an allowance for fuel used by the ship for domestic purposes, such as heating, lighting, cooking, and hotel services. This allowance may be deducted from hire as a lump sum or calculated according to the method agreed in the charterparty.
Off-Hire: If the charterer is deprived of the full or efficient working of the ship in circumstances covered by the off-hire clause, the charterer may be entitled to deduct hire for the relevant period or time lost. Examples may include breakdown, machinery defects, crew deficiency, detention, or performance failure depending on the wording of the clause. Speed and fuel consumption disputes are common examples, where the charterer alleges that the ship failed to meet charterparty warranties and the shipowner may argue that weather, currents, sea conditions, or other excluded factors caused the apparent underperformance.

Many time charterparties contain express provisions allowing deductions in specified situations. For example, a clause may permit deductions for disbursements made on the shipowner’s behalf, advances to the master, commissions on such advances, or charges that are for the shipowner’s account. Shelltime 4 clause 9(ii), for example, contains wording allowing payment of hire less certain amounts disbursed on the shipowner’s behalf and charges for the shipowner’s account, depending on the exact contractual context.

Even where a deduction is permitted by the charterparty, it does not mean that the deduction will never be challenged. A shipowner may dispute whether the deduction falls within the clause, whether the amount is correct, whether the event actually occurred, or whether the charterer acted reasonably. The legal distinction is important: a deduction may be provisionally valid even though the final amount is later adjusted by arbitration, court decision, or agreement.

Equitable set-off may also allow charterers to deduct from hire in limited cases where the claim is closely connected with the same charterparty and directly affects the charterer’s use of the ship. The leading principle associated with The Nanfri is that, if the charterer makes a reasonable assessment of loss in good faith and deducts that amount, the charterer is not automatically in default merely because the shipowner disputes the deduction.

In this situation, the shipowner cannot simply withdraw the ship on the basis of non-payment if the deduction is legally valid. Where the shipowner’s breach has deprived the time charterer of part of the consideration for which hire has been paid or is payable, the charterer may deduct an equivalent amount from the next hire payment. However, this right is not available for every breach. It generally arises where the shipowner’s breach deprives or prejudices the charterer’s use of the ship.

A breach of speed and performance warranty may qualify if it causes underperformance and loss of time or excess bunker consumption. The principle was considered in cases such as The Chrysovalandou Dyo. Even if the whole ship has not been physically withdrawn from the charterer’s service, a right of set-off may arise if the charterer’s use of the ship has been substantially impaired. By contrast, cargo damage claims are usually not sufficiently connected with the hire obligation to justify deduction from hire, as emphasized in The Nanfri.

If the shipowner wrongly, in breach of contract, deprives the charterer of the use of the ship for a period of time, the charterer may be able to deduct from the next hire payment a sum equivalent to the loss of use. The amount must be a reasonable assessment made in good faith. If the deduction is later found excessive, the shipowner’s remedy is generally to recover the excess rather than to treat the original deduction as an immediate default justifying withdrawal.

Legitimate Deductions From Charter Hire

The charterer’s obligation to pay hire on time is strict. Hire is the financial foundation of the time charterparty: in exchange for payment, the charterer receives the service of the ship and her crew for the agreed period. Under English law, where hire is not paid as required and there is no valid deduction or set-off, the shipowner may be entitled to exercise contractual rights, including withdrawal if the charterparty provides for it.

However, not every short payment is wrongful. There are circumstances where the charterer may lawfully deduct from hire. These include:

where the charterparty expressly allows the deduction;
where the ship has been off-hire and the hire account requires adjustment;
where the charterer has a damages claim that gives rise to equitable set-off against hire.

The difference between lawful deduction and unlawful non-payment is commercially critical. A shipowner faced with reduced hire should first identify whether the charterer is relying on a specific charterparty clause, an off-hire argument, or equitable set-off. The shipowner should then consider whether the deduction is supported by the facts, the contract wording, and a reasonable calculation.

Express Right of Deduction

Many standard time charter forms, including forms based on New York Produce Exchange (NYPE) and Baltime wording, contain clauses allowing certain deductions from hire. These may include deductions for time lost, bunkers consumed, expenses caused by defects in hull, machinery, or equipment, advances made for ship’s disbursements, and fuel used for domestic consumption.

An express right of deduction depends on the exact wording of the clause. The charterer must show that the deduction falls within the clause and that any required conditions have been met. Some clauses may require notice, supporting invoices, documentary evidence, or calculation by a particular method. If the clause grants the right clearly, the charterer does not usually need the shipowner’s prior agreement before making the deduction, unless the contract says otherwise.

Ship Hire Adjustment Due to a Period of Off-Hire

An off-hire adjustment is a particular type of deduction arising when the ship was not earning hire for a period during the charterparty. If the ship is off-hire under the charterparty, the shipowner is not entitled to hire for that period or for the net time lost, depending on the wording. In practice, the adjustment is often made against the next hire payment rather than paid separately by the shipowner.

A charterer cannot usually deduct hire in anticipation of a future off-hire event. The event must have occurred, the off-hire clause must apply, and the resulting amount must be calculated in a reasonable and good faith manner. If there is a disagreement over the calculation, the parties may later resolve the issue through negotiation, arbitration, or litigation.

Damages: Equitable Set-Off

Equitable set-off is a limited but important principle under English law. It allows a charterer to deduct from hire where the charterer’s cross-claim is so closely connected with the shipowner’s claim for hire that it would be unjust to require full payment without taking the cross-claim into account. The Nanfri is one of the central cases in this area.

The main requirements for equitable set-off against hire are generally understood as follows:

the shipowner’s claim for hire and the charterer’s counterclaim must arise from the same charterparty;
the counterclaim must be closely connected with the claim for hire;
it must be unjust to enforce the shipowner’s hire claim without recognizing the charterer’s closely connected claim.

The most difficult requirement is usually the close connection between the claims. The shipowner’s breach must normally affect the charterer’s use of the ship. It is not enough that the charterer has some unrelated claim against the shipowner. The claim must directly impeach the shipowner’s demand for hire because the charterer did not receive the use of the ship for which hire was payable.

Legal authorities have generally recognized two main situations where a breach by the shipowner may justify deduction from hire by equitable set-off:

where the charterer has been wrongfully deprived of the use of the ship;
where the charterer’s use of the ship has been wrongfully impeded or prejudiced.

Examples of claims that may support equitable set-off include:

breach of a speed and performance warranty;
failure to load a full cargo where the failure affects the charterer’s use of the ship;
time lost dealing with contaminated cargo caused by the shipowner’s contractual breach;
delays caused by the shipowner’s failure to perform hold-cleaning obligations.

Examples of claims usually considered too remote or insufficiently connected include:

cargo damage claims;
failure to maintain accurate logs;
the master’s involvement in false bunker documentation;
breach of duty as bailee of the charterer’s bunkers;
the master’s refusal to load bunkers where the claim does not sufficiently affect the use of the ship in the required legal sense.

When and How much Deduction from Ship Hire?

Once the charterer has a valid right to deduct from hire, the deduction may usually be made from the next hire payment falling due. The amount does not have to be finally agreed by the shipowner or determined by an arbitrator before the deduction is made, provided the deduction is made in good faith and based on a reasonable assessment.

If the charterer deducts an amount that is reasonable and honestly assessed, the charterer should not be treated as being in default merely because the shipowner disputes the calculation. If the amount is later found to be too high, the shipowner may recover the excess. The key point is that the original deduction must be based on a valid right and a reasonable calculation.

A charterer’s personal belief that a deduction is justified is not enough by itself. The deduction must be legally supportable. The claim and counterclaim must arise under the same charterparty, and the shipowner’s breach must have deprived or affected the charterer’s use of the ship in a way recognized by law. If these conditions are absent, the charterer may face the risk that the short payment is treated as non-payment of hire.

In the absence of an express clause, a charterer cannot usually set off a deduction under one charterparty against hire due under another charterparty, even if the same parties are involved. Each charterparty is treated as a separate contractual relationship unless the parties clearly agree otherwise.

If a valid deduction is made, the shipowner should not withdraw the ship solely because the full hire amount has not been paid. Wrongful withdrawal may place the shipowner in breach of charter. This is why a shipowner must examine the legal basis of the deduction before taking drastic action.

Deductions From Ship Hire: Off-Hire and Equitable Set-Off

When hire is not paid in full, the shipowner must first determine whether the charterer is relying on a contractual or equitable right to deduct. A shortfall does not automatically mean unlawful non-payment. The deduction may arise from an off-hire clause, a disbursements clause, an express contractual right, or equitable set-off.

Only if no such right exists should the shipowner consider remedies for non-payment or underpayment of hire. These may include a demand for payment, a notice under an anti-technicality clause, withdrawal of the ship where permitted, arbitration, or a claim for damages. The correct response depends on the wording of the charterparty and the governing law.

For clarity, the principles discussed here are commonly considered in the context of English law and time charter forms such as the New York Produce Exchange (NYPE) form. Different charterparty forms and legal systems may produce different results, so the exact contract wording must always be reviewed.

Ship Off-Hire

1- Burden of Proof

The duty to pay hire rests on the charterer, and the burden is normally on the charterer to prove a clear contractual right to withhold or deduct hire. Off-hire is not assumed simply because a delay has occurred. The charterer must bring the facts within the off-hire clause.

For a charterer to legitimately deduct for off-hire, they must establish that:

the full or efficient working of the ship was prevented or hindered;
the prevention or hindrance was caused by an event listed in the off-hire clause;
there was loss of time or the relevant off-hire period required by the clause.

An off-hire event does not necessarily mean that the shipowner has breached the charterparty. Off-hire clauses often allocate the risk of certain interruptions without requiring fault. The ship may be off-hire because of an event specified in the clause, even if the shipowner was not negligent.

2- Prevention of Full/Efficient Working of the Ship

The first question is whether the ship was unable to perform the service required by the charterparty at the relevant time. This requires identifying the actual service then required, not simply the charterer’s commercial preference.

The Berge Sund illustrates this distinction. The ship could not immediately load the next cargo because further tank cleaning was required to remove residues from the previous cargo. The Court of Appeal considered that the service required at that time was not necessarily immediate loading, but continuation of cleaning until the tanks were suitable for the intended cargo. A time-chartered ship is employed not only to load, carry, and discharge cargo, but also to perform related operations such as ballasting, bunkering, waiting, cleaning, and proceeding as ordered.

External obstacles may also complicate the off-hire analysis. If a voyage is delayed by a sandbar, boom, congestion, port closure, or temporary navigational obstruction, the ship may still be fully efficient in herself. By contrast, detention, arrest, seizure, or a restriction specifically affecting the ship may more readily be treated as preventing the full working of the ship, depending on the clause.

3- Ship Off-Hire Event

Even if the ship’s full or efficient working has been prevented, the ship is not automatically off-hire. The charterer must show that the cause of the prevention falls within the off-hire events listed in the charterparty.

Clause 15 of the NYPE form traditionally lists specific off-hire events and may include wording such as “any other cause preventing the full working of the ship.” Under English law, general words of this kind may be read in context and may be limited to causes similar to those specifically listed, particularly where the cause must be internal to the ship’s condition or efficiency. The Saldanha, involving piracy, showed that not every external event preventing the ship from working will necessarily fall within such wording unless the clause is broad enough.

Some charterparties expand the wording by adding “whatsoever” after “any other cause.” This can broaden the scope of off-hire events. However, even broad wording still requires that the event actually prevents the full working of the ship or otherwise satisfies the clause.

4- Ship Off-Hire Period

If the charterer proves an off-hire event, the next question is how much hire is deductible. Under many clauses, including classic NYPE wording, the deduction is calculated by the “net loss of time” method. This means that the charterer deducts for actual time lost as a result of the off-hire event, not necessarily for the entire duration of the event itself.

Other charterparties use “period” clauses. These may state that hire ceases until the ship is again in an efficient state to resume service, or until the ship is ready to resume service from a position no less favorable to the charterer than the position where the off-hire event began. Under this type of clause, the period of off-hire may be calculated differently from the net loss of time method.

The Pythia provides an example of the importance of the wording. Once the ship refloated after grounding and became capable of full operation, hire resumed even though further delay followed because a berth had become occupied. After refloating, the required service was to wait for a berth, and the ship was capable of performing that service.

Charterparty Entitlement to Deduct From Charter Hire

The shipowner should always review the charterparty to identify clauses allowing the charterer to deduct certain expenses from hire. These may include port disbursements, cash advances, shipowner’s expenses paid by the charterer, bunkers remaining on board at redelivery, off-hire fuel, or other agreed items.

Where the charterparty expressly permits deduction, the charterer may generally deduct from hire:

after the relevant event or expense has occurred;
an amount claimed in good faith and reasonably estimated;
even if the exact figure has not yet been finally agreed or determined.

This allows the hire account to operate practically during the charter. However, the charterer should keep supporting records, invoices, calculations, and notices because the shipowner may later challenge the deduction.

Equitable Set-off

Where the charterparty does not expressly permit deduction, the charterer may still seek to rely on equitable set-off. The charterer bears the burden of proving that the claim is closely connected with the hire claim and that it would be unjust to require full payment without taking the cross-claim into account.

Loss of Use

A charterer may set off a damages claim against hire if the shipowner’s breach deprived the charterer of the use of the ship or hindered the charterer’s use of the ship. The right is generally limited to the amount of hire corresponding to the loss or impairment of use.

This differs from voyage charters, where freight is subject to a stricter rule and equitable deduction from freight is generally not allowed for damages claims. Time charter hire is treated differently because hire is payment for the continuing use and service of the ship.

Provisional Remedy

Equitable set-off is provisional in the sense that the charterer may make the deduction before the final amount is legally determined, but the deduction remains open to later challenge. To exercise the right properly, the claim should:

be made in good faith and on reasonable grounds;
arise from the same transaction or be closely connected with it;
be so closely connected with the shipowner’s right to hire that it would be unfair to enforce the hire claim without considering the charterer’s claim.

Examples where equitable set-off has been recognized include:

claims for breach of speed and performance warranty;
failure to load a full cargo, causing shut-out cargo;
time lost because damaged cargo had to be disposed of at sea;
periods when the ship was not usable because of inadequate hold cleaning.

Examples where equitable set-off has been rejected or considered inappropriate include:

cargo damage caused by crew negligence;
loss of cargo fixtures due to delays after ship repairs following negligent contact with a quay;
claims involving inaccurate log-keeping or false bunker documentation;
breach of duty as bailee of the charterer’s bunkers;
a cancellation fee charged by a bunker supplier.

The parties may agree to exclude equitable set-off, but the exclusion must be clearly drafted. Ambiguous wording will normally be construed against the party seeking to rely on it. The Teno shows that wording such as “without discount” may be insufficient to exclude the charterer’s right of set-off.

Incorrect Lawful Deductions from Ship Hire

If the charterer has a valid right to deduct, but later overestimates the amount, the shipowner may recover the excess. The more difficult question is whether the over-deduction gives the shipowner a right to withdraw the ship. The better view is that, where the deduction was made in good faith and based on a reasonable estimate, the shipowner should not be entitled to withdraw merely because the calculation was later found to be too high.

This approach protects the charterer where the right to deduct exists but the precise amount is uncertain. It also protects the shipowner by preserving the right to recover any over-deducted sum. The practical lesson is that the charterer should calculate deductions carefully, keep evidence, and avoid exaggerated or speculative claims.

Deductions from Freight and Ship Hire

Before paying freight or hire, a charterer may have suffered loss which the charterer believes was caused by the shipowner. The charterer may then consider deducting the claim from the payment due. This may appear commercially attractive because it places immediate financial pressure on the shipowner, but it can also create serious legal risk if the deduction is not permitted.

The rules governing deductions from freight and deductions from hire are different. Freight under a voyage charter is protected by a strict rule against deductions, while time charter hire may be subject to off-hire provisions, express deduction clauses, and equitable set-off in defined circumstances. A charterer should therefore avoid assuming that a deduction available under one type of charter will be available under another.

If a deduction is improper, the shipowner may enforce a lien over cargo where available, claim unpaid freight or hire, withdraw the ship under a time charter if the contract permits, or argue that the charterer’s conduct amounts to a repudiatory breach in serious cases. For this reason, deductions should be made only after careful legal and contractual analysis.

This discussion focuses mainly on equitable set-off. English law also recognizes other forms of set-off, including common law set-off, procedural set-off of mutual debts, abatement in limited contexts, and insolvency set-off. These other forms are often less relevant to ordinary charterparty hire and freight disputes.

1- Express Right to Deduct from Freight and Ship Hire

Charterparties often contain express provisions allowing deductions in specified circumstances. Such provisions are usually enforced according to their wording because they do not necessarily depend on breach of contract or damages. The parties have agreed in advance that certain sums may be deducted.

In a time charter, deduction may operate in two ways. First, the off-hire clause may state that hire does not accrue during certain periods. In this situation, the issue is not deduction from earned hire, but whether hire was earned at all. Secondly, the charterparty may provide that hire remains payable but certain items may be deducted, such as disbursements advanced for the shipowner’s account or specified expenses.

In voyage charters, express deduction rights are less common but may exist. For example, a voyage charter may allow deduction of despatch earned at the loading port from freight. If the contract clearly permits the deduction, the clause will normally be applied according to its wording.

When assessing whether an express deduction is valid, the following questions should be asked:

Does the deduction fall within the clause?
Has the relevant event or expense occurred?
Does the clause require notice, invoices, survey reports, or other evidence?
Is the deduction provisional or final?
Does the clause require agreement, certification, or third-party determination?

The Olympic Brilliance illustrates that a clause may make a particular calculation final if the wording is clear enough. In that case, the charterparty allowed freight deduction based on cargo discrepancy figures determined by customs authorities. The clause was treated as a final mechanism for calculating freight payable rather than a general damages set-off.

Once an express right to deduct is established, prior agreement by the shipowner is not usually required unless the clause says so. The Nanfri rejected the idea that a deduction clause should be read as requiring prior owner approval where that would destroy the practical value of the right.

2- Voyage Charters

Voyage charter freight is governed by a strict rule against deduction. If freight is properly earned and payable, the charterer generally cannot deduct damages claims from freight. This rule has been repeatedly confirmed by English law and is designed to protect the shipowner’s right to freight.

The Aries is a leading example. Charterers attempted to deduct from freight for cargo shortfall, but the House of Lords upheld the rule against deduction. The decision also considered the effect of time-barred cargo claims under the Hague Rules, which could not be used as a counterclaim or set-off.

The Cleon confirmed that even disputes arising from ship defects and additional freight charges did not allow set-off against freight. The Elena applied the same principle where the shipowner failed to provide the full guaranteed cargo space at the start of the charter.

The Dominique emphasized two further points. First, freight earned on shipment but payable later remains due even if the shipowner subsequently commits a repudiatory breach. Secondly, the rule against deduction applies even in serious breach situations, subject only to very narrow possible exceptions such as fraud.

The Khian Captain (No. 2) indicates that the rule may apply not only to damages claims but also to some liquidated claims or debts, such as overtime costs paid for the shipowner’s account. The overall position is strict: voyage charter freight should not be treated like time charter hire for deduction purposes.

3- Time Charters

A- Doctrine of Equitable Set-Off

The doctrine of equitable set-off developed separately from the rule against deductions from freight. Its purpose is to prevent unfairness where a payment claim and a closely connected cross-claim arise from the same contractual relationship. In time charters, this doctrine has particular relevance because hire is paid for the continuing use and service of the ship.

Earlier uncertainty existed over whether time charter hire should be treated like voyage charter freight, with no deduction allowed, or whether equitable set-off should apply. Seven Seas Transportation Limited v. Atlantic Shipping Co. S.A. suggested a stricter approach, but The Teno and The Nanfri supported the application of equitable set-off to time charter hire in appropriate cases. The Nanfri established that a charterer’s claim must be closely related to the transaction and must directly impeach the shipowner’s demand for hire.

B- Types of Claims for Set-Off

Equitable set-off in time charters is generally limited to claims where the shipowner’s breach directly affects the charterer’s use of the ship. Total deprivation of use is the clearest example. Partial impairment may also qualify if the breach prejudices the charterer’s ability to use the ship as contracted.

Claims unrelated to the use of the ship, such as cargo damage claims, generally do not qualify. The dividing line is not always simple, but the central question is whether the shipowner’s claim for hire is undermined because the charterer did not receive the use of the ship for which hire was payable.

C- Exercising the Right of Set-Off

A set-off is exercised by paying less than the full hire due. As a practical matter, charterers should notify shipowners of the deduction, explain the basis, provide supporting calculations, and preserve evidence. Clear communication reduces the risk of escalation and helps show that the deduction was made in good faith.

D- Consequences of Unjustified Deductions

If the deduction is unjustified because the claim is not of a type that gives rise to set-off, the charterer may be in breach and may face withdrawal or other remedies depending on the charterparty. If the claim is of a valid type but the amount is excessive, the consequences may be less severe if the deduction was made in good faith and reasonably calculated. In that case, the shipowner’s remedy is likely to be recovery of the excess.

E- Excluding the Right of Set-Off

The parties may agree to exclude equitable set-off, but clear wording is required. A phrase such as “without discount” is not necessarily enough. If the shipowner wishes to exclude deduction or set-off rights, the charterparty should say so expressly and unambiguously. Ambiguity is likely to be interpreted against the shipowner.

4- Procedural Considerations

Procedural strategy is important in deductions from freight and hire. If set-off is not allowed, the shipowner can seek immediate recovery of the unpaid amount and may consider contractual remedies. If the charterer has a claim that is subject to a shorter time bar than the shipowner’s hire or freight claim, the charterer must act quickly or risk losing the claim entirely.

Both parties should keep clear records, including hire statements, off-hire calculations, weather reports, logbooks, performance analyses, bunker data, invoices, port disbursement accounts, correspondence, and notices. In many disputes, the legal issue depends heavily on factual evidence and the accuracy of the calculation.

Deductions from ship hire sit at the intersection of charterparty wording, commercial accounting, and maritime law. A valid deduction protects the charterer from paying for a service not received. An invalid deduction may expose the charterer to withdrawal and damages. Careful drafting, accurate calculation, and timely communication are therefore essential for both shipowners and charterers.