Freight Deductions
Freight Deductions in Charterparty Agreements
Deductions from Freight should only be made with explicit agreement in the Charter Party, such as:
- Address Commission (ADDCOM)
- Brokerage Commission
- Cash to Master (CTM)
Under English law, the concept of equitable set-off allows for deductions from payments under a contract. However, this rule does not extend to Freight, as established by The Aries (1977) case. In this case, concerning a cargo of oil, the charterer unilaterally deducted $30,000 from Freight for short delivery without the owner’s consent.
The Charterers, believing they had compensated for their loss, did not formally claim for the short delivery. Years later, the Shipowner initiated legal proceedings to recover the unpaid Freight. The charterers contended that standard set-off rules should apply, arguing against treating Freight as an exception.
The dispute escalated to the House of Lords, where the judgment supported the Shipowner, reinforcing that the long-standing rule regarding Freight should remain unchanged. Furthermore, it was determined that the 12-month time limit under the Hague Rules not only barred the remedy but also extinguished the claim, leaving no basis for set-off by the charterers. The ruling underscored the necessity for charterers to pay Freight as agreed and separately pursue claims for any losses.
Address Commission Considerations
Address Commission (ADDCOM) is typically negotiated in Charter Parties as a deductible from Freight. Some charterers justify the Address Commission as a cost to maintain their shipping departments, though there is no industry consensus on the standard rate for Address Commission (ADDCOM).
In dry cargo trades, Address Commissions can reach up to 5%, while in tanker trades, they are usually around 1.25% but can be higher. For instance, if a ship loads 32,000 mt of cargo at $100 per mt with a 2.5% Address Commission payable by the owners, the calculation would be:
Freight for 32,000 mt x $100 per mt = $3,200,000 Less 2.5% Address Commission = $80,000 Net Freight payable = $3,120,000
This arrangement is often seen as a discount by Shipowners to Charterers, sparking debate about the effectiveness of Address Commissions and whether they should be eliminated to reduce costs.
In chartering market reports, the focus is generally on the Headline Rate with little to no details on commission structures, implying that charterers not claiming Address Commission are unlikely to benefit from lower Freight rates.
Cargo Retention Clauses in Tanker Charterparty Forms
In Tanker Charterparty agreements, particularly for crude oil and dirty products with heavy or sediment-laden cargoes like sand, a Cargo Retention Clause is common. This clause allows Charterers to deduct from Freight an amount equivalent to the FOB value of any cargo remaining onboard at discharge completion, plus applicable Freight, provided the leftover cargo is liquid, pumpable, and accessible by the ship’s fixed pumps, as verified by an independent surveyor. This provision is applied without prejudice to any party’s rights or obligations.
Freight Deduction Clauses in Tanker Shipping
The above clause permits the Charterer to deduct from Freight an amount equivalent to the FOB value of the cargo at the port of loading plus the Freight due, provided the remaining cargo is liquid (excluding sediment), pumpable (meaning the pumps can handle the liquid’s viscosity), and reachable (i.e., the liquid cargo can access the vessel’s cargo pump, typically located at the starboard aft corner of the tank). While this may seem reasonable, there is often debate about how much of the cargo is liquid, pumpable, and reachable. Occasionally, the only available surveyor in a timely manner is employed by the receiving terminal or the Charterer, raising concerns about the surveyor’s independence.
Another clause often included in tanker charter parties is the In Transit Loss Clause, which allows the Charterer to deduct from Freight an amount for cargo losses exceeding a specified threshold. Here’s how it is typically structured:
A- In transit loss capped at 0.5% of the Bill of Lading (B/L) quantity. The loss is calculated from the gross volume at loading completion to the gross volume before discharge starts.
B- Should a shortage over 0.5% occur, the Charterer has the right to deduct from Freight the value of the excess loss.
Notably, the industry standard loss for bulk liquid transport is 0.3%, making a 0.5% allowance relatively generous.
The term ‘Gross’ volume measures the ullage, the distance from the liquid’s surface to the top of the tank, which does not distinguish between different components of the liquid, such as gas, water, and sediment. During transit, the ship’s movements and vibrations cause separation of oil and water; the resultant volume of oil is termed ‘net’ volume. Thus, owners and operators are hesitant to agree to compare ‘gross’ volume post-loading with ‘net’ volume pre-discharge.
In both tanker and dry cargo charters, Clauses frequently address the Insurance Premium Payable by Charterers, if they own the cargo, for loading onto vessels of specific age, class, flag, or ownership as follows: EXTRA INSURANCE ON CARGO – Any additional insurance costs due to the Vessel’s age, class, flag, or ownership are to be covered by the Shipowners up to a specified maximum and may be deducted from Freight at the Charterer’s discretion.
The Charterers must provide proof of payment for such deductions. This clause aims to level the playing field between newer and older ships. For instance, if a 3-year-old ship and a 15-year-old ship both charge $40, the Charterer is aware that any extra costs associated with the older ship are covered by the Shipowners.
However, Shipowners may be apprehensive about this clause because they lack control over the insurance premiums and are unaware of the insured value of the cargo. Concerns might be mitigated by setting a cap, such as $5,000, which can be accounted for in the voyage estimate and hopefully in the agreed Freight.
It’s important to note that if the cargo is sold, the Bill of Lading (B/L) Holder has the right to claim against the owner for short delivery under the Bill of Lading’s contract of carriage, potentially leading to dual claims for the same loss. Thus, it is prudent to ensure that the Voyage Charter includes a detailed Freight Payment Clause covering the payment method (e.g., Telegraphic Transfer to the Shipowner’s designated bank, not by Cheque in the Post) and specifying the owner’s bank details to minimize the risk of fraud.
All topics discussed in this module aim to highlight potential issues to watch for when reviewing the charterparty. Remember: Always Read the Charter Party Thoroughly.
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