Charterer may be entitled to an overall adjustment of hire for a variety of reasons including, interalia, advances for disbursements made on the shipowner’s behalf, deductions for off-hire periods, allowances for speed deficiency or other failure of the vessel to meet charter specifications, or compensation for damage to cargo.
In such circumstances most charterers prefer self-help in the form of making appropriate deductions from future payments of hire rather than the danger of running the risk of having to collect an arbitration award from an insolvent owner, or from a single ship-owning company with its head office in a distant country.
Conversely, shipowners resist an interruption to their cash flow. Certain charters make express provision for the charterer to make deductions from future payments of hire for disbursements made on the owners’ behalf or for periods of off-hire. Some charters do not allow deductions in the event of a disputed claim, while others suspend the obligation to pay instalments of hire which fall due at a time when the vessel is off-hire. Where no express right to deduct is given in the charter, British courts have been reluctant to allow self-help. It has long been established that a claim in respect of cargo cannot be asserted by way of deduction from freight, and the initial reaction of the courts was to extend a similar rule to deductions from hire.
So Donaldson J in Seven Seas Transportation v Atlantic Shipping held that there was no general equitable right of set-off for time lost under an off-hire clause. In his view, arguments against the existence of such a right to deduct centred on the problem which would result should the shipowner deny liability or dispute the amount of the claim. Any exercise of a right to deduct in such circumstances would involve the risk of the vessel being withdrawn for non-payment of hire, should the claim later prove to be unjustified in whole or in part. A radically different approach, however, was advocated by Parker J in The Teno who expressed the opinion that ‘it would be grossly unjust to allow an owner to recover hire in respect of a period during which he had, in breach of contract, failed to provide that for which the hire was payable’. Accordingly, he favoured the existence of an equitable right of set-off under which the charterer was entitled to make deductions from future payments of hire to cover disbursements made on the owner’s behalf and to cover periods while the vessel was off-hire due to a breakdown of machinery. Moreover, he held that the right of set-off extended not only to total but also to partial withdrawal of the use of the ship.
These conflicting views were considered by the Court of Appeal in The Nanfri where the charterers had made a deduction in paying an installment of hire for an earlier alleged loss of speed by the chartered vessel. In the view of Lord Denning MR, the line of authority holding that deductions from freight were not permissible was not applicable to payment of hire under a time charter. ‘So different are the two concepts that I do not think the law as to “freight” can be applied indiscriminately to “hire”.’ A clear distinction had to be drawn between a defensive right of set-off, and a cross-claim or counter claim. For ‘it is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it. And it is only cross-claims which go directly to impeach the plaintiff’s (claimant’s) demand, that is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim.’
Accordingly, on the facts of the case under review, Lord Denning was of the opinion that ‘if the shipowner wrongly and in breach of contract deprives the charterer for a time of the use of the vessel, the charterer can deduct a sum equivalent to the hire for the time so lost’.
While this decision has not yet been reviewed by the House of Lords, the members of which have recently tended to apply an increasingly strict interpretation to charter clauses, its underlying philosophy has been endorsed by the lower courts. In the view of Mocatta J the decision is more in accord with what commercial considerations demand. Nevertheless, the operation of the set-off is limited to claims ‘which go directly to impeach the plaintiff ’s (claimant’s) demand’ for hire and the better view is that it does not extend to claims for cargo damage, or to other claims which do not involve loss of use of the vessel. Nor is the charterer entitled to deduct for claims in excess of the amount of hire otherwise payable for the period during which the required services were not provided.
A charterer is also not permitted to make deductions from hire in advance for prospective periods of off-hire. So in The Li Hai, at the time a particular installment of hire fell due, the vessel was scheduled for a routine drydocking which was estimated to take about eight days. In refusing to allow a deduction in advance, the trial judge commented that ‘ The question is really one of cashflow, are the potential overpayments resolved in advance on the basis of some estimate or in arrears on the basis of actual events? To allow deduction for anticipated off- hire, would be bound to introduce an element of uncertainty and lead to disputes.’
Where deductions are permissible, however, the courts have recognized that it would be unreason, able to expose the charterer to the risk of withdrawal of the vessel should he make a marginal error in calculating the precise amount to be deducted. All that is required is a reasonable assessment made in good faith . . . Then the actual figures can be ascertained later: either by agreement between the parties or, failing agreement, by arbitration . . . If it subsequently turns out that he has deducted too much, the shipowner can of course recover the balance. But that is all.’ To hold otherwise would render valueless the express right to deduct conferred by many off-hire clauses.