Equitable Set-Off

Charterparties may incorporate rights for charterers to make a deduction from hire.

Where charterers can have a claim in damages, it may be possible to deduct it from hire if the charterer can prove that they have the right to make the deduction through equitable set-off.

Namely, Steamship informs that the English Court of Appeal in The Nanfri describes that the doctrine of equitable set-off could apply to the payment of hire under a time charterparty if:

  • The cross-claims arise as a result of the same transaction or closely connected with it;
  • Owners’ breach of charterparty had directly impeached on the Owner’s demand for hire. This would usually arise where the owners’ actions had deprived charterers of or prejudiced their use of the whole or part of the vessel.

If the right of equitable set-off is established, then charterers would not be in default for withholding sums.

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However, Courts have not yet established the exact scope of the application of the doctrine. There are several cases where the right to equitable set-off has been allowed, like in case of a breach of a speed and performance warranty, loss of time leading to the Master’s refusal to enter port, owners’ inability to make the whole cargo space of the ship available, and others.

Arbitration 7/19

In this case, the ship was chartered on a NYPE 1981 form as amended. The Recap amended Clause 54 and provided that:

… cl 54 – delete and replace with ‘chrtrs have no right to make any deductions from hire payments but in case an extraordinary matter such as attending to crew’s hospitalisation or survey work for owners account then owners will appoint their own agents or they will pay directly. chrts do not hve the right to deduct fm hire payment any amounts on alleged under performance, except undisputed off hire

Owners then started arbitration proceedings against Charterers for an alleged outstanding balance in their favour of US$237,719.07 and made two applications:

  1. The first for an immediate award in the sum of US$80,925.74. Owners argued that Charterers had issued a hire statement showing a balance of that amount in Owners’ favour.
  2. The second for an immediate payment of US$ 107,522.78. Owners’ second application was based on a deduction of US$85,266.08 in respect of three alleged off-hire events that had not been agreed and a deduction of US$24,388.35 that Owners were prepared to accept upon receipt of the supporting vouchers (which had not taken place to date).

Charterers claimed they had the right to an equitable set off against any sums as they had a counterclaim deriving from the refusal by the Owners to conduct a voyage from Russia to Morocco. They also highlighted that the 'Owners expenses' deductions were created from the bunkers consumed during the off-hire periods.

What is more, charterers claimed they had they right to withhold hire on the basis of clauses 15, 49, 57, 58 and 95, which allegedly allowed the non-payment of hire upon certain events taking place. Charterers then argued that clause 54 could not apply to these clauses as no hire was deducted but there had just been a suspension of hire.

Charterers also focused on clauses 88 (bunkers on delivery) and 89 (C/E/V), which presumably contemplated deductions.

On the other hand, Owners responded that Charterers’ claims for damages were time-barred and that Charterers were not able to prove the applicability of the off-hire clauses because they had not shown a loss of time.

Decision

The Tribunal decided that, while Charterers have in some cases the right to deduct sums from hire by way of equitable set-off, the parties had also the right to contractually agree to exclude such a right.

According to the Tribunal, clause 54 made clear that the parties had agreed to such an exclusion and as such Charterers did not have any right to make deductions by way of equitable set-off.

What is more, the Tribunal also decided that the prohibition could be qualified as clause 54 and allowed deductions for undisputed off-hire. Nonetheless, in this case Owners had contested the off-hire deductions.

The Tribunal dismissed Charterers’ argument that this matter did not fall within clause 54 as a 'suspension'of hire based on the fact it was a distinction without a difference as these sums amounted to a deduction.

Owners were successful and an award for sums deducted from hire was awarded to them.

Commenting on the decision, Steamship noted that:

When the Charterers have suffered a loss that has arisen as a result of Owners’ breach, Charterers might be tempted to deduct the damages suffered from next hire payment. However, outstanding hire due to a wrongful deduction by Charterers may in some circumstances entitle Owners to withdraw the ship or suspend service and, in some cases, might even allow the Owner to claim that the deduction amounts to a repudiatory breach of the entire contract