Pay Now, Argue Later – London Arbitration Award Considers Underperformance Claims and Deductions from Hire

Underperformance disputes are among the most common sources of disagreement under time charters. Allegations that a ship has failed to achieve the warranted speed or has consumed bunkers in excess of contractual warranties frequently give rise to substantial claims, often before the parties have had an opportunity to investigate the underlying facts properly.

In those circumstances, a charterer may be tempted to recover its alleged losses immediately by deducting them from hire. Whether it is entitled to do so, however, depends not only upon the nature of its claim but, more fundamentally, upon the terms of the charterparty.

A recent London arbitration (London Arbitration 10/26) provides a useful reminder that carefully drafted anti-deduction clauses may fundamentally alter the parties' respective rights and obligations.

The dispute

The dispute arose in relation to one time charter trip under an amended NYPE form charterparty which contained a short but significant provision: “No Hire deductions for alleged underperformance claims.”

The charterer nevertheless deducted approximately US$146,000 from hire, alleging that the ship had underperformed and consumed excessive bunkers. The owner commenced arbitration and, rather than waiting for the substantive dispute to be determined, sought a partial final award requiring the charterer to pay the deducted hire.

The tribunal’s decision

The tribunal held that the charterer had acted in breach of the charterparty.

It concluded that the deductions had plainly been made in respect of alleged underperformance claims and therefore fell squarely within the contractual prohibition. Whether the charterer ultimately proved to be right about the ship’s performance was irrelevant to the application before the tribunal: the parties had expressly agreed that such claims should not be pursued by withholding hire.

Accordingly, the owner was entitled to immediate payment of the deducted hire, leaving the substantive underperformance dispute to be determined separately.

i) Start with the charterparty

The charterer relied upon the well-known decision in The Kostas Melas ([1981] 1 Lloyd's Rep. 18) arguing that it was entitled to deduct hire because it had a genuine crossclaim. The tribunal considered that decision did not assist the charterer because, unlike The Kostas Melas, the parties had expressly agreed that no deductions could be made in respect of underperformance claims.

The award therefore serves as a useful reminder that the starting point should always be the charterparty itself. The scope for relying upon the general law concerning deductions from hire may be significantly restricted—or excluded altogether—by express contractual wording.

ii) What is an “underperformance” claim?

The tribunal also adopted a broad interpretation of the expression "underperformance". It was not limited to conventional speed warranty disputes. Rather, it encompassed claims that the ship had failed to perform in accordance with the charterparty, including allegations relating to bunker consumption and other aspects of contractual performance.

Members negotiating bespoke charterparty wording should therefore consider carefully how anti-deduction clauses are drafted and whether the intended scope is sufficiently clear.

iii) The merits could wait

One of the more interesting aspects of the award is what the tribunal deliberately declined to decide. The charterer had advanced a number of substantive complaints concerning the ship's delivery condition, accuracy of weather reporting and possible hull fouling.

The tribunal recognised that those allegations might ultimately prove to have merit. However, those issues were irrelevant to the immediate application.

The question before the tribunal was not whether the ship had underperformed. It was whether the charterer was contractually entitled to withhold hire pending determination of that dispute. As the charterparty expressly prohibited such deductions, the owner was entitled to payment regardless of the eventual outcome of the underlying performance claim.

The award therefore illustrates that the contractual obligation to pay hire and the ultimate liability for an underperformance claim are separate questions, even though they arise out of the same underlying facts.

iv) Interest

Although owners succeeded, the tribunal awarded interest at a reduced rate because the owner had delayed for more than two years before seeking the partial final award. The decision provides a useful reminder that even where a party enjoys a strong contractual position, unnecessary procedural delay may still carry financial consequences.

Commentary

The award highlights a number of practical points which Members may wish to bear in mind when dealing with underperformance disputes.

The existence of an underperformance claim does not necessarily mean that hire can be withheld. Therefore, it is advisable to review the charterparty before considering the merits. Where an anti-deduction clause has been agreed, the immediate question may not be whether the claim is well founded, but whether the contract permits hire to be withheld pending its determination.

Equally, owners faced with deductions should consider at an early stage whether the wording of the charterparty allows them to seek a partial final award rather than waiting for the substantive dispute to be resolved.

Where an effective anti-deduction clause exists, such an application may provide an efficient means of restoring cash flow while leaving the substantive underperformance dispute to proceed in the ordinary course. Conversely, charterers should recognise that withholding hire contrary to an express contractual prohibition may expose them not only to an early payment order but also to liability for interest and costs.

The drafting of anti-deduction clauses deserves careful attention. A relatively short clause may determine not only who holds the money while the dispute is ongoing, but also the parties' procedural options, their exposure to interest and costs, and ultimately their commercial leverage.

Conclusion

Underperformance disputes often require detailed technical evidence concerning weather, ship condition, routing, hull fouling and bunker consumption. Those issues may take many months to resolve.

London Arbitration 10/26 demonstrates that the parties' contractual obligations during that period may be considerably simpler. Where the charterparty expressly prohibits deductions from hire for underperformance claims, tribunals applying English law are likely to enforce that bargain according to its terms, leaving the substantive dispute to be resolved separately.

For Members, the practical message is straightforward: before withholding hire—or advising that hire may properly be withheld—it is essential to examine the charterparty carefully. A short anti-deduction clause may determine not only who retains the cash during the dispute, but also the parties' procedural options, their exposure to interest and costs, and ultimately their commercial bargaining position.

If Members have any questions in relation to the above issues they are invited to contact the Club for further information.