Time Charters. Withdrawal for underpayment and express right of set-off

The express right of set-off is normally only given in circumstances in which the shipowner can easily and simply check the facts.
Per Mr. Justice Donaldson in Seven Seas Transportation Ltd. v Atlantic Shipping Company S.A. [1975] 2 Lloyd’s Rep 188

Withdrawal versus express right to deduct from hire

The charterers have a right to deduct from the hire on the basis of equitable set off. But for such the deductions to be permissible it is essential that the estimates of the amounts of each of them were reasonable. To satisfy this test the deductions should be calculated on a reasonable basis in good faith and with detailed justifications.

… if the shipowner has been guilty of some other wrongful conduct which has deprived the charterer of the use of the ship during some days - or prejudiced the charterer in the use of the ship - then the charterer should in fairness be able to recoup himself by making a deduction from the next month’s hire. If the charterer quantifies his loss by a reasonable assessment made in good faith - and deducts the sum quantified - then he is not in default. The shipowner cannot withdraw his vessel on account of non-payment of hire nor hold him guilty at that point of any breach of contract. If it subsequently turns out that he has deducted too much, the shipowner can of course recover the balance. But that is all.
Per Lord Denning MR in The Nanfri [1978] 2 Lloyd’s Rep 132 at pp.140

This view was followed by Mocatta J. in The Chrysovalandou Dyo [1981] 1 Lloyd’s Rep. 159, where he said at p.164:

The time charter contains a withdrawal clause applying in the event of failure to pay punctual and regular payment of hire, the stringency of which is only lessened by the notice provision of cl. 33. At the same time it permits by cl. 35 the charterers to deduct owners’ disbursements from hire against presentation of vouchers or telexed breakdown of estimated disbursements and cl. 56 dealing with deductions from hire in respect of the speed warranty. These two entitlements would be of little value, if, despite being made reasonably and in good faith, they could not be relied upon if by error they were too large.

It is for the charterers to prove that their calculations were correct. As Bingham, J. said in The Lutetian [1982] 2 Lloyd’s Rep.140 at 154:

The duty of calculating the sum due rested on the charterers. They either calculated correctly or incorrectly. If they calculated correctly, the charterers must succeed, but not on this ground. If they calculated incorrectly, they cannot rely on their own legal error to escape the contractual consequences.

If deductions appear to be either unreasonable or unjustified or miscalculated, then withdrawal clause will operate with the same vigour as in events when monthly hire payment had been delayed or not paid at all.

If the owners are considering withdrawing the vessel for deduction from the hire, which was in their view impermissible, they are entitled to a reasonable time to ascertain whether the amounts comprising the deduction were correct, before deciding to exercise a right of withdrawal which would accrue to them only if the deductions were wrong.

Underpayment even of relatively small sum will not, for the sake of certainty, reduce the effect of invocation of withdrawal clause by the owners, as Lord Bridge of Harwich stressed in A/S Awilco v Fulvia SpA di Navigazione (The Chikuma) [1981] 1 All ER 652 at p.658 referring to judgement of Lord Wright in the House of Lords in Tankexpress A/S v Compagnie Financière Belge des Petroles SA [1948] 2 All ER 939 in which His Lordship stigmatized earlier authority as erroneous in law:

A dictum or decision of BIGHAM, J., in Nova Scotia Steel Co. v. Sutherland Steam Shipping Co., has been relied on as an authority that a certain latitude was permissible so that payment made two days after the due date did not constitute a default in payment, but I cannot agree that so drastic a departure from the specific words of the charter can be supported. In that case the clause provided for regular and punctual payment. These adjectives, however, add nothing to the stringency of the simple and unqualified language in the charter before this House. I think that so much of BIGHAM, J.’s, judgment as conceded a latitude as to the date of payment is erroneous in law and should be overruled. The importance of this advance payment to be made by the charterers, is that it is the substance of the consideration given to the shipowner for the use and service of the ship and crew which the shipowner agrees to give. He is entitled to have the periodical payment as stipulated in advance of his performance so long as the charterparty continues. Hence the stringency of his right to cancel.

The underpaid sum at issue in The Chikuma [1981] 1 All ER 652 was a "trifling bank charge" of $70 or $100, what can be viewed as indication that unless de minimis principle can ever be successfully applied to claim for underpaid hire, the monetary value of unjustified reduction itself, however small, would not probably qualify the owners’ right of withdrawal.

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