- Introduction
Underperformance claims commonly arise where a vessel is alleged to have failed to meet the speed or bunker consumption warranties agreed under a time charterparty. However, even where Charterers have a substantive performance claim, this does not necessarily entitle them to deduct the alleged loss from hire.
London Arbitration 10/26 addresses this issue directly. The tribunal held that an express prohibition on deductions for alleged underperformance claims required the Charterers to pay the withheld hire, while leaving the merits of the underlying performance claim to be determined separately.
- Background
The dispute arose under an amended New York Produce Exchange (“NYPE”) time charterparty for a single trip. Following the voyage, the Charterers alleged that the Vessel had underperformed and consumed bunkers in excess of the contractual warranties and deducted USD 146,095 from hire. The Charterparty, however, expressly provided that “No Hire deductions for alleged underperformance claims.”
The dispute therefore also concerned the effect of this express anti-deduction wording on the Charterers’ right to withhold hire. The Owners sought a partial final award for the withheld hire, leaving the underlying performance claim to be determined separately. The issue before the tribunal was whether the Charterers could rely on their underperformance crossclaim to withhold hire despite that express prohibition.
- Underperformance Claims and the Right to Deduct
Assessing an underperformance claim may require detailed technical consideration of matters including speed and bunker consumption data, weather conditions, vessel condition, routing and hull fouling. London Arbitration 10/26 demonstrates, however, that before turning to those technical issues, the Charterparty must first be examined to determine whether the alleged claim may be deducted from hire.
The existence of an underperformance claim does not, by itself, entitle Charterers to deduct the corresponding amount from hire. Where an express anti-deduction clause applies, it may prevent the claimed amount from being deducted from hire pending determination of the underlying performance dispute. In London Arbitration 10/26, the tribunal construed “underperformance” broadly, covering not only conventional speed claims but also excessive bunker consumption and other alleged failures to perform in accordance with the Charterparty.
The Charterers’ reliance on The Kostas Melas did not alter that conclusion. Although they relied on a bona fide crossclaim, the tribunal held that the express anti-deduction wording prevailed. It therefore did not determine at that stage whether the complaints concerning the Vessel’s delivery condition, weather reporting or possible hull fouling were well founded. Those matters remained open for separate determination, but did not entitle the Charterers to withhold hire.
- Legal and Practical Implications
For Charterers, a credible underperformance claim does not necessarily justify withholding hire. The Charterparty must also permit the relevant deduction. For Owners, an appropriately drafted anti-deduction clause may preserve hire cash flow and allow recovery of withheld sums without awaiting determination of technically complex performance issues. The scope of any anti-deduction wording should therefore be considered carefully when negotiating the Charterparty.
The award also shows that Owners should act promptly. Although the Owners recovered the withheld hire together with interest and costs, the tribunal reduced the applicable interest rate because of the delay in seeking the partial final award.
- Conclusion
London Arbitration 10/26 confirms that an underperformance claim and the right to deduct that claim from hire are separate contractual questions. Where the Charterparty expressly prohibits deductions for underperformance, the position is effectively “pay now, argue later”: hire must be paid first, while the substantive performance claim is pursued separately.