Contractual Limits on Charterers’ Right to Deduct Hire: Recent Guidance from London Arbitrations 27 July 2026

Two recent London arbitration awards provide a timely reminder that a charterer’s ability to withhold or deduct hire ultimately depends on the contractual framework agreed between the parties. Whilst the disputes arose in different factual contexts, in both cases the tribunals emphasised the importance of giving effect to the parties’ agreed allocation of risk, even where charterers asserted potentially arguable performance-related claims.

Letter of undertaking defeats charterers’ hire deductions

The first award (11/26 – (2026) 1215 LMLN 3) highlights the importance of carefully considering the interaction between standard charterparty provisions and bespoke agreements entered into during a voyage.

The dispute arose under a time charter on an amended NYPE 1993 form. During the fixture, the charterers requested that certain cargo be carried on deck. In response, the parties agreed a letter of undertaking (“LOU”) addressing the risks and operational consequences associated with that carriage.

When the voyage was completed, the charterers withheld and deducted various sums from hire, principally relying on allegations of underperformance and off-hire. The owners contended that such deductions were incompatible with the parties’ agreement as reflected in the LOU. The tribunal ultimately found in favour of the owners.

The contractual status of the LOU

The central issue was whether the LOU merely provided ancillary protection for the owners, or if it altered the parties’ contractual rights and obligations under the charterparty.

The owners’ case was that the LOU did more than simply record the parties’ understanding of the risks involved in carrying the deck cargo. Rather, it modified the contractual position by qualifying the charterers’ ability to rely on performance-related remedies where any reduction in performance resulted from operational measures reasonably required for the safe carriage of that cargo. On that basis, the owners considered themselves entitled to protection from the financial consequences of such measures.

The charterers, by contrast, argued that the LOU did not alter the parties’ substantive rights and obligations under the charterparty. In particular, they maintained that it did not affect their existing rights to place the vessel off-hire or make deductions from hire where the vessel failed to meet the contractual performance requirements.

The tribunal rejected the charterers’ characterisation of the document. Considering the commercial context, the tribunal held that the LOU formed part of the contractual framework governing the voyage. It was intended to supplement the charterparty and address the consequences of the charterers’ request that the owners undertake a particular form of cargo carriage.

Importantly, however, the tribunal did not regard the LOU as entirely eliminating the charterers’ contractual protections. Rather, it qualified the exercise of those rights where any loss of performance resulted from operational measures reasonably connected with the agreed cargo arrangement. The tribunal considered that this interpretation best reflected the commercial purpose of the agreement. To conclude otherwise would leave owners exposed to performance-based deductions arising from operational consequences that the parties had specifically anticipated when agreeing the LOU.

Performance claims and hire deductions

The charterers relied primarily on allegations of reduced performance and off-hire, seeking to justify deductions by reference to the charterparty’s off-hire regime. Evidence included the master’s reports and weather-routing material intended to demonstrate that the vessel had failed to achieve the warranted level of performance.

The tribunal considered that, even if some reduction in performance could be established, that was not sufficient. The key question was whether the charterers could demonstrate an entitlement to deduct hire in circumstances falling outside the protection afforded by the LOU.

On the evidence before it, they could not. The tribunal was not persuaded that the charterers had established any relevant crew default, qualifying breakdown or other circumstance capable of placing the vessel off-hire independently of the operational consequences contemplated by the LOU.

As a result, the charterers were found not to have been entitled to place the vessel off-hire, withhold hire or recover the amount they alleged had been overpaid.

An Express Prohibition on Hire Deductions

A similar outcome was reached in the second arbitral award (10/26 – (2026) 1215 LMLN), although in a much more straightforward contractual context. The dispute arose under a time charter containing a clause which stated: “No Hire deductions for alleged underperformance claims.” Despite that provision, the charterers withheld approximately US$146,000 from hire, relying on allegations relating to the vessel’s performance. The owners subsequently sought a partial final award for the unpaid hire.

In resisting the application, the charterers relied on SL Sethia Liners Ltd v Naviagro Marine Corporation (The Kostas Melas) [1981] 1 Lloyd’s Rep. 18, arguing that the tribunal should consider the reasonableness and bona fides of their underlying claim. While that case is commonly cited for the proposition that a party seeking to rely on a cross-claim must ordinarily be able to demonstrate a prima facie claim advanced in good faith and on reasonable grounds, the tribunal considered it of no relevance in the circumstances. The issue before it was not whether the charterers might ultimately have a valid underperformance claim, but whether they were contractually entitled to withhold hire pending determination of that claim.