Deck Cargo, Letters Of Undertaking And Charterparty Rights: Can Operational Adjustments Defeat Underperformance Deductions

The London Arbitration 11/26 concerned a dispute arising under a one-trip charter on the NYPE 1993 form. The central issue was whether a Letter of Undertaking provided in connection with the carriage of deck cargo varied or qualified the parties’ rights and obligations under the charterparty.

What Happened in London Arbitration 11/26?

The Owners commenced arbitration following deductions made by the Charterers from hire in the amount of US$52,459.33. That claim was reduced to US$50,000 to enable the Owners to proceed under the LMAA Small Claims Procedure. The Charterers denied liability and counterclaimed US$691.01 for alleged overpaid hire.

In the course of the charter, the Charterers requested the carriage of deck cargo. The Owners required a Letter of Undertaking (“LoU”), which they alleged was requested to address the operational steps necessary for the safe carriage and preservation of that cargo. The Charterers provided the LoU.

The Owners argued that the LoU either varied or qualified the charterparty by noting that the vessel’s speed and performance could be affected by the deck cargo, and that a reduction in speed might reasonably be required in the interests of safety and cargo preservation. On that basis, they claimed the deducted hire together with extra war risk insurance, communications, victuals and entertainment charges.

The Charterers maintained that the LoU did not affect their rights under the charterparty in respect of underperformance, off-hire or deductions from hire. They characterised the LoU as collateral or security in nature only and pursued their counterclaim.

Tribunal’s Decision on the Legal Effect of the LoU

The Tribunal held that the LoU supplemented and qualified the parties’ rights under the charterparty in the circumstances contemplated by them.

Importantly, the LoU did not displace the Charterers’ rights in relation to performance or deductions from hire. However, it did recognise that adjustments to speed and other operational parameters might be necessary to ensure the safe delivery of the deck cargo.

Accordingly, the LoU qualified the Charterers’ rights where the alleged underperformance resulted from operational measures taken to manage risks associated with the deck cargo.

The Tribunal considered that accepting the Charterers’ position would leave the Owners exposed to performance deductions notwithstanding that the cargo arrangement had been requested by the Charterers and that the operational consequences of that arrangement had been catered for by the LoU.

The Tribunal also found that the Charterers had failed to demonstrate, by reference to the noon reports and the weather routing company’s report, that the alleged underperformance fell outside the matters contemplated by the LoU. As a result, the Charterers were not contractually entitled to withhold hire, place the vessel off-hire, or recover US$691.01 in alleged overpaid hire.

The Tribunal awarded the Owners US$50,000, together with interest, and dismissed the Charterers’ counterclaim.

Conclusion

This decision is important because it illustrates that a LoU may have practical contractual consequences even when it does not alter the charterparty. For law firm clients involved in voyage planning, charterparty negotiations or cargo operations, the case highlights the need to draft LoUs with precision and to consider carefully how operational risks, performance warranties and hire deductions interact when non-standard cargo arrangements are agreed.

FAQs

What is a Letter of Undertaking in shipping law?

A Letter of Undertaking (LoU) is a document commonly used in the shipping industry to provide assurances or allocate responsibility for particular risks. Depending on its wording, an LoU may influence how contractual rights and obligations operate alongside a charterparty, particularly where special cargo arrangements are involved.

When can charterers deduct hire for vessel underperformance?

Whether charterers are entitled to deduct hire depends on the terms of the charterparty and the facts of the case. In London Arbitration 11/26, the tribunal found that the charterers were not entitled to make deductions because the alleged underperformance arose from operational measures contemplated by the parties’ Letter of Undertaking relating to deck cargo