In the current market the Club is often asked to advise on owners’ rights and remedies should charterers stop paying hire. This article highlights some of the issues to be borne in mind when considering the options open to owners in the event of default. It is not a substitute for seeking advice from the Club under your FDD cover.
Payment of hire is a contractual obligation, the non-payment of which will put charterers in breach of charter. The first question that needs to be looked at is whether hire is actually due and outstanding. And, if so, how much?
Are Charterers in default?
Charterers cannot be in default of payment until after midnight on the due date for payment - see The “Afovos” [1983.] Payment means receipt of cleared funds which means attention must be given to where payment is to be received. Legal complications may also arise when payment is due on a weekend. The preferred answer is that if a full instalment, i.e 15 days, is due on a weekend, payment must be made on the last working day before the weekend: The “Zographia M” [1976].
What if the vessel is off-hire when payment is due? The “Leutetian” [1982] is support for the proposition that hire need not be paid on the due date if the vessel is off-hire on that date.
What if hire has been paid, but in a lesser amount than owners believe is due. Consideration must be given to whether charterers have made a bona fide and reasonable deduction from hire. For example, is there an express right to make a deduction or adjustment for an off-hire event, or is there an express right to deduct agreed claims?
Charterers may have made a deduction for a damages claim of their own purporting to rely on the doctrine of equitable set-off. Whilst the general rule is that charterers are not entitled to set-off claims for damages, they may do where owners’ breach of charter has deprived charterers of the use of the ship and the claim “arises out of the same transaction or are closely connected with it” as per Lord Denning in The “Nanfri” [1978].
What does that default mean?
Most owners are surprised to learn that mere non-payment of hire, even on more than one occasion, may not be legally considered a repudiatory breach of charter such as to entitle owners to treat the charter as at an end: The “Brimnes” [1972].
Payment of hire is rarely a condition of the charter and to demonstrate repudiatory breach, owners must also show that charterers have “evinced an intention not to be bound” by the terms of the charter. This can be very difficult to show, particularly if charterers are corresponding with owners openly confessing to financial difficulties and offering ways to resolve the impasse and continue the charter. A failure to give orders to the vessel, for example, coupled with the failure to pay hire may go towards showing such a repudiatory breach.
Where hire is simply not paid owners must beware of holding charterers in repudiatory breach and declaring the charter at an end. Such conduct may itself be repudiatory and charterers would be at liberty themselves to accept owners’ conduct in declaring the charter at an end as repudiatory in order to (i) bring the charter to an end and (ii) claim damages for their losses. It may be that charterers have no losses, as dependent on the length of the charter and the state of the market, charterers may in fact be losing money on the fixture, but where that is the case owners would have given charterers the opportunity of bringing the charter to an end.
The charter may, however, give owners express remedies in the event of non-payment of hire and two such examples are the right to withhold services and the right to withdraw.
Withholding service
There is no automatic right to withhold services in the event of non-payment of hire. Where there is a contractual right to withhold services owners should beware of breaching their obligations under any contract of carriage if they stop the vessel en route to the discharge port.
The BIMCO Non-Payment of Hire Clause expressly gives owners the right to suspend services if they so choose, from midnight on the due date for hire. Formal notice is not required in advance but charterers must be advised that performance has been so suspended. The clause provides for the vessel to remain on hire during such period of suspension. The NYPE 1993 proforma charter gives a similar right to withhold services with hire to continue to accrue, but only after expiry of a grace period.
Both of these clauses provide that charterers are to indemnify owners for any liabilities that accrue to owners as a result of the withholding of services, e.g. towards receivers under a contract of carriage. Whilst in theory a comfort, it is probable that owners will be liable to cargo receivers in the first instance and if charterers have not paid hire they may have similar difficulties honouring any indemnities.
Anti-Technicality Notices
Where the charterparty incorporates the requirement for such a notice, the giving of it is a condition precedent to the contractual right to withdraw. Such notice cannot be given until after the actual due time/date, as discussed above. Notices come in various forms with potentially differing requirements.
There is a plethora of authority as to the strict requirements for giving such notices and the form they must take. The notice must require payment within the contractual period provided for in the charter and must clearly and unequivocally state that if the notice is not complied with, the vessel WILL be withdrawn. A notice that threatens withdrawal will not be an effective one.
Further, if owners have previously accepted late payments without sufficient protest, they may be found to have waived the right to punctual payment (again this will depend on the form of notice incorporated as, for example, the BIMCO Non-Payment of Hire Clause expressly addresses this issue.) A further notice may be required in that situation to reassert the need for strict compliance before an anti-technicality notice can be given. Further, whilst owners would be allowed a reasonable period of time to consider rights following non-payment, an anti-technicality notice must be given within a reasonable period of time.
An owner that had not served an anti-technicality notice in a reasonable time period may be held to have waived the right to do so and thus lose the subsequent right to withdraw.
Withdrawal
If charterers have not made payment under the terms of the anti-technicality notice owners can then give notice of withdrawal. It is recommended that owners do so promptly to avoid any suggestion that the right to withdraw has been waived. A reasonable period of time would still be allowed to owners, for example to check whether payment had been received by their bank. As per Lord Wilberforce in the “Laconia” [1977]:
“What is a reasonable time…depends on the circumstances. In some, indeed many cases, it will be a short time-viz the shortest time reasonably necessary to enable the shipowner to hear of the default and issue instructions.”
A notice that the vessel has been withdrawn takes effect at the time received by the charterers and brings the charter to a complete end. It does not have a temporary suspensive effect. It is therefore a draconian measure that the courts are at pains to ensure must be exercised correctly.
If hire is earned, or other sums are due, at the time of withdrawal, owners have a right to claim those monies. However, as the law currently stands, absent a repudiatory breach (and the mere non-payment of hire is not likely to be a repudiatory breach) there is no right to claim damages at large. If the charter rate of hire is at variance with the current market rate, this means the owners’ loss subsequent to withdrawal may be significant and one that is not capable of being claimed as damages against charterers. As such there is some degree of tension when considering whether to withdraw: forego a claim for damages or (at least until charterers conduct does evidence an intention no longer to be bound by the charter) continue a charter when hire is not being paid and might never be recovered.
Often the most important consideration for owners is whether the vessel is laden at the time of withdrawal. Withdrawal will not release owners from pre-existing obligations to cargo interests as carrier under a bill of lading or potentially otherwise as bailee. The “Kos” [2010] reiterates the position that recovery of compensation from charterers for the time and expense involved in such obligations would not be automatic. However this is to be contrasted with a recent arbitration award where a tribunal awarded owners hire and bunkers for completing their obligations under the bill of lading on a quantum meruit basis on the grounds that the requirements set out by Goff J in the The “Tropwind (No2)” [1981] had been met. In that case charterers had expressly asked owners to complete the voyage and discharge the cargo at a time when charterers were already in breach of charter and owners had not yet withdrawn the vessel.
It should also be noted that a charter term that gives owners the right to withdraw for “any breach” of charter is likely to be interpreted by the courts as only applicable to repudiatory breaches of the charterparty. As non-payment of hire is not, of itself, a repudiatory breach, the right to withdraw will not exist unless it is expressly said to arise in the event of non-payment of hire.
What if charterers are in repudiatory breach?
Measure of loss
The measure of damages for repudiatory breach of contract is to put owners, in so far as money can do it, in the same position as if the charterparty had been performed, “Robinson v Harman” [1848]. The starting point is, therefore, the amount owners would have earned had the charterparty been performed.
It is generally straightforward to calculate the sum which owners would have earned had the charterparty been performed. For a time charter, the basic calculation is hire multiplied by the outstanding period of the charterparty plus other sums payable under the charterparty as at the date of termination. If any period of the unperformed charterparty is after the date of an assessment of damages, that part of the damages will be reduced for accelerated receipt. Damages will be based on the minimum obligation of the charterers. Thus, where the redelivery date has a tolerance within charterers’ option, the earliest redelivery date will be taken in assessing the charterparty period to be claimed for.
Further, if at the time damages are assessed events have occurred which mean that the charterparty would have been terminated early in any event, this will be taken into account and damages awarded for the shorter charterparty period, The “Golden Victory” [2007]
Duty to Mitigate
Owners will not be able to recover damages for any loss which they could have avoided by taking reasonable steps in mitigation (usually by re-chartering the vessel.) There is a general rule that if at termination there is an available market on which owners could promptly have re-chartered the vessel for the balance of the charter period on terms similar to the original charterparty (“the available market”), the amount which would have been earned under such a replacement fixture is considered as representing the owners’ position at termination.
The general position is that in order to mitigate its loss, the reasonable step for the wronged party is to enter the market and obtain a replacement for that which has been lost, The “Elena D’amico” [1980].
The general rule is inapplicable if there is no available market at the time of termination. In those circumstances, account will be taken of the actual sums earned by owners in consequence of steps taken to mitigate their loss. Account will also be taken of any other benefit which is gained (or cost incurred) in consequence of the steps taken in mitigation.
The reasonableness or otherwise of steps taken (or not taken) in mitigation is to be assessed at the time of termination; that is, at a time when owners would not have the benefit of knowing which way the market would move. It is therefore inappropriate for the tribunal to consider the reasonableness of owners’ actions for the purpose of mitigation with the benefit of hindsight.
The burden of proving that owners ought to have taken certain steps, or that their conduct was not reasonable, is on the charterers.
Securing the claim
This is an entire topic in its own right but relevant considerations are whether arrest of an asset owned by charterers is possible, and if so where? Some jurisdictions allow the arrest of bunkers (on another vessel chartered to the charterers) assuming it can be proved they are owned by charterers. One or two jurisdictions even allow the arrest of a “charterers’ interest” in a vessel.
Consideration can also be given to such possibilities as freezing bank accounts or sister ship arrests.
Bunker arrests or attachments are often problematic, particularly of bunkers on the vessel that has been withdrawn. It cannot be assumed that legal ownership of bunkers supplied by charterers vests back in the owners in any situation other than a contractual redelivery. Although this particular issue has not been tested before the English courts, there is House of Lords’ authority, The “Span Terza” [1984] that upon cancellation (as it was in that case) of a charter, owners’ right to use and consume bunkers ceased and owners were merely bailees of the bunkers as against charterers.
Exercising a lien on cargo is another route that may be open to owners. But it is one that is fraught with difficulty and legal complications. The enforceability of a lien is likely to depend on whether charterers own the cargo or not and whether the lien clause is incorporated into the bill of lading. Local law of the place where the lien is to be exercised is also relevant. Owners must always be wary of exposing themselves to delay claims under the contract of carriage.
Is there a commercial answer?
There are also commercial considerations and solutions when charterers have not paid hire. These are, though, beyond the scope of this article but can include: hire holidays or a reduced rates of hire for a set period, perhaps backed by performance guarantees to allow charterers to work their way out of the immediate financial difficulties, or allowing a viable sub-charterer (if there is one) to step into their immediate charterers’ shoes by way of an assignment of the charterparty, or a negotiated termination on such terms as are acceptable to both parties.
Article by Sian Morris
Please refer to the decisions in the Astra http://www.steamshipmutual.com/publications/Articles/Astra0613.htm and Fortune Plum http://www.steamshipmutual.com/publications/Articles/FortunePlum0613.htm both of which post-date the above article.
