Withdrawal Notice - "Red in Tooth and Claw"

January 2006

In early 2005, the English Commercial Court had to decide whether an owner was entitled to withdraw their bulk carrier from the charterers' service in a rising market for unlawful deduction by charterers of USD500.

The "Li Hai" was time chartered on the NYPE form, as amended, by Owners, Li Hai Maritime Inc, to Charterers, Western Bulk Carriers A/C, for four consecutive charters of 5/7 months + 5/7 months in Charterers' option.

Clause 5 of the charter was substantially unamended and the charter contained an additional typed clause which read as follows:

"Clause 47 Punctual Payment/ Breach of Charter 

With reference to clause 5 it is agreed that the hire to be considered paid upon charterers instructing their bankers to irrevocably remit the hire to owners' bank [in Tianjin]. Before exercising the option of withdrawing the vessel from the charter the owners will give the charterers seventy two hours (Saturdays, Sundays and Holidays and Banking Holidays excluded) official notice in writing and will not withdraw the vessel if the hire is paid or the alleged breach is rectified within the seventy two hours allowed for notice from time the charterers received such notice…"

During 2003, the handymax market had risen steeply and when, in September 2003, a dispute arose about quality of bunkers stemmed at Santos, the market rate was approximately double the charter rate. Owners complained that the bunkers were off spec and called for charterers to off load the fuel, as a result of which charterers had to cancel a further stem ordered in Hong Kong, which led to a USD500 cancellation fee. Charterers maintained that the fuel could be used and that the owners should pay the USD500 fee.

In late October 2003 the vessel was due for routine dry-docking in Shanghai, so charterers made 2 deductions from the hire instalment due in mid October 2003 for off hire for the forthcoming dry-dock and the USD500 bunker cancellation fee

The two parties had a settled practice for resolving disputes over deductions made to hire in that charterers would email a breakdown of each monthly hire statement to owners in advance, following which, a further payment would be made if owners disputed the reduction or, owners would agree with the amount remitted if it correctly reflected deductions made for owners' expenses.

Having received the hire payment, the owners asked for full payment of hire without deduction and on 14 October 2003 sent the following message to charterers:

"Re: deductions for estimated dry-docking

Sorry to find that charts have deducted seven days for DD FM hire payment, which is in respect of charterparty DD 27 September 2002. In this respect, charts are kindly requested to arrange same to our account asap. And the said off-hire for DD will be adjusted FM hire payment after completion of DD or alternatively owners will refund same to charts in due course. Please confirm by return.

Re debunker and cleaning of oil tanker no.3 and 4.

As we have stated we fully reject charts claims for USD500.00 for cancellation of oil supply at Hong Kong, which results FM inferior bunker supplied by charts at Santos. We once again request charts to arrange the debunker and cleaning of oil tankers no.2 and 3. (sic). Please urgently confirm by return by 0800 GMT 14 October. Otherwise owners will arrange same during dry-docking and all time and costs involved to be for charts account, FYR, the costs involved are about US$25,000, which is subject to final invoice to be sent to charts. Please arrange same to owners account in case charts elect not to arrange the debunker and cleaning of said oil bunkers"

And on 15 October 2003, the owners sent the following message to charterers:

"Re: MV Li Hai/WBC- Notice of withdrawal. Please be advised that charterers were in breach of clause 5 of the charter-party dated 27 September 2002. Owners hereby give seventy two hours notice that owners will withdraw the vessel from the service of the charterers without prejudice to any claims that owners may otherwise have upon the charterers."

Charterers did not want to risk withdrawal of the vessel so they agreed to pay further hire to the owners. Believing that the owners were objecting to their deduction for off hire for the dry-dock, charterers remitted the deduction they had made for this but did not remit the USD500 bunker cancellation fee.

Owners subsequently withdrew the vessel on the basis of wrongful deduction of USD500 for the bunker cancellation fee. Charterers issued proceedings against owners for wrongful withdrawal of the vessel and claimed damages in excess of USD2M.

Charterers raised several arguments in support of their claim that the owners had wrongfully withdrawn the vessel, the majority of which were rejected by the court, but were successful with their argument that the message sent by owners on 15 October 2003 did not comply with clause 47 and was therefore not a valid anti-technicality notice.

In particular, the message did not state that, to avoid the vessel being withdrawn, charterers would have to pay the hire in full within 72 banking hours (Saturdays, Sundays and holidays and banking holidays excluded). In reaching it's decision, the Court also decided that it was reasonable for charterers to assume from owners' previous message of 14 October that the 15 October notice related to the deduction for anticipated off hire during the dry-dock and not the USD500 and that the notice was not unambiguous as a properly drawn anti-technicality notice had to be.

Charterers were awarded damages of just over USD2M, representing the cost of chartering in substitute tonnage for the remaining charter period at approximately twice the charter rate.

The Judge described the situation in this case as "representing commerce, red in tooth and claw" and the case has to be seen against the background of a strong handymax market. The US$500 deduction represented less than 2 hours' hire but despite this owners saw an opening and tried to get out of the charter. Had they drafted a proper anti-technicality notice they would have been able to do so, but their failure to draft the notice properly cost them approximately 224 days hire.

The decision serves as a salutary lesson to owners of the importance of not losing sight of the small details when trying to maximise profits in a strong freight market. As everyone knows the freight market is cyclical, and it is only a matter of time before the market will favour charterers and they need to be equally careful. As this case illustrates, the implications of getting the small things wrong can be catastrophic. 

The "Li Hai" - Western Bulk Carriers K/S v. Li Hai Maritime Inc [2005] 2 Lloyd's Law Rep. 389