Following the prolonged economic downturn, parts of the freight market have seen positive movements in 2013 with the Baltic Dry Index (BDI) reaching highs of above 2,000. While improvements in market conditions are generally to be welcomed, a rising market can be a cause of disputes in itself, particularly where counterparties may have little latitude for any significant forbearance between themselves.
The Club is regularly requested to advise on parties’ rights and remedies and this article underlines some of the issues to be borne in mind when considering the options open to owners in the event of default. This article is, by necessity, general in nature and is not a substitute for specific advice on any of the issues.
In a rising market, owners may choose to take a strict approach with late or non-paying charterers with an eye upon alternative fixtures at attractive rates. Equally, charterers may be looking to maximise earnings from their charters fixed at favourable rates: perhaps through seeking to extend charter periods or pushing contractual tolerances for final voyages.
Perhaps, faced with continuing defaults from charters and a more readily available market, owners may prefer to take ships back, or at least to have the realistic threat of being able to do so, as an extension of pushing charterers to comply strictly with their payment obligations. Recent case law has developed substantially in this area, but while the Astra decision has been hailed as promoting owners’ rights to withdraw in the event of non-payment of hire, possibly even after one missed payment, the legal position is still not straightforward and as always care must be taken when considering withdrawal.
Indeed, the Fortune Plum illustrates the difficulties faced by owners in considering whether a charterer’s breach amounts to repudiatory conduct and explores the important question of when to accept any such repudiatory conduct. In particular, owners should be careful not to give any impression, post-breach, that the contract has been affirmed by their words or actions. A failure to respond both correctly and timeously in response to a repudiatory breach by charterers could result in owners being in repudiatory breach themselves.
Where withdrawal is not considered to be possible or appropriate, exercising a lien or withholding service may enable owners to push for payment of freight or hire, subject to the charterparty and /or bill of lading terms and applicable local laws, as well as that chosen under the charter.
Vessels on time or CVC charters may experience charterers wishing to maximise the number of laden voyages they can perform under the charter, and consideration will need to be given to how to correctly identify the charter period duration. It is perhaps worth noting that the “Achilleas”, referenced below and a key case on quantum of damages, was in relation to a late redelivery.
Any available options to extend the duration of a charter must be exercised contractually, which may be by express notice or by conduct as applicable, as well as other conditions precedent to performance such as post-contractual notices and nominations.
As well as charterers’ duty to redeliver the ship at the end of the charter period, there is also a duty only to give orders which are legitimate, namely ones given in the reasonable expectation that the vessel can complete them within the charter period. If the opposite applies and the vessel is likely to overrun the charter duration, the order would be considered as an illegitimate order and owners would be entitled to refuse them.
Where charterers find themselves in breach and a vessel is redelivered late then the measure of damages would also need to be taken into account and has been the subject of recent judicial authority http://www.steamshipmutual.com/publications/Articles/AchilleasHL0908.html
In contrast to that decision the “Sylvia” is of note Counterparty risk must still be managed and the importance of performing appropriate due diligence remains, although it is hoped that positive market movements may give owners improved options and an ability to exercise greater quality over the quality of business fixed.
Overall, an improved market – even with its attendant peaks and troughs – should alleviate some pressure on cargo interests and reduce the risk of more serious defaults under charterparties.
