Early Termination of Time Charter
What happens during the Early Termination of Time Charter?
If the vessel suffers a very serious casualty, such as a major fire in the engine-room or a grounding causing extensive damage to shell plating, the question whether the time charter is thereby brought to a premature end depends on the time required to repair the vessel and the time left before the vessel is due to be redelivered. The cost of such repairs may also be relevant, since owners are not obliged to repair, if the cost would be disproportionate to the ship’s value in a repaired condition.
Many time charters legislate indirectly for this situation by providing that, in the event of the vessel being off-hire for more than a certain number of days, charterers have the option to cancel the charter. In the absence of such a clause, there are two main ways from a legal perspective in which the charter – and the contracts of carriage contained in bills of lading or sea waybills – terminate prior to discharge of the cargo: repudiatory breach and frustration.
In addition, we have seen that the charter is also brought to an end, if the owners exercise their right to withdraw the vessel from charterers’ service for late or non-payment of hire. In this latter case, the contracts evidenced by any bills of lading remain in force.
Consequences of such termination on the rights and obligations that exist between cargo interests and owners, it being assumed that owners are the contractual carrier under the bills of lading. Given that the time charter on the one hand and the contracts of carriage evidenced by bills of lading on the other hand are very different types of contract, it is not surprising that an event which causes the cargo-carrying voyage to be abandoned may not necessarily cause the time charter to terminate. And an event, such as withdrawal, which causes the charter to terminate will not usually cause pre-existing bill of lading contracts to terminate.
The first question after any major casualty is: Is it feasible to complete the voyage in the original vessel after repairing it?
If it is, owners are bound to carry out such repairs as are necessary to enable them to carry the cargo to destination (Kulukundis v Norwich Union Fire Insurance Society ).
In this situation, the contract of carriage under any bill of lading remains alive and owners must take all reasonable steps to complete it, whether or not charterers have opted to exercise a contractual right to cancel the charter. Owners are entitled, but not obliged, to choose to tranship the cargo at their expense in order to get it to destination.
If they elect not to tranship, and there is no alternative method of carrying the cargo to destination, the Bill of Lading (B/L) contracts come to an end.
If the casualty is attributable to some breach by one party, the contract of carriage will terminate by reason of that party’s repudiatory breach. If breach is alleged, it will generally be owners who are said to be at fault.
Occasionally, however, a voyage cannot be continued because of breach by cargo interests. An example of such breach would be where shippers have shipped goods possessing some hazardous characteristic of which the Master and owners had no reason to be aware, without giving due notice of such hazardous properties.
If the cargo were explosive or highly flammable, and led to the vessel being so severely damaged that further progress was impracticable, that event would constitute a repudiatory act by cargo interests.
Frustration occurs where, without any breach by either party, performance of the contract becomes illegal or impossible by reason of a supervening event or if the effect of the event in question is such as to destroy the identity of the agreed service.
The Bill of Lading (B/L) contract will also be frustrated or repudiated if completion of the voyage is physically possible, but not within a commercially reasonable time or within the foreseeable future. In such a case, it is said that the commercial purpose of the voyage has been frustrated.
When can Shipowners cancel a Time Charter Party?
The failure to remunerate the hire charges is among the prevalent predicaments encountered by proprietors, potentially leading them to contemplate the termination of the charter agreement and the subsequent renegotiation of the vessel.
Whether shipowners possess the lawful right to validly terminate or cancel the charter, re-fix the vessel, and seek reparation for the foregone profits during the unfulfilled duration of the annulled charter party (as opposed to solely claiming the outstanding hire amount prior to the owners’ termination of the charter party) depends on the occurrence of a repudiation of the charter party.
In English law, “repudiation” is a precise term, and in this context, a contract is deemed repudiated under two circumstances:
i) When the breached contractual term, specifically the duty to remunerate the hire charges, is categorized as a “condition” according to English law.
ii) When the breach of the contractual term is so severe that it fundamentally undermines the essence of the contract itself, often referred to as “going to the root of the contract.”
In the case of a long-term charter, the premature termination of the charter party empowers shipowners to claim substantial damages, which encompass the projected profits for the remaining duration of the terminated charter party. In such a scenario, shipowners bear the responsibility of substantiating that they have suffered losses that cannot be adequately compensated by re-fixing the vessel, particularly if the charter party rate has declined subsequent to the initial charter agreement.
What are the perils associated with the wrongful termination of a Charter Party by the Shipowners?
If the shipowners unjustly terminate a charter agreement and subsequent proceedings reveal that the owners lacked the right to do so, the situation will be reversed against the owners. In such a scenario, the shipowners themselves will be considered to have breached the charter agreement in a repudiatory manner, enabling the charterers to cancel the charter agreement and seek compensation and/or indemnification from the shipowners.
What occurs in the event that Charterers have not fulfilled their hire payment obligations? Can Shipowners terminate the Charter Party?”
If English legislation determines that the duty to remunerate for the use of a vessel is a “condition” of the charter agreement, then the non-payment of even a single installment by the charterers will automatically (subject to the conditions of any anti-technicality clause in the charter agreement) empower the owners to terminate the charter agreement.
For a considerable period, conflicting English legal cases debated whether the payment of vessel hire constituted a “condition” or merely a term of the charter agreement (The Astra  2 Lloyd’s Rep 69 argued for the former standpoint, while The Brimnes  2 Lloyd’s Rep 465 asserted the latter).
Clarity on this matter carries significance since, as discussed earlier, the ramifications of violating a term or condition regarding payment diverge significantly.
The determination of whether the payment of vessel hire constitutes a condition was ultimately settled by the Court of Appeal in Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd  2 Lloyd’s Rep 447 (“Spar Shipping”).
By overturning the precedent set by The Astra, the Court of Appeal concluded that the obligation to remunerate for the use of a vessel is not a “condition” but merely a term of the charter agreement.
This establishes a degree of certainty, namely, that owners do not possess an automatic entitlement to terminate the charter agreement and seek compensation for lost profits in instances where charterers fail to fulfill their payment obligations.
However, as evident from the aforementioned point ii), this signifies that the narrative doesn’t conclude here. This is due to the fact that despite reaching the determination that the mere payment of hire isn’t a requirement, the court in the case of Spar Shipping still determined that the overall behavior of the charterers amounted to a repudiatory breach. Consequently, the owners rightfully exercised their option to cancel the charter party and successfully pursued their claim for damages and loss of opportunity concerning the prospective hire they would have earned had the charter party not been repudiated.
Therefore, when encountering a situation where the hire payment is not made, it becomes crucial to grasp the elements that constitute a repudiatory breach.
What are the key considerations in determining if a Charter Party Breach is of repudiatory nature?
A conduct is considered repudiatory if it “strikes at the core of the contract” or deprives the other party (i.e., owners) of substantially all the benefits of the agreement. In this context, the intentions of the defaulting party (charterers) are not entirely relevant. What holds significance is the manner and behavior of the charterers leading up to the breach.
The following factors are pertinent in determining whether the charterers’ conduct regarding non-payment of hire constitutes a repudiatory breach:
1- The extent of arrears accumulated in relation to the entire duration of the charter party.
2- Failure to present a concrete payment plan to settle the outstanding amount.
3- Inadequate explanation provided for the non-payment of hire.
1- The accumulated arrears and the duration of the charter party. Some argue that comparing the arrears against the total duration and potential earnings under the charter party helps assess whether the non-payment of hire significantly deprives the owners of contractual benefits. For instance, a delayed payment spanning two to three months would represent a minor fraction of the overall sum that the owners could have earned during a five-year charter. Can such an insignificant proportion be deemed to substantially deprive the owners of the entire contractual benefit?
While this approach serves as a starting point, the court cautioned against relying solely on a mathematical comparison of arrears to determine the repudiatory nature of a breach. Such an approach fails to consider the fact that a charter party is a credit-based contract where the charterer essentially acquires services on credit. Consequently, this mathematical comparison may not definitively establish whether the charterers’ breach was repudiatory.
2- Failure to devise a concrete and comprehensive arrangement for settling outstanding debts was a critical factor leading to the determination of a repudiatory breach. The failure of the charterers to formulate a specific payment proposal became evident. A well-crafted payment plan should encompass a detailed and rational timetable for discharging specific portions of the debt. Additionally, incorporating an interest rate for late payments could lend further credibility to the proposed payment plan. Mere assurances of punctual payments are generally insufficient to be deemed reasonable in the context of a payment plan.
The formulation of a payment plan necessitates careful drafting as it may be interpreted as an acknowledgement of liability. For the charterers, such a payment plan should be accompanied by qualifying terms like “without prejudice,” along with clear statements affirming that the plan does not constitute an admission of liability and does not affect their right to offset damages related to other matters.
However, accepting such a payment plan also presents drawbacks for the owners. Embracing the payment plan may be perceived as compromising their claim under the charter party, thereby relinquishing their rights to detain any of the charterers’ vessels as security. To address this concern, owners may include provisions in their acceptance, specifying that their rights to detain the vessel would not be extinguished in the event of a subsequent breach of the payment plan. Nonetheless, the effectiveness of such provisions in extinguishing arrest rights would be contingent upon the local admiralty laws of the jurisdiction where the prospective arrest would occur.
3- Failure to provide a comprehensive explanation as to why the hiring fee remains unpaid can be perceived by the tribunal as a repudiation on the part of the charterers. The absence of any clarification or the charterers’ refusal to disclose the underlying reasons might lead to such a conclusion. For instance, when the charterers persistently demonstrated their intention to pay below the agreed charter rate for a period exceeding three years, it was determined that the arbitrators were justified in deeming this a fundamental breach of the contract (The Astra).
To avoid any allegations of breaching the contract, charterers should openly communicate the reasons for their failure to fulfill the payment obligations. Common explanations may involve cash flow difficulties, a decline in market conditions, economic downturn, or outstanding sub-hire payments. However, charterers may be concerned that excessive disclosure of information could be interpreted as a commercial vulnerability or even prejudice their legal position. Nonetheless, a certain level of transparency is necessary since the courts have recognized that charterers’ failure to provide details regarding the expected receipt of fresh funds constitutes one of the types of conduct that amounts to a fundamental breach.
What factors are inconsequential in ascertaining whether a Charter Party Breach is repudiatory?
There are several factors that tribunals have deemed irrelevant when determining the liability of a party for a repudiatory breach.
Firstly, as previously mentioned, the intent of the defaulting party (charterers) holds no significance. Providing evidence that charterers possess the willingness or intention to fulfill the contract and make the payment does not alter the fact that there was a failure to pay the hire. As succinctly stated by the court in Spar Shipping, “To claim, ‘I would like to, but I cannot’ is just as void of intent as ‘I will not.'”
Secondly, the financial strength of owners is also of no consequence. Therefore, it is not a valid defense for charterers to argue that because owners have substantial resources, they could have absorbed the failures and potential inability of charterers to fulfill the charter party. The fact that owners have a stronger financial foundation does not impose an obligation on them to accept delayed payments of hire, particularly when the parties’ intention under the charter was for timely payment.
There exist various pivotal elements that would ascertain whether the conduct of the charterers in failing to fulfill their payment obligations constitutes a grave breach of the charter party, thereby granting the owners the right to terminate said agreement.
If the charterer members have, for any given reason, neglected their duty to remit the hire charges, it is crucial for them to take cognizance of these factors and ensure that appropriate measures are undertaken to dismiss any allegations of a fundamental violation.
Conversely, it is incumbent upon the owner members to assess the aforementioned factors in order to determine whether the actions of the charterers amount to a substantial breach.
Results of Early Termination of Time Charter
In the shipping industry, a time charter is a contract for the hire of a ship for a specific period. The shipowner still manages the vessel but the charterer directs the vessel where to go. The charterer pays for all fuel the vessel consumes, port charges, commissions, and a daily hire to the shipowner.
In the event of an early termination of a time charter, several consequences can ensue, depending on the stipulations of the contract and the reason for termination. Here’s an overview:
- Contractual Penalties: The agreement usually includes a clause that specifies the penalties for early termination. This could be a financial penalty, which often constitutes a considerable sum, as it is meant to compensate the shipowner for the potential loss of income due to the premature end of the contract.
- Recovery of Costs: The shipowner might be entitled to recover costs associated with the termination, such as the costs of repositioning the vessel to a port of their choosing or preparing the vessel for a new charter.
- Liability: If the termination is due to the charterer’s fault, for example, non-payment or breach of contract, then the charterer may be held liable for damages or losses that the shipowner incurs.
- Off-hire: This is a situation where the vessel is unavailable for use due to repairs, breakdown, or other issues. If this leads to early termination, the charterer might not need to pay the hire for the off-hire period, depending on the specifics of the charter party.
- Disputes: Early termination of a time charter can lead to disputes between the parties, which might need to be resolved through negotiation, arbitration, or court proceedings.
- Redelivery: The charterer has to redeliver the vessel back to the shipowner. Depending on the terms of the charter party, redelivery must be done at a specified place, in the same good order and condition as when delivered, fair wear and tear excepted.
- Rechartering: Depending on market conditions, the shipowner may be able to recharter the vessel and mitigate their losses.
- Rechartering Costs: Rechartering might come with its own set of costs. For instance, if the market rate at the time of rechartering is less favorable than the original contract rate, the shipowner might lose out on potential income. Conversely, if market rates have improved, the shipowner could potentially earn more from a new charterer.
- Loss of Reputation: For the charterer, an early termination may lead to a loss of reputation in the market, making it more difficult or expensive to charter vessels in the future.
- Negotiated Settlements: In some cases, the charterer and the shipowner may agree to a negotiated settlement instead of strictly adhering to the early termination clause in the contract. This could involve, for instance, the payment of a mutually agreed sum or extending the duration of another ongoing charter between the two parties.
- Insurance Claims: If the early termination is due to an insured risk, such as damage to the vessel or loss of the vessel, the shipowner may be able to recover losses through an insurance claim.
- Sub-charterers: If there are any sub-charterers involved, the early termination of the main charter might also affect these secondary contracts. This can create additional complexity, particularly if the sub-charterers are not at fault for the early termination of the main charter.It’s important to note that the specifics of an early termination of a time charter can vary widely depending on the circumstances and the terms of the contract. Because of this, both shipowners and charterers should seek legal advice when drafting, entering into, and terminating time charter contracts. In particular, they should ensure that the contract includes clear and comprehensive provisions for potential early termination, in order to protect their interests and minimize potential disputes or uncertainties.The specifics of an early termination of a time charter depend on the terms of the contract, the reasons for the termination, and the actions of both parties. Therefore, when entering into a time charter, both parties should carefully consider the terms and potential scenarios to protect their interests.
Repudiatory Breach of Time Charter Party
A repudiatory breach of a time charter party is a serious breach of contract that allows the innocent party to terminate the charter party agreement and potentially claim damages. This can occur when one party acts in a way that shows a clear intention to not fulfill the obligations of the contract or when a party fails to perform a fundamental obligation under the contract.
In the context of a time charter party, this could happen if the charterer does not pay hire, or if the shipowner does not provide a seaworthy ship, for example.
When a repudiatory breach occurs, the innocent party has two options:
- Affirm the contract: The innocent party can choose to continue the contract. In this case, both parties are obliged to continue to fulfill their obligations under the contract, and the innocent party can claim damages for any losses caused by the breach.
- Terminate the contract: The innocent party can choose to ‘accept’ the breach and end the contract. In this case, the parties’ future obligations under the contract come to an end, and the innocent party can claim damages for loss of the contract.
These decisions need to be carefully considered, and it’s often advised to seek legal advice before taking any action. The implications of accepting a repudiatory breach can be significant, including the potential loss of future claims under the contract.
For example, in a time charter party, if the charterer consistently fails to pay hire on time and the owner decides to accept this as a repudiatory breach, the owner may be able to terminate the charter party and claim damages for the loss of future hire. However, the owner would also lose the right to claim any future hire under the contract, even if the market rate increases.
It’s worth noting that what constitutes a ‘fundamental’ breach can be somewhat subjective and may depend on the specific terms of the contract and the facts of the case. Therefore, it’s important to consider all relevant factors and potentially seek legal advice when dealing with potential repudiatory breaches.
Frustration of Time Charter Party
Frustration of a Time Charter Party refers to a situation where the agreed upon conditions of a charter party, which is a contract between the owner of a vessel and a charterer who rents the vessel for a specific period of time, become impossible to fulfill due to unexpected circumstances.
This could occur due to various reasons, such as the vessel being damaged beyond repair, government intervention, or an unforeseen global event like a pandemic. For instance, if the cargo to be carried is no longer available or the ports specified in the agreement are closed due to a war, the charter party could be frustrated.
The doctrine of frustration is a legal principle that allows a party to be released from a contract when an unforeseen event either changes the nature of the obligations or makes performance impracticable or impossible.
However, it’s worth noting that the threshold for a contract to be deemed “frustrated” is very high. The unexpected event must be so fundamental that it strikes at the root of the contract. Simply being more expensive, difficult, or time-consuming than anticipated will not be enough to frustrate a contract.
When a time charter party is frustrated, the parties are excused from further performance and, generally, no damages can be claimed by either party for non-performance. However, any obligations incurred before the frustration occurred would still need to be fulfilled. The precise consequences may depend on the laws of the jurisdiction in which the contract was made, and parties may wish to take legal advice in such circumstances.
This is a complex area of law, and the application of the doctrine of frustration to charter parties can involve intricate legal and factual analysis. It’s advised to consult with a maritime law expert in the case of such an event to fully understand the rights, obligations, and potential liabilities of the parties involved.
Early Termination of Time Charter Party Sample Clause 1
If the Charterers deem it necessary to prematurely terminate this Time Charter after the Vessel has been delivered to them, they have the authority to do so by providing Owners with a written notice of termination, which should be given no less than ninety (90) days in advance. Should the Charterers choose to terminate this Time Charter early, they are obligated to compensate Owners with the daily fixed charter rate as an Early Termination Charge until the vessel is rechartered. Once the Vessel is redelivered to Owners at Punta Arenas, Chile (or another mutually agreed port), the Hire will cease, and the Early Termination Charge will take effect. In the event that the Vessel is rechartered, and the re-charter rate for that particular charter is lower than the original Fixed Charter Rate, Charterers shall pay Owners the difference between the original Fixed Charter Rate and the re-charter rates, provided that the amount does not exceed the Early Termination Charge. However, if the re-charter rate is higher than the applicable Fixed Charter Rate, no Early Termination Charge of any kind shall be payable to Owners during the period of the re-charter when the re-charter rate exceeds the applicable daily Fixed Charter Rate.
Early Termination of Time Charter Party Sample Clause 2
The Early Termination Charge mentioned in this agreement is the sole responsibility of the Charterers towards the Owners in the event of an early termination of the Time Charter. Once the Owners receive notice of early termination, they will endeavor to secure a new charter for the Vessel promptly and minimize the Charterers’ liability for the Early Termination Charge. The Charterers have the right to suggest a charter to the Owners, and the Owners will not unreasonably decline to accept such a charter or to sub-charter the Vessel themselves.
Early Termination of Time Charter Party Sample Clause 3
The expenses incurred by the owners for re-chartering the Vessel, which include brokerage fees and refurbishment costs, will be discussed and agreed upon with the Charterers. These negotiated expenses will be divided equally and added to the reduced daily rate for Early Termination Charge, encompassing these agreed-upon costs, if they surpass the currently applicable daily rate for Early Termination Charge mentioned in the Pricing Schedule. However, under no circumstances shall the adjusted daily rate for Early Termination Charge, including these negotiated costs, exceed the then applicable daily rate for Early Termination Charge mentioned in the Pricing Schedule.
Early Redelivery of a Ship in Time Charter
When is the ship redelivered early in Time Charter?
A charterer bears the responsibility to deliver the vessel in accordance with the redelivery provisions outlined in the charter agreement. The timing of redelivery is primarily determined by the duration of the charter. Typically, a time charter can be categorized into two main types:
- Fixed period:
- A flat period, such as “1 year,” or a specific time frame until a certain date, for example, “until June 30th.”
- Variable period:
- A flexible time frame, like “11 to 13 months” or “approximately 8 months, with a margin of 15 days more or less.”
Fixed Period in Time Charter:
In the case of a fixed period, even when the term “about” is absent from the redelivery period, it is understood that the specified termination date should be considered as an approximation only (London Explorer 1971). The precise date agreed upon for redelivery signifies “around that date.” Charterers are granted a reasonable timeframe before and after this exact date. The length of this margin of time for redelivery depends on various factors. For instance, if a ship is redelivered 7 days beyond the stipulated period of a 6-month, 20-day duration, it could be considered as reasonable.
Variable Period in Time Charter:
In the case of a variable period, there are two main scenarios:
A- “Approximately 6 months, with a margin of 15 days more or less”: In this situation, the parties involved have agreed upon a fixed duration with an included tolerance clause. Therefore, there is no implicit allowance.
B- “11 to 13 months”: Determining whether an implicit allowance is permissible in this case is not straightforward. It depends on the length of the time range. If the range is 15 days (“6 to 6½ months”), the law may allow for an implicit tolerance. However, if the range is longer (“11 to 13 months”), arbitrators and judges are less likely to permit an implicit tolerance.
No implicit tolerance exists if the range is defined by a minimum and/or maximum period (e.g., “minimum 7 months, maximum 8 months”).
“About” in Ship Chartering
The NYPE (New York Produce Exchange Charter Party Form), for instance, typically specifies the duration of the charter using the term “about.” There is no definitive rule to determine the precise extent implied by the term “about.” It predominantly relies on the duration of the charter and any particular factual circumstances that reflect the parties’ intentions.
To illustrate, in one instance, a vessel was chartered for approximately “3 to 5 months,” allowing a margin of 5 days. However, in a charter for roughly “8 months,” a margin of 12 days was not considered reasonable.
If the term “about” is omitted, the judge or arbitrators may consider this omission when assessing the tolerance margin.
TCT (Trip Time Charter) on a WOG (Without Guarantee) Duration
If, for instance, the charter stipulates a journey between two ports spanning a period of “55/60 days WOG,” there exists no specific minimum or maximum duration as long as the estimation is conducted in good faith. In the event that unforeseen circumstances prolong the voyage to 140 days, the charter shall bear no responsibility for delayed redelivery, but shall persist in remunerating the agreed rate for the hire.
Early Redelivery in Time Charter
Upon the early delivery of the vessel by the charterers, the owners are presented with two alternatives:
- Embrace the prompt redelivery and seek compensation for any resulting damages.
- Decline the redelivery while keeping the ship under the charter, thus relieving the shipowners from the obligation to mitigate their losses.
Shipowner’s Refusal to Take Redelivery in Time Charter
The course of action, however, is contingent upon the shipowners lacking any “legitimate interest” in continuing the execution of the time charter party. If the shipowners’ behavior in adhering to the charter is deemed “wholly unreasonable”, they will be unable to assert their full entitlement to hire.
In most instances, it is generally inadvisable to keep the vessel idle and await the charter’s completion, as the shipowners would need to recuperate the hire owed to them. It is typically preferable to accept early redelivery and resume the vessel’s trading activities once more.
What is a Wholly Unreasonable in Time Charter?
Shipowners’ mere unjustifiable conduct shall not suffice. It must be entirely unjustifiable. The determination of what is deemed wholly unjustifiable shall be contingent upon the circumstances.
In the event that the vessel is returned 15 days prior to the agreed-upon redelivery date, it is highly probable that the shipowner can decline the redelivery of the vessel and insist upon the payment of hire until the minimum redelivery date. However, if the redelivery date is advanced by 24 months, there would likely be no “legitimate interest” for the shipowners to demand the continuation of charterer’s performance in the charter agreement.
How much Damages may the Shipowner recover in Time Charter?
The overarching principle dictates that proprietors shall have the entitlement to assert the disparity amidst the charter rate and the rate prevailing in the “Available Market” had the vessel been expeditiously re-chartered for the duration of the remaining charter term. (Charter Party Hire Rate – Available Market Rate) multiplied by the number of days the vessel was prematurely redelivered equals the compensatory Damages.
What is Available Market Rate Time Charter?
The “available market” rate will be determined by referencing the same market as the initial charter, specifically within the corresponding geographic area and trade. This determination applies to a charter period that aligns with the remaining duration of the original charter.
For instance, if a vessel was chartered for a 14-month period in the Pacific trade but was returned after 9 months, then the applicable market rate would be for a 5-month charter, representing the remaining time left on the original charter, within the realm of the Pacific trade.
What if Shipowners re-charter the ship on a different market?
Considering the aforementioned example, what if the Shipowners opt to relocate the vessel from the Pacific to the Atlantic trade, there exists no hindrance preventing shipowners from doing so, although it entails a certain level of risk.
In the event that the Shipowner ends up generating a lesser income in Atlantic compared to what could have been obtained in the Pacific, the compensation will still be calculated based on the “Available Market” rate. Shipowners will not be eligible to claim the discrepancy between the available market and the distinct market.
What if the Shipowner discovers an Alternative Market that offers better rate compared to the Available Market?
The insignificance of the Shipowners’ incurred losses in comparison to the prevailing market is immaterial. The quantification of losses will nonetheless be determined in relation to the “Available Market.” The Shipowner may conceivably generate profits and yet pursue claims for damages against the charterer.
What if there is no Available Market for Early Redelivered Ship?
In such circumstances, Shipowners will be entitled to receive compensation that would restore their financial position to the same level as if the charter had been executed.
What if an event enabling termination of the original charter party occurs after ship redelivery but before the end of the minimum period?
In a scenario where an incident takes place (following redelivery but preceding the completion of the minimum duration) that would have enabled the Charterers to prematurely terminate the charter (such as war or other similar circumstances), the Shipowners can solely seek compensation until the moment the event occurs, which would have triggered the charter party’s termination.
What is the Damage in Early Redelivery of the ship in Time Charter?
A formidable hurdle that proprietors encounter in a capricious market is the Early Redelivery of a vessel under a lucrative charter.
The Early Redelivery may transpire when charterers are no longer inclined or capable of executing the charter, or when Shipowners, confronted with non-payment of hire, opt to withdraw the vessel and conclude the charter.
When the failure of the Charterers to fulfill their obligations amounts to a repudiation of the charter, it presents the shipowners with a choice: they can either choose to uphold the charter and insist on the charterers’ performance or terminate it immediately. Both options may appear equally unfavorable to a Shipowner faced with the prospect of an early vessel redelivery. Nevertheless, Shipowners must carefully consider the consequences that ensue from any subsequent decision made.
If Shipowners decide to uphold the charter, they can continue to bill the charterers for the hire. However, Shipowners must also ensure that the vessel remains available to fulfill any services required by the charterers.
A recent ruling, by the English High Court in The Aqua Faith case, affirmed that under certain circumstances, it is permissible for a Shipowner to uphold the charter and continue invoicing the Charterer for the hire up until the earliest redelivery date specified in the charter. The rationale behind this ruling lies in the distinction the courts make between time charters and other service contracts, as the former requires less cooperation from the defaulting party to maintain the contract.
In a time charter, the Shipowner does not rely on the Charterers’ assistance to issue orders to the vessel, ensuring its position is maintained and the required services are performed, even in the absence of orders or payment from the Charterers.
This approach may be appealing for Shipowners, at least in the short term, as they are under no obligation to mitigate losses. However, for longer-term Charters, Shipowners must strike a balance between the financial implications of funding the increasing costs of vessel operations and the prospects of recovering their losses from Charterers, whose solvency may become a concern.
Insolvent Charterers in Time Charter
There are two scenarios wherein the shipowners are deprived of the option to uphold the charter. The initial circumstance arises when owners possess no legitimate vested interest in prolonging the execution of the charter, to the extent that insisting on further execution would be deemed unreasonable. This situation may occur, for instance, when the charterers are evidently insolvent or when it is abundantly clear that they will not partake in any additional execution of the charter. The second scenario emerges when the performance of the charter is contingent upon the Charterers’ own execution. In such cases, the Shipowner is left with no alternative but to acknowledge the termination of the charter and act accordingly.
Assessment of Damages in Early Redelivery
In order to safeguard their claim for compensation upon the termination of the charter, Shipowners must be cognizant of the necessary measures they need to undertake. In cases where an early redelivery of the vessel occurs, Shipowners have the right to be placed in the same circumstances they would have been in had the charter been executed.
The conventional approach employed by the Courts to assess damages for early redelivery is the disparity between the charter rate and the prevailing market rate for the vessel, determined at the time of charter termination, for the remaining duration of the charter.
It is important to acknowledge that when there exists an “Available Market Rate” for the vessel, the calculation of damages is based on that market level, resulting in a theoretical estimation. Any variations in the charter rate compared to the market rate, unless owners can demonstrate that the replacement fixture rate is representative of the market, or that no market rate for the vessel is available and the achieved terms were the most favorable, are disregarded.
In challenging market conditions, determining the correct market rate may be arduous. Therefore, it is always advantageous for owners to diligently undertake all reasonable actions to mitigate their losses by entering into a replacement charter at market rates for the remaining term of the original charter.
Early Redelivery Cases in Time Charter
Where there is no “Available Market” upon the termination of the charter, but subsequently a market emerges, the assessment of damages will be based on the actual loss suffered by the shipowner.
In the case of The Wren, the Charterers returned the vessel prematurely during the peak of the economic crisis. The Court determined that there was no available market at the time of termination, thus the Shipowners had to charter the vessel on the spot market at a financial loss. As the market revived later on, the Shipowners chose to continue trading the vessel on the spot market, which proved to be more profitable than engaging in a similar charter. The Shipowners claimed damages based on their initial losses incurred in the spot market, as well as the subsequent market rate. The Court ruled that this approach was incorrect and that the Shipowners had a duty to take reasonable measures to minimize their losses. Consequently, the damages payable by the Charterers were determined based on the Actual Losses suffered by the Shipowners.
The decision in The Golden Victory further established that the assessment of damages must consider the terms of the charter, and any subsequent events occurring after the termination that might impact the damages.
In this particular case, the charter was prematurely terminated in 2001, and the Shipowners sought damages for their losses during the remaining four (4) years of the charter period. However, in 2003, a war broke out in Iraq, and the Charter Party’s War Clause would have allowed the Charterers to cancel the charter. The Court held that the Shipowners could only claim damages up until the point when the charterers would have been entitled to terminate.
The decision in The Golden Victory serves as a vivid example of how subsequent events can affect the damages recoverable by the Shipowners. Although agreeing to Early Redelivery enables Shipowners to enter into new contracts and generate revenue from the vessel, disputes often arise with charterers regarding the assessment of damages. Contentions may arise concerning the existence of a market, the appropriate hire rate, deductions required to account for potential off-hire periods, and the credit to be given for accelerated payment of damages as compared to hire payments spread over time.
Given the frequent occurrence of Early Redelivery cases in the courts, there is now an abundance of legal precedents to assist Shipowners in navigating such situations. While this does not necessarily simplify the commercial decision-making process especially in challenging market conditions.