Off-Hire Clause in Time Charter
Many off-hire clauses include a de minimis provision and are not activated until a period of 24 or 48 hours has elapsed from the occurrence of the specified event. Once the clause operates, however, all time lost will count, including the initial 24 or 48 hours.
In the absence of provision to the contrary, the suspension of the obligation to pay hire under this clause does not relieve the charterer of his other obligations arising under the charterparty during that period, for example his obligation to pay for bunkers or other port services during the off-hire period, or to pay the crew for overtime.
Occasionally the off-hire clause will give the charterer an option to extend the charter for an equivalent period but, since such a provision can be unfair to shipowners on a rising market or where subsequent charters have already been arranged, it is more normal practice to require the off-hire period to be counted as part of the basic charter term.
Should the off-hire event arise from breach of shipowner’s warranty, or some other act or neglect not covered by the exceptions, then the charterers may also have a claim for damages in addition to their right to suspend payment of hire.
Ship Off-Hire Clause in Ship Chartering
Ships experience failures. Machinery malfunctions. Other variables can impact operations. If a ship is under a time charter, these issues may indicate a violation of the charter agreement by the shipowners. In such cases, if the charterers have suffered a loss, they may have grounds for a damages claim. However, establishing a breach can be challenging. The obligations concerning seaworthiness and maintenance can differ, and the legal framework is intricate, making it uncertain to predict the outcome. Even determining the extent of the incurred loss may prove difficult. Moreover, what if a breach cannot be substantiated? Must the charterer still remunerate for a ship they cannot utilize or that does not match their expectations due to some deficiency? Off-hire clauses partly address these inquiries.
In most time charter agreements, there is typically a tailored off-hire clause. It may exist in a standardized form or customized to account for specific circumstances, such as the ship’s time spent in drydock. The primary purpose of an off-hire clause is to release the charterer from the obligation to pay charter hire when the ship’s usability is compromised, without requiring proof of a breach by the shipowner. Since a breach is unnecessary, the off-hire clause does not function as a liquidated damages clause (unlike a demurrage clause in a voyage charter). Nevertheless, not all off-hire clauses are equal, and sometimes the application of such clauses depends on the charterer’s circumstances rather than the condition of the ship.
New York Produce Exchange 1946 Off-Hire Clause
In the realm of time charters, there exists a renowned off-hire provision encapsulated within clause 15 of the (1946) New York Produce Exchange. This provision stipulates that:
“in the event of loss of time from deficiency of men or stores, fire, breakdown or damages to hull, machinery or equipment, grounding, detention by average accidents to ship or cargo, drydocking for the purpose of examination
or painting bottom, or by any other cause preventing the full working of the ship, the payment of hire shall cease for the time thereby lost; and if upon the voyage the speed be reduced by defect in or breakdown of any part of her hull, machinery or equipment,
the time so lost, and the cost of any fuel consumed in consequence thereof, and all extra expenses shall be deducted from hire.”
In the application of such a provision to specific circumstances, the court or arbitrators commence with the fundamental principle that, in a time charter, the responsibility for delays primarily rests with the time charterer. Consequently, it ensues that the charterer remains obligated to make hire payments under all circumstances, unless the charterer can establish compliance with the explicit terms of an off-hire provision, as stated in The Doric Pride – 2006 Case. The charterer bears the burden of proving the applicability of the clause, and any uncertainties or ambiguities are resolved in favor of the shipowners.
The complete functionality of the ship
An important aspect to observe is that in order for the termination of the hire to occur, there must have been an impediment to the seamless operation of the ship. Unless such an impediment exists, there is no need to examine whether it had a relevant cause. The inquiry regarding whether there was any failure in the smooth operation of the ship necessitates a practical investigation rather than a theoretical one. It becomes essential to consider the subsequent task assigned to the ship (The Berge Sund 1993 Case).
For instance, if the ship possesses a malfunctioning crane that does not affect the time taken to unload cargo or if its engines are undergoing repairs but do not impact the actual loading time, or if there is a temporary breakdown preventing any cargo from being loaded but no cargo is available for loading, then the full operation of the ship, in terms of the service actually required of it, remains unaffected.
Moreover, if the ship is engaged in its regular operations, it will not be deemed as being hindered from functioning. For example, if a ship’s captain overloads the ship and is subsequently instructed to lighten its load and then reloads it, the process of lightening and reloading may cause a delay but does not affect the complete functioning of the ship (The Aquacharm 1980 Case), thus no off-hire situation arises. In such circumstances, charterers may need to evaluate whether they can file a claim for negligence.
A completely operational ship may face hindrances in achieving its full functionality. Conversely, a defective ship might still be allowed to operate fully, as required at a specific time. Suppose a ship is compelled to set sail, but the local authorities restrict its operation. In that case, the ship’s complete functionality could have been impeded, resulting in its classification as off-hire (The Roachbank 1987 Case). This circumstance might prompt the shipowners to scrutinize the regulations pertaining to unsafe ports. Other charter agreements, such as the Shelltime 3 and 4, allude to the efficient operation of the ship. In such instances, any bureaucratic or legal obstacles would not be relevant unless they are linked to the actual physical condition of the ship itself or perhaps its suspected condition.
Ultimately, hindering the full operation of the ship does not imply a complete cessation of its functioning to qualify as off-hire. On the contrary, even a minor inefficiency can render the ship wholly off-hire. This may initially appear illogical, as the shipowner lacks any incentive to operate the ship partially if no hire is being earned. In fact, the shipowner is even vested in refraining from any operation until the ship attains full efficiency, thereby enabling the resumption of full hire earnings. However, the apparent strictness of this provision is mitigated by the fact that it allows for hire deduction only to the extent that a genuine loss of time has been experienced.
Considering the Loss of Time in Off-Hire
Presuming that the complete functioning of the ship has been impeded due to a reason falling within the mentioned clause, the ultimate query is whether, and if so, to what extent has time been lost? There exist two perspectives when it comes to evaluating time loss: From the shipowners’ standpoint – determining the duration for which the ship has been incapacitated from operating, and from the charterers’ standpoint – quantifying the extent to which their venture has been delayed.
The off-hire clauses in the Baltime, Shelltime 3 and 4, and New York Produce Exchange charters are all construed as net loss of time clauses. This implies that it is not sufficient ,as it would be under a period off-hire clause, to merely ascertain the duration for which the ship was not functioning optimally due to one of the required causes. Instead, in addition to this, charterers must establish the actual time delay they have suffered – the genuine setback to their venture (The Pythia 1982 Case).
For instance, let’s say during the unloading process, a crane on the ship malfunctions, rendering it partially operational. However, unless this malfunction results in an actual increase in the time required for unloading, there is no net loss of time and thus no off-hire. If the unloading does take longer due to the malfunction, it becomes necessary to calculate the extent of this delay as the permissible off-hire period. However, the obligation to pay hire is only suspended for as long as the off-hire event persists. Hence, if the ship’s deficiency is rectified, hire deductions are no longer applicable, even if the original inefficiency caused a continued delay in the charterers’ venture. In the event that charterers seek additional compensation, they must identify a breach of charter and make a damages claim.
Off-Hire Clause Advantages to Shipowners
The ultimate paradox of the clause concerning the net loss of time lies in the fact that it primarily favors shipowners when charterers are already in a disadvantaged position. In the event that charterers do not have any assignments for the ship and, therefore, their nonexistent venture is not delayed in any way, it follows that no matter how inefficient the ship may be, it will not be taken out of service. Consequently, charterers will still be obligated to pay the hire charges when, had they been earning freight, they would have been exempted from doing so. Charterers may, of course, endeavor to enhance their position through mutual agreement. They have the option to modify or supplement the fundamental off-hire clause, potentially incorporating a provision to encompass routine or emergency drydocking or repairs that may not necessarily occur in a drydock. Alternatively, charterers may introduce a clause that considers delays as off-hire even after the off-hire event causing those delays has concluded. What is crucial is that the off-hire stipulations are not disregarded as insignificant standard wording, but rather comprehended prior to committing to the arrangement in the first instance. Both parties should engage in negotiations to align with their reasonable expectations.
Defaulting Sub-Charterer in Time Charter
To extricate oneself from a charter agreement requires strategic maneuvering. The individual who finds themselves in dire circumstances may ardently desire to disentangle from the charter altogether. Their motivation could stem from a defaulting sub-charterer, challenging financial circumstances, or a glaring incongruity between the agreed-upon remuneration and the projected earnings. In such challenging circumstances, the charterer may opt for a legal recourse, citing a genuine or contrived breach by the shipowners as grounds for terminating the charter.
By abandoning the charter, the charterer effectively presents the shipowners with an accomplished fact—a decisive move made even before the potential for negotiation arises, even as the shipowner is attempting to mitigate their loss. The looming prospect of arbitration or litigation, coupled with the inherent uncertainty surrounding the recovery of losses from the charterers, may compel shipowners to adopt a more pragmatic stance in managing their expectations.
Early Cash Settlement with the Shipowner
A charterer who values their reputation or tangible assets (ensuring recoverability of any potential awards or judgments) might adopt a more cautious approach. Under such circumstances, initiating negotiations from the beginning may prove more fruitful. The charterer may discover that the shipowner, who has their own financing requirements and commitments to new constructions, is equally eager to reach an early cash settlement, just as the charterer is keen to minimize their losses. Both parties could potentially derive advantages from such a restructuring.
In this negotiation, akin to all negotiations, the charterer must endeavor to demonstrate—despite any difficulty the shipowner may have in recognizing it—that while having one sure thing is better than having two uncertain prospects, the sure thing in this case is not merely the contractual obligations outlined in the charter, but rather the proposed settlement currently put forth as an alternative.
Effects of Ship Off-Hire Clause
The Off-Hire Clause and other provisions in the time charterparty delineate the circumstances under which the ship ceases to be operational and results in a reduction in hire payment.
These provisions, along with the situations they describe, differ from another general clause designated by the phrase “Off Hire.” This particular clause, known as the “On/Off Hire Survey” Clause, pertains to surveys conducted to assess matters such as the quantity of fuel, including bunkers, onboard the ship, and any visible damages upon delivery to the charterers and upon redelivery to the shipowners. The reference to “Off Hire” signifies the point in time when the ship’s hire permanently ends within the specific time charter containing the clause.
The Off-Hire Clause” may also be referred to as a “Suspension of Hire” clause in certain charterparties.
In various Time Charters, the consequences for the charterer’s obligation to pay hire may vary under the off hire provisions. The duration of non-payment can commence from the occurrence of the event itself or from a mutually agreed time after the event.
Off-Hire Clause in the New York Produce Exchange Charterparty Form
According to the Off-Hire Clause in the New York Produce Exchange form, if there is a loss of time due to one of the agreed-upon reasons that hinder the full operation of the ship, the payment of hire ceases for the duration of the time lost. The phrase “loss of time” holds significance in this context. For instance, if there is a breakdown of the main engine but the ship is waiting outside a port for a berth, the ship is not considered off hire. The breakdown must impede the complete utilization of the ship at the time it occurs.
When the ship is awaiting a berth, it is not actively utilized by the charterer. This charterparty specifies that the payment of hire ceases for the duration of the time lost. It can pose challenges for the shipowner since all the time lost by the charterers, including the consequential loss of time, may be treated as off hire, even if the ship is restored to its non-off hire condition. This type of off hire clause is commonly known as a “Net loss of time” clause.
Off-Hire Clause in the BALTIME Charterparty Form
The “Suspension of Hire” Clause in the BALTIME charterparty states that if certain circumstances hinder or prevent the operation of the ship for more than 24 hours, “no hire shall be paid for the time lost during the period in which the ship is unable to perform the immediate service required.”
The LINERTIME Suspension of Hire clause is almost identical to the BALTIME clause in terms of content. These are also considered “net loss of time” clauses, but there exists a “threshold” of a pre-agreed number of hours after which the ship is considered off hire, and the non-payment applies to the time lost from the event causing the off hire. For instance, if there is a breakdown of the main engine lasting 20 hours, the threshold is not reached, and there is no off hire. However, if the breakdown lasts for 30 hours, the threshold is exceeded, and the off-hire period includes the time from the breakdown, which is 30 hours, rather than 30 hours minus 24 hours.
If the Off-Hire Clause is worded slightly differently, it could state that “if the complete operation of the ship is halted for a consecutive period of more than X hours, the payment of hire shall cease until the ship is restored to an efficient state to resume its service.” In this clause, there is still a threshold period, but the duration during which the hire is not payable is defined and ends when the ship is restored to an efficient state for resuming its service. This provides more certainty to the off hire provisions, as the off hire period begins with a specific incident and concludes with another event. The full hire becomes payable when the ship becomes sufficiently operational to resume its service. This type of off-hire clause is known as a “Period Off-Hire Clause.”
There exist two categories of clauses: the period loss of hire clauses and the net loss of hire clauses.
1- Period Off-Hire Clause: In relation to these types of clauses, the calculation of the off-hire duration is comparatively straightforward. The ship shall be considered off-hire from the initiation of the off-hire incident until the conclusion of the said incident, regardless of whether any time has been lost or not.
2- Net Loss of Time Clause: This particular clause is extensively utilized and can be found in charterparties such as NYPE ’46, Baltime, and Shelltime 4. The charterers are only entitled to declare the ship off-hire for the actual duration of time during which the ship’s full operation is impeded.
Under a Period Off-Hire Clause, the charterers can deduct hire for the actual time lost. In a Net Loss of Time Clause, it appears that the charterers can deduct hire for all time lost, even if an event occurs that restores the ship to its non-off hire condition.
Let’s consider a scenario where a time-chartered ship is scheduled to berth, but en route, it experiences an engine breakdown. This incident renders the ship off hire from the moment of the breakdown. The breakdown leads to a delay in berthing as the berth has been assigned to another ship. According to the Period off hire clause, the hire payment resumes once the engine repairs are completed. However, in the case of a Net loss of time clause, the ship would remain off hire until it is berthed. Nonetheless, English cases, such as The Marika M 1981 Case, have established that the payment of hire is reinstated when the ship becomes fully operational again.
Under U.S. law, the charterer’s utilization of the ship is of utmost importance. If an event occurs that would cause the ship to become off hire, and subsequently, the charterer loses the ship’s use due to consequent delays, the ship remains off hire until the delay is resolved.
It is worth mentioning the case of The Aquacharm 1982, concerning off hire. The ship was loaded to a draft exceeding the permitted limit for transiting the Panama Canal. As a result, partial discharge was required, and the partially discharged cargo had to be reloaded on the other side of the Canal after the ship completed its transit. This entire operation took nine days longer than the standard transit time. The Charterers argued that the ship was off hire. However, the English Court of Appeal ruled that the ship was not off hire since its efficiency as a working ship was not diminished by the lightening and reloading of the partial cargo.
Dealing with Off-Hire issues in Time Charter
Time charterparties inevitably include an off-hire clause that allows exceptions to the charterers’ obligation to pay hire from the moment of delivery until redelivery. The precise terms of this off-hire provision determine whether a particular event entitles the charterers to declare the ship off-hire and for how long. By considering a commonly used charterparty such as the NYPE ’46, charterers should bear in mind the following fundamental principles when asserting an off-hire claim:
- There must be a loss of time experienced by the charterers.
- The loss of time must be caused by an event specified in the charter.
- The event must hinder the ship’s complete operation.
- The charterers bear the burden of proving that the event falls within the scope of the off-hire provision.
- The off-hire provision limits the shipowners’ right to receive hire from delivery to redelivery and is thus interpreted narrowly against the charterers.
- Off-hire applies independently of any breach or fault on the shipowners’ part.
- General exception clauses in the charter usually do not affect the off-hire provision, unless explicitly stated otherwise.
- Off-hire events must be unforeseeable, meaning they do not naturally result from compliance with the charterers’ instructions.
- Off-hire events caused by the charterers may, in certain circumstances, prevent them from invoking the off-hire provision.
Some of the Principal Off-Hire Events
Shortage of Personnel: This pertains to any numerical insufficiency of the officers and crew (excluding contractors) and not any other form of insufficiency or their refusal to comply with orders. Incorporating the term “default” would likely encompass circumstances where the crew refuses to execute legitimate and lawful orders from the charterers, NYPE ’93 accounts for “insufficiency and/or default and/or strike of officers or crew”.
Malfunction or damage to the hull, machinery, or equipment: This is self-explanatory. The term “malfunction” should be interpreted in a widely understood and reasonable manner, encompassing defects that, upon discovery, would necessitate a prudent operator to proceed to a harbor for repairs.
Destruction or impairment of the hull, machinery, or equipment: It would likely not qualify as an off-hire event if the damage resulted from the charterers’ utilization of the ship (refer to our article on hull fouling, for instance).
Confinement due to unforeseen accidents affecting the ship or cargo: Generally, this refers to incidents that are typically covered by insurance. An “average incident” does not necessarily indicate general average, although general average incidents might be covered under certain circumstances. The term “confinement” implies that there must be some physical or geographical limitation on the ship’s movements in relation to its service under the charter. Therefore, delay in discharging operations caused by cargo damage (as opposed to the ship’s arrest) would not constitute confinement. Since such an event must not result from the natural compliance with the charterers’ orders, there is legal precedent stating that confinement due to piracy would not be considered an off-hire event under this clause.
Confinement due to ship arrest (unless such arrest is caused by events for which the charterers, their employees, representatives, or subcontractors are responsible) – only in NYPE ’93: Sub-charterers, shippers, and consignees are considered the charterers’ representatives, and any arrest caused by these parties will not render the ship off-hire.
Due to any other factor impeding the complete operation of the ship: Any event claimed as an off-hire occurrence under “any other factor” must be of the same nature as those specifically mentioned in the earlier part of the clause. This could include, for example, legal action or administrative measures taken by a port or other lawful authority (exercised in a proper and reasonable manner) relating to the ship’s condition or the efficiency of its crew (this is more restrictive than “Any other cause whatsoever” mentioned below).
Any other cause whatsoever: This implies that an event claimed as an off-hire occurrence under “any other cause” does not have to be of the same nature as those specifically mentioned in the earlier part of the clause. Consequently, if this addition were made, off-hire events could encompass any event that leads to time loss and hampers the full operation of the ship – for example, the ship’s arrest by cargo interests, arbitrary actions by local authorities, or confinement due to piracy.
Once charterers have established the occurrence of any of the events listed in the off-hire clause, they must subsequently substantiate that the said event hindered the ship from carrying out the subsequent operation mandated by the charter service at that particular time.
What precisely is the subsequent operation demanded by the charter service? This matter of fact can occasionally prove challenging to determine, leading to disagreements. The inquiry pertains not to the service the charterers hoped or anticipated the ship would be capable of performing, but rather the service they actually required when the off-hire event transpired. Typically, a ship is not impeded from functioning if, in order to fulfill the charterers’ directives, it engages in an operation that is ordinarily expected within the scope of their charter.
The ship will not be obstructed from its duties if, to execute the charterers’ instructions, shipowners must first carry out an operation that is typically mandated by the charterers.
Hence, a ship will be considered as performing the chartered service while undertaking tasks such as bunkering, ballasting, lightering, and hold cleaning, if these services were the subsequent requirements at the time, even if the charterers would have preferred the ship to carry out a different service, such as cargo loading. Here are a few examples:
Ship Off-Hire Examples
Ship Off-Hire Example 1:
Subsequent service required Delays at the loading port occur due to insufficient cleaning of the holds by the crew. Further cleaning of the holds is necessary prior to cargo loading. The subsequent service required is not the loading of cargo, but the additional cleaning of the holds. According to NYPE ’46, the ship would not be considered off-hire.
Ship Off-Hire Example 2:
A captain is instructed to load as much cargo as possible to achieve the required draft for passage through the Panama Canal but negligently exceeds the cargo limit, necessitating the lightening of the cargo. According to NYPE ’46, the ship would not be considered off-hire, as the ship will not have been prevented from fully carrying out its duties: in this scenario, the subsequent service required would be the lightering of the ship.
What is the duration for which the ship can be deemed off-hire?
There exist two categories of clauses: period loss of hire clauses and net loss of hire clauses.
1- Period Clauses: Within these particular clauses, the computation of the off-hire period is relatively straightforward. The ship will be considered off-hire starting from the initiation of the off-hire event until the conclusion of said event, regardless of whether any time has been lost.
2- Net Loss of Time: This type of clause is extensively utilized and can be found in the NYPE ’46, Baltime, and Shelltime 4 charterparties. The charterers will only have the authority to declare the ship as off-hire for the actual time lost during the period in which the ship’s full operation is impeded.
Difficulties may arise when determining the exact amount of time lost, if any. For instance, if a ship possesses four cranes and one of those cranes malfunctions, the charterers might assume that the ship is off-hire for 1/4 of the time required to complete cargo operations. However, this assumption may not hold true if no delay actually occurs due to the usage of the remaining functional cranes to complete the cargo operations without any time loss.
The latter portion of clause 15 in the NYPE ’46 charter explicitly stipulates that if the ship’s speed is reduced due to defects or breakdowns in the ship’s hull, machinery, or equipment, the charterers have the right to decrease the hire payment for the time lost, as well as any additional fuel consumed and any extra expenses incurred.
Do charterers consider additional time lost?
A ship experiences a temporary cessation of operations due to an engine malfunction. Consequently, it fails to catch a tidal window or forfeits its designated berthing position. As per clause 15 of the New York Produce Exchange (NYPE) form of charter party, the ship will only be deemed off-hire during the period when its full functionality was impeded i.e., until the engine was repaired and the ship was capable of resuming its intended service. Any subsequent delay resulting from the off-hire incident, such as the inability to catch a tidal window, would typically fall outside the off-hire period.
Do charterers consider the time that is compensated for?
In general, shipowners cannot claim credit for any time that is compensated for after the off-hire incident. For instance, let’s consider a scenario where a ship is voyaging from the Indonesia to Qingdao. Unfortunately, the ship experiences a breakdown in the Indonesia, which is considered an off-hire event. As a result, the ship needs to sail to Vietnam for repairs. Under clause 15 of NYPE ’46, it could be debated whether the ship is still off-hire during the time spent on the Indonesia-Vietnam leg, even if time is later compensated for.
It is established that the ship’s mere operation in a manner consistent with performing the next required service does not imply that it is actually performing that service. Therefore, in this example, it is likely irrelevant for determining whether or not the ship was off-hire that part of the ship’s route overlapped with the route to Qingdao while proceeding to Vietnam for repairs. Sailing towards the charterers’ intended destination may not be considered by an English Court or Tribunal as equivalent to sailing directly to that destination. However, in this example, if Vietnam had been the intended next destination, the outcome might have been different.
Can shipowners contend that there has been no loss of time if, during the duration of the time lost, the ship would not have been able to dock regardless?
Suppose a ship drifted in international waters outside a port for a span of nine days due to an off-hire incident. It would be inconsequential, concerning off-hire as per clause 15 of NYPE ’46, that had the ship sailed to the port nine days earlier, it would still have been unable to berth within the nine day period due to congestion. In such a scenario, the subsequent required action would be to navigate directly to the port, rather than drifting in international waters awaiting repairs. Consequently, the ship would be deemed off-hire for a duration of nine days.
Other events not specified in off-hire clauses, which authorize charterers to subtract from hire payments, may still entitle charterers to withhold full or partial hire payments if they have a legitimate claim against shipowners for violating the charterparty, resulting in a loss or expense. Charterers possess the authority to exercise this right of set off under the following circumstances:
- Shipowners’ breach of the charterparty has impeded or disadvantaged charterers in utilizing the ship, whether partially or entirely.
- Charterers exercise their right in a bona fide manner and on reasonable grounds, such as deducting an amount that reasonably corresponds to the claim.
- Charterers provide evidence of shipowners’ breach of the charter agreement.
Charterers may possess the entitlement to offset a demand for indemnification against the remittances for hire concerning the subsequent claims:
- Violation of an assurance pertaining to ship speed.
- Negligence on the part of the shipowners in adequately loading a complete cargo, leading to a time loss.
- Delays incurred due to the shipowners’ failure to duly fulfill their responsibilities in maintaining cleanliness within the holds, resulting in a loss of time.
Examples of assertions that typically do not elicit the entitlement to offset against remittance for the lease:
- Claims pertaining to the impairment of merchandise
- Forfeiture of an envisaged consignment to be loaded by the lessees
- Involvement of the crew in a fraudulent act with fuel providers
- Claims concerning bunkering
Alternative Remedies for Charterers in Off-Hire Clause
Alternative remedies accessible to the charterers should be considered. It is essential to bear in mind that in accordance with clause 15 of NYPE ’46, the ship shall only be deemed off-hire during the period when time is forfeited and the full functionality of the ship has been hindered. However, if the incident leading to off-hire also constitutes a violation of the charterparty by the shipowners, the charterer may potentially seek compensation for:
- Additional time lost or any other incurred losses resulting from the breach of the charterparty.
- In cases where the ship was not off-hire, damages equivalent to the time lost, which would correspond to the hire fee for that specific period. The charterers must establish a breach of the charterparty committed by the shipowners.
The charterers will need to demonstrate that, as a consequence of the shipowners’ breach, they have been unable to utilize the ship or have experienced detrimental effects in its usage during the relevant period. This differs from placing the ship off-hire, charterers are not required to demonstrate a breach in order to do so.
For instance, an off-hire event could lead to the ship losing time by missing a tide, a berthing slot, or incurring losses due to a missed fixture. If these losses occur as a result of a breach of the charterparty, the charterers may have grounds to claim damages.
However, a proposition of this nature would be subject to the following conditions:
Charterers are required to substantiate a violation of the charterparty by shipowners Please note that some of the obligations of shipowners are not absolute, such as their duty to maintain the ship. Certain obligations may be qualified by the requirement to exercise “due diligence,” for instance, obligations pertaining to seaworthiness in relation to cargo claims when the US COGSA or the Hague/Hague-Visby Rules are incorporated into the charter).
Shipowners, on the other hand, might have defenses available to them. For instance, if the US COGSA or the Hague/Hague-Visby Rules are incorporated into the charter, Article 4 rule 2(a) allows shipowners to defend themselves if the loss was caused by the actions, negligence, or default of the master, mariner, pilot, or servants of the shipowners in the navigation or management of the ship.
In situations involving lost sub-fixtures, charterers would need to demonstrate that the breach by shipowners resulted in damages incurred by charterers in relation to the lost sub-fixture. Moreover, they must establish that such damages are not excessively remote. For example, if the cancelling date under the sub-fixture was missed and the fixture was subsequently canceled due to additional time lost caused by a separate intervening event occurring after the shipowners’ breach, such as the ship missing a tide, it could be argued that a claim for the lost fixture was not a direct consequence of the shipowners’ breach and therefore too remote to be recoverable as damages.
Please note that the recoverability of a damages claim is a specialized subject in English law, particularly concerning causation and remoteness. In-depth legal advice may be necessary to navigate this area effectively.
What is Off-Hire Clause in Time Charter?
An Off-Hire Clause in a Time Charter refers to a provision that determines circumstances under which the charterer does not have to pay for the use of the ship, despite having it on charter. The situations when a ship could be considered “off-hire” generally include periods when the ship is unavailable for service or unable to perform its stipulated functions, due to reasons such as:
- Undergoing repairs or maintenance.
- Experiencing engine or other machinery failures.
- The ship or crew is detained or arrested.
- Navigational issues due to the fault of the ship, which are not related to weather or sea conditions.
The main goal of the off-hire clause is to ensure that the charterer only pays for the period when the ship is in service and able to fulfill its charter party obligations. The specifics of the off-hire clause can vary between different charter parties and can often be a point of negotiation. Therefore, it is essential for both parties to understand the exact conditions stipulated by the off-hire clause in their specific contract.
When the ship is off-hire, the charterer is typically exempted from paying the charter hire until the issue is resolved, and the ship is deemed back “on-hire.” However, it’s crucial to note that not all downtime events will result in an off-hire situation. It depends on the terms of the specific clause written into the time charter agreement.
The off-hire clause is intended to protect the charterer from paying for a service they are not receiving. But at the same time, the shipowners also want to protect their interests. As a result, the precise wording of these clauses can lead to disputes between shipowners and charterers.
For example, a common area of dispute is what constitutes a period of off-hire. Some clauses stipulate that a temporary period of unavailability or reduced performance doesn’t count as off-hire unless it exceeds a certain period. The point at which the off-hire period begins and ends can also be a matter of dispute.
Moreover, there may be exceptions where, even though the ship is unable to provide service, it would still be considered on-hire. These could include circumstances such as strikes by the crew, or when the ship is detained by authorities because of actions or non-actions of the charterer.
Understanding and properly implementing the off-hire clause is crucial for both parties because it has significant financial implications. A ship that is off-hire is a ship that isn’t making money for its shipowners, and yet might still incur costs such as wages, maintenance, and port fees. On the other hand, the charterer doesn’t want to pay for a ship that cannot fulfill its intended purpose.
In some instances, the off-hire clause may also stipulate that the charterer is entitled to a proportionate refund of the hire for any time that the ship is off-hire. This can sometimes be a contentious point, and precise language is essential to avoid disputes.
It’s also important to consider insurance in the context of the off-hire clause. In many cases, if a ship is off-hire due to something like damage or a machinery breakdown, the shipowners can claim these losses from their insurers. However, it’s necessary to have clear definitions of what constitutes an off-hire event for the purpose of insurance.
Moreover, since the off-hire clause is generally beneficial to the charterer, it can impact the negotiations around the charter rate. A contract with a broad off-hire clause may command a higher charter rate than one with a more narrowly defined clause.
Overall, while the off-hire clause might seem like a relatively small part of a time charter agreement, it has considerable significance. Therefore, both the shipowner and charterer must pay due attention to its terms and potential implications during contract negotiation and operation phases of the charter party. Misunderstandings or disagreements about the off-hire clause can lead to costly disputes, which might need to be resolved through arbitration or legal proceedings.
Ship Speed Performance Warranty and Off-Hire Clause
The Ship Speed Performance Warranty and the Off-Hire Clause are two important elements in a Time Charter that are often closely related.
- Ship Speed Performance Warranty: In many time charter contracts, the shipowner provides a warranty concerning the speed and fuel consumption performance of the ship. Essentially, the shipowner guarantees that under certain specified conditions, usually good weather, the ship can maintain a certain speed while consuming a specified amount of fuel.
The reason this is significant is because the charterer plans its operations and calculates costs based on these promised performance levels. If the ship fails to meet the warranted speed and performance criteria, the charterer could potentially claim damages for breach of warranty.
Speed performance warranties are typically defined carefully in the contract, specifying the conditions under which they apply (like weather conditions), the speed, and the amount of fuel consumed. Any deviation from these stipulated figures without a valid reason may constitute a breach of warranty.
- Off-Hire Clause: As explained earlier, the off-hire clause stipulates when the charterer can cease paying hire because the ship is not available for use. Often, if a ship’s inability to achieve the warranted speed leads to a significant underperformance, it may trigger the off-hire clause.
For instance, if the ship’s speed decreases due to machinery failure or other reasons (excluding external factors like bad weather or rough seas), and the shipowner is unable to remedy this promptly, the charterer may be able to invoke the off-hire clause. This is because the ship is not providing the service as stipulated in the charter party agreement.
As such, these two elements in a time charter are interrelated and can significantly impact the charterer’s costs and the shipowner’s income. They can also form the basis for disputes, so it is crucial that they are clearly defined in the contract. Both parties should ideally seek legal advice to ensure they understand these terms and how they might affect their responsibilities and rights under the charter party agreement.
In which situation ship can be considered as off-hire?
“Off-hire” is a term used in the chartering business to refer to a situation when a chartered ship is not available for the service for which it was hired. Various reasons might lead a ship to be considered off-hire, depending on the specific terms in the charter party agreement. However, some general situations that can render a ship off-hire include:
- Breakdowns or Defects: If the ship experiences mechanical breakdown or defects that prevent it from functioning as required, it could be considered off-hire until it’s repaired. This includes issues with the engine, navigation systems, or any other critical part that affects the ship’s operability.
- Dry-Docking for Repairs or Maintenance: A ship is usually considered off-hire when it’s in dry-dock for repairs or maintenance. Although scheduled maintenance might not count towards off-hire time if stipulated in the agreement, unscheduled or emergency repairs usually do.
- Detentions or Arrests: If a ship is detained or arrested by authorities for legal issues, it would be considered off-hire. This can happen due to issues such as contravention of maritime laws, customs disputes, or any other legal disputes.
- Delays Due to Crew: If the crew causes a delay, such as through a strike or if the ship is waiting for a change of crew, it may be considered off-hire.
- Inability to Load/Unload Cargo: If the ship is unable to load or unload cargo due to a failure of its equipment or because it is unfit to carry the cargo, it could be considered off-hire.
- Navigational Incidents: If the ship is grounded, stranded, or has a collision, it will be considered off-hire during the period of salvage or repair.
- Contamination: If the ship is contaminated, perhaps by the previous cargo, and this hinders the ability to load the new cargo, the ship would be considered off-hire.
- Safety Violations: In case the ship has safety violations that make it unfit for service, it would be off-hire until those issues are corrected.
- Weather-Related Issues: While weather conditions are typically not considered in off-hire clauses, if the ship is unable to operate due to extreme weather and its aftermath (e.g., hurricane, heavy storm), it might be considered off-hire. This, however, largely depends on the terms outlined in the charter party.
- Underperformance: Some charter parties include clauses that allow a ship to be declared off-hire if it underperforms, for instance, if the ship doesn’t reach the agreed speed, or if it consumes more fuel than specified in the charter party.
- Deviation from Course: If a ship deviates from its agreed course for reasons not accepted in the charter party, the time lost due to this deviation may be considered off-hire.
- Delays in Ports: Delays experienced in ports can sometimes lead to off-hire situations. For instance, if the ship is waiting for a berth to become available, or for tugs, pilots, or clearance from port authorities, and the charter party specifies that these delays count as off-hire, then the ship would be off-hire during these periods.
It’s important to reiterate that the specifics of what constitutes an off-hire event are usually clearly defined in the terms and conditions of the charter party agreement between the shipowner and the charterer. Not all of the situations listed above will apply in every case, and there may be other, case-specific situations that could lead to a ship being considered off-hire. It is also worth mentioning that any off-hire period will typically result in a loss of hire payment from the charterer to the shipowner for that duration.
These are general situations and the exact circumstances under which a ship is considered off-hire can vary and should be outlined in the specific terms and conditions of the charter party agreement. The off-hire clause is one of the most important in a time charter party as it directly affects the income of the shipowner and the costs of the charterer.