Shipowner Right to Withdraw for Non-Payment
Hire is the price paid for the use of the ship and is usually calculated on the basis of a fixed sum per ton of the ship deadweight for a specific period of time, such as 30 days or a calendar month.
Hire is normally payable in advance at monthly or semi-monthly intervals. Where ships are chartered for relatively long periods of time, there is constant exposure to the risks of currency devaluations, fluctuations in the market rate of hire, and the effects of inflation on the operating costs of the ship defrayable by the shipowner.
It is, therefore, common for the parties to make express provision in the charter for such contingencies by the use of such devices as a currency clause, providing for a fixed rate of exchange between the currency stipulated for payment of hire and any other relevant currency, and an escalator clause providing for a periodic revision of the hire rate.
At common law time is not of the essence of a charter of this type with the result that a shipowner cannot repudiate the contract for late payment of hire unless the delay is such as to frustrate the object of the contract.
It is consequently standard practice for a specific clause to be included in the charter giving the shipowner the right to withdraw his ship in default of payment of an instalment of hire on the due date. While the original object of the clause was to enable a shipowner to put pressure on the recalcitrant charterer, or to recover the ship from an incipient bankrupt, it has been used in recent years to take advantage of fluctuations in the market rates of hire. Ships have accordingly been immediately withdrawn by their owners on a default in payment of the hire and then offered back to the identical charterers for the residue of the charter period at the current enhanced market rate.
The courts have adopted a strict approach in the interpretation of such withdrawal clauses and have refused to exercise their discretion by extending towards the charterer any form of equitable relief against forfeiture. This problem can, however, be avoided by including in the charter an anti-technicality clause requiring the shipowner, on default in payment of hire, to give the charterer a specified period of notice before exercising his right to withdraw the ship.
Charterers’ Obligation to Pay Hire
Under English jurisprudence, the Charterers bear an absolute obligation to promptly pay the hire, but their right to withdraw the ship in case of default in payment does not arise automatically. It necessitates the inclusion of an express term in the charter party to enable such action.
To address these challenges, most standard time-charter forms incorporate a clear provision for withdrawing the ship in case of non-payment or unjustified underpayment of hire.
However, this right is usually qualified by an Anti-Technicality Clause, which stipulates that a notice of default must be served on charterers, allowing them a specific period to rectify the breach. Examples of such clauses are clause 11(b) of the NYPE 1993 and clause 9(a) of the SHELLTIME4.
While the ability to withdraw the ship is a valuable right for Shipowners, especially during rising market conditions, it may not be the most suitable solution when rates are stable or falling.
Mode of Payment
In determining whether the right of withdrawal has come into effect and can be exercised, Shipowners need to consider the mode of payment provisions. These days, electronic funds transfer is the most common method used for payment. The order is sent from the Charterers’ bank to the Shipowners’ bank, instructing the latter to credit the Shipowners’ account and provide information on seeking reimbursement.
The general rule is that payment is considered made when the Shipowners’ bank decides to credit their account. Charterers’ instructions to transfer funds alone are insufficient (The Brimnes 1974 Case). This principle is expressly reflected in clause 11(a) of NYPE 2015, which specifies that the funds must be received into the shipowner’s bank account.
However, if Charterers make payment using an irrevocable payment order, the payment may be regarded as made as soon as the order is received by the Shipowners’ bank.
Waiver of the Right to Withdraw
Waiver can be inferred from either words or conduct. For instance, not exercising the right to withdraw within a reasonable time after its occurrence or accepting late funds from Charterers without any reservation would imply waiver.
An interesting scenario arose in The Caravos Liberty 2019 Case, where charterers underpaid the fourth hire installment due to an overconsumption claim, which later turned out to be erroneous. The Shipowners protested but did not serve an anti-technicality notice. Subsequently, the Charterers paid the fifth and sixth installments in full, as required under the charterparty, but did not make up the shortfall for the fourth installment, even though the Shipowners had explicitly indicated that the payment was necessary. After settling the sixth installment, Shipowners served an anti-technicality notice, calling for payment of the full balance of the hire due, and subsequently withdrew the ship based on that shortfall.
A dispute arose regarding whether the Shipowners were entitled to serve the anti-technicality notice and invoke the withdrawal procedure after the payment of the sixth installment, which related to a previous payment default, Charterers’ failure to pay the fourth installment.
Upon appeal to the High Court, Mrs. Justice Cockerill DBE dismissed Shipowners’ appeal on the grounds that the reference to hire in the BIMCO (Baltic and International Maritime Council) Non-Payment of Hire Clause for Time Charter Parties, incorporated into the charter, pertains to individual installments with specific due dates. Thus, the right to withdraw is tied to those individual installments and their due dates, rather than the overall balance. Consequently, the Shipowners’ withdrawal of the ship without contractual justification constituted a repudiatory breach.
The above case highlights the importance for Shipowners to determine whether an underpayment is justified and to act promptly.
In practice, deciding whether to withdraw the ship within the limited available time may be challenging, as Charterers may argue that they have the right to deduct, as was the case in The Caravos Liberty. The risk of facing a wrongful withdrawal claim needs to be considered alongside any potential commercial advantages, such as securing more favorable rates.
An open question remains as to whether a demand for hire necessarily waives any previously accrued right to withdraw arising from prior late payments. Although the point was raised but not decided in The Mahakam 2012 Case, where the Demise Charterers unsuccessfully argued that Shipowners’ demands for payment of subsequent hire installments amounted to a waiver of their right to terminate for non-payment. Previous authority in Modern Transport Co Ltd v Duneric Steamship Co 1917 Case suggests that an unqualified demand for payment of a particular hire installment does indeed waive any entitlement to withdraw based on late payment of previous installments.
Withdrawal and the Right to Damages
If, at the time of a valid withdrawal, there is hire both payable and earned, the Shipowners undoubtedly have the right to claim it, along with any other amounts owed by the Charterers at the time of withdrawal.
Shipowners often inquire whether they can also claim damages for any loss of net earnings , for the remaining charter period, caused by the market rate of hire at the time of withdrawal being lower than the charter rate.
Following the Court of Appeal’s decision in Spar Shipping AS v Grand China Logistics Holding Group Co Ltd 2016 Case, it is now established that, in the absence of specific terms, hire payment obligations are not considered conditions but rather innominate terms. The seriousness and consequences of a breach must be assessed on a case-by-case basis.
In cases where Shipowners independently decide to exercise the right to terminate, courts have been hesitant to accept Shipowners’ entitlement to damages for the balance of the charter period unless Charterers’ conduct amounts to a repudiatory breach of the charter. To prove a repudiatory breach, Shipowners must demonstrate that Charterers’ default in payment indicates an intention not to perform or an inability to do so. This will always depend on the specific circumstances of each case.
Lawyers often get involved at this stage as Shipowners try to discern any indication from Charterers that they no longer intend to be bound by the contract. If Charterers indicate as such, Shipowners can then consider such conduct as repudiatory and terminate the contract. In such cases, established authority dictates that Shipowners can recover damages for the balance of the charter period, representing losses that naturally and probably result from Charterers’ default in payment such as in The Raithwaite 1921 Case. However, this entitlement is subject to Shipowners’ duty to mitigate their losses by taking advantage of any available market at the time they accept the charterers’ repudiation. Failure to do so may lead to a reduction in their damages.
When contemplating whether to exercise their right to withdraw the ship from Charterers’ service due to their failure to comply with hire payment obligations, Shipowners must carefully consider various factors and aspects to safeguard their legal position.
A thorough review of the specific charter terms is essential, and the gravity of Charterers’ breach must be assessed to determine whether
- Shipowners can validly exercise their right to withdraw without being in repudiatory breach themselves and
- Shipowners are entitled to damages for the balance of the charter period
What is Anti-Technicality Clause in Ship Chartering?
An Anti-Technicality Clause (ATC) in a ship chartering contract is a clause designed to protect the charterer from any technical breach of the terms of the charter. These “technicalities” may include late payments, certain forms of minor breach, or other small issues that could otherwise provide the owner with a legitimate excuse to terminate the charter agreement or lay claim to damages.
For instance, when it comes to late payments of hire, if a payment is even a day late, the owner can, under common law, withdraw the ship from the charterer’s service, and the charterer would be liable for wrongful termination of the charter.
To prevent this severe outcome for a relatively minor breach, the Anti-Technicality Clause was created. Anti-Technicality Clause (ATC) provides the charterer with a grace period (often 72 hours) after receiving formal notice from the owner about the late payment, during which they can rectify the issue without incurring penalties or risking termination of the charter.
However, the specific protections provided by the Anti-Technicality Clause (ATC) can vary from contract to contract, and it’s crucial for both parties to understand what is and isn’t covered. The application and interpretation of Anti-Technicality Clause (ATC) clause often lead to legal disputes and thus, it’s important to ensure that it’s carefully drafted and reviewed by a legal expert in maritime law.
While Anti-Technicality Clauses are beneficial for charterers, they do not eliminate all the risks associated with defaulting on the terms of a charter. For instance, if a charterer fails to make payment within the grace period specified in the Anti-Technicality Clause (ATC), the shipowner is still entitled to withdraw the ship from service and may pursue legal action against the charterer.
Additionally, Anti-Technicality Clauses (ATC) are not always applicable to all breaches of contract. They are typically designed to address minor breaches or “technicalities”, such as late payments. More significant breaches of the charter, such as using the ship for unauthorized purposes or damage to the ship caused by gross negligence, will not be protected by an Anti-Technicality Clause (ATC).
It’s also important to note that Anti-Technicality Clauses need to be explicitly stated in the charter party agreement. If no such clause is present, the charterer won’t benefit from the protections that an Anti-Technicality Clause (ATC) provides.
The specific wording of the Anti-Technicality Clause (ATC) can also have a significant impact on how it’s interpreted and applied. For instance, an Anti-Technicality Clause (ATC) that gives the charterer a 72-hour grace period “after receipt of notification” might be interpreted differently than one that gives the charterer a 72-hour grace period “after the owner becomes aware” of a breach.
Finally, while Anti-Technicality Clauses are common in ship chartering contracts, Anti-Technicality Clauses (ATC) are not universally used. Different jurisdictions may have different rules regarding the use and enforcement of such clauses. Additionally, whether or not to include an Anti-Technicality Clause (ATC), and the specifics of how it should be worded, are often points of negotiation between the shipowner and the charterer.
Do Shipowners possess the entitlement to withdraw the ship from the charter or to suspend service?
Unless explicitly stipulated in the charter party, there exists no right under English law to withdraw the ship from the charter or to suspend service due to non or late-payment of hire. Instead, in the event of non or late payment of hire, shipowners merely possess the right to claim the outstanding hire amount, along with interest on the delayed payments.
In cases where Shipowners have an explicit right to withdraw the ship from the charter or to suspend service
NYPE 1946 – Lines 61-62, NYPE 1993 Lines 150-151, and Baltime – Clause 6 / Line 86 all grant an explicit right to withdraw the ship for late payment.
Only the standard NYPE 1993 charter party form provides an express right to the Shipowner to suspend service. Other charter parties will require a rider clause granting this right, such as the BIMCO (Baltic and International Maritime Council) Non-Payment of Hire Clause for Time Charter Parties.
We kindly suggest that you visit the web page of BIMCO (Baltic and International Maritime Council) to learn more about BIMCO (Baltic and International Maritime Council) Non-Payment of Hire Clause for Time Charter Parties and to obtain the original Charter Party forms and documents. www.bimco.org
In cases where Owners do not have an explicit right to withdraw the ship from the charter or to suspend service
Where there is no explicit right to withdraw, and Shipowners wish to regain possession of their ship from the charter, Shipowners face a more challenging route. In such instances, Shipowners will need to establish that Charterers’ failure to pay hire also constitute a repudiatory breach of the charter, which, once accepted by Shipowners, would bring the charter to an end. The difficult question Shipowners confront in this situation is determining how many missed hire payments are necessary to establish a repudiatory breach.
What is Repudiatory Breach in Ship Chartering?
In ship chartering, a repudiatory breach refers to a situation where one party to the charter party contract behaves in a manner that communicates their intention not to fulfill their contractual obligations. This typically occurs when one party either refuses to perform their obligations, is unable to perform them, or performs them in a way that fundamentally contradicts the terms of the contract.
For example, the shipowner may commit a repudiatory breach by refusing to provide the ship at the agreed time and place. Similarly, the charterer might commit a repudiatory breach by refusing to load or unload the cargo in a timely manner or failing to pay hire or freight as agreed in the contract.
The impact of a repudiatory breach is significant. If one party commits a repudiatory breach, the other party has the option to terminate the contract and may be entitled to damages. However, the party that is not in breach must make a decision whether to accept the repudiatory breach and terminate the contract or affirm the contract and insist on performance by the other party.
For instance, consider a case where a ship owner has chartered out their ship to a charterer, who in turn has contracts with several other parties based on the use of that ship (e.g., to transport goods for a third party). If the ship owner commits a repudiatory breach of the charter party contract (for instance, by failing to deliver the ship in a seaworthy condition or on time), the cascading effects can be substantial. The charterer might not only lose the use of the ship but might also face potential breaches of their own contracts with other parties, resulting in further potential damages and legal complications.
Moreover, the complexities of international trade and the variety of legal systems that may come into play can make resolving disputes related to repudiatory breaches in ship chartering particularly complex. Questions may arise about which country’s laws apply, how damages should be calculated, and how any legal judgments can be enforced.
For this reason, ship chartering contracts often include arbitration clauses that specify how and where disputes will be resolved. Arbitration can offer a more flexible and potentially quicker way to resolve disputes than going to court, though the process and outcome can still be uncertain.
In conclusion, a repudiatory breach in ship chartering is a serious matter. It reflects a fundamental failure of one party to meet their contractual obligations, and it can result in the termination of the contract, significant financial and legal consequences, and potentially complex international legal disputes.
Ship Hire Remittance Genuinely Delayed by the Charterers
The Rule of Midnight
Seldom does the charter stipulate a specific deadline or time for payment. In the absence of an explicit agreement or established custom, Charterers have until midnight on the due day to make the payment of the ship hire. For example, The Afovos Case. Consequently:
- The time of the ship’s delivery under charter holds no significance; and
- The fact that the bank is closed and the hour is too advanced to transfer the funds will be inconsequential.
When is Ship Hire Payment Considered Completed?
The general principle dictates that payment is considered made when the Shipowners’ bank chooses to credit the account. Therefore:
- Charterers’ instructions to transfer funds do not equate to payment.
- An irrevocable instruction to the bank to pay the hire might be considered paid once the order is received and authenticated by the Shipowners’ bank.
Ship Hire Payment Falling due on a Non-Banking Day
In the case of hire payable in advance, if the hire is due on a non-banking day, ship hire payment must be made earlier. Nonetheless, Shipowners must still wait until the official due date before withdrawing the ship. For example, The Laconia Case.
For instance, if the Ship Hire Payment falls due on a Sunday, where Sunday is not a banking day, payment must be made by Charterers on Friday. However, Shipowners can only withdraw the ship or initiate the withdrawal process, depending on the precise charter party term, after midnight on Sunday. Shipowners must also exercise caution as the tribunal may find a longstanding practice of Shipowners accepting late payment throughout the charter party’s history.
Partial Payment or Non-Payment of Ship Hire by Charterers
When Shipowners possess an explicit right to withdraw the ship or suspend hire, they reserve the option to do so if the Charterers fail to make timely and adequate payments or if there are no payments at all. However, it should be noted that in specific situations, Charterers have the legitimate authority to make deductions from the ship hire. Under such circumstances, if the charterers have the right to deduct, and as a consequence, no hire is due, the Shipowners will not be entitled to withdraw their services.
Ship Hire Deductions
Under what circumstances do Time Charterers have the right to deduct from Ship Hire
Charterers have the right to make deductions from the hire in certain scenarios. These circumstances include:
- Having a contractual right
- Encountering an off-hire event
- Having a right of “set-off.”
If Charterers possess a legitimate right to deduct, Charterers must quantify their loss through a reasonable and bona fide assessment. Deducting only the sum that has been properly quantified will ensure that Charterers are not in default. In such a case, Shipowners will not have the right to withdraw the ship or suspend services, as confirmed in The Nanfri Case.
It is essential for both parties (Shipowners and Charterers) to understand their respective rights and obligations under the charter party agreement to avoid disputes and foster a harmonious working relationship.
Can Shipowners withdraw the ship once payment is belated?
A distinction must be drawn based on whether the charter party includes an Anti-Technicality Clause (ATC) or not.
- In cases where there exists an express entitlement to withdraw, and No Anti-Technicality Clause (ATC) is present, Shipowners may effectuate withdrawal as soon as the hire is delayed and/or overdue.
- In situations where an express right to withdraw exists, but the charter party does encompass an Anti-Technicality Clause (ATC), Shipowners will be obligated to adhere to certain formalities and grant Charterers a grace period before they can exercise their right to withdraw.
Anti-Technicality Clause (ATC) in Time Charter
The customary version of NYPE 93 Charter Party Form (excluding the NYPE 1946 edition) incorporates Anti-Technicality Clause (ATC). Please note that if the standard charter form lacks such a provision, it is customary to include an Anti-Technicality Clause (ATC) in the Rider Clauses.
In the event that Shipowners fail to adhere strictly to the prescribed procedure or prematurely withdraw within the grace period’s confines, Shipowners will be deemed to have committed a repudiatory breach of the charter. This entitles Charterers, at their discretion, either to keep the charter in force or, as an alternative, to consider the charter terminated which Shipowners, in this particular scenario, won’t object to. Subsequently, the Charterers can claim damages from the Shipowners to cover any losses incurred due to the charter party’s termination. Hence, it becomes imperative to meticulously follow the Anti-Technicality Clause (ATC) procedure to the letter.
Ship Withdrawal Notice by Shipowners
The Ship Withdrawal Notice must be resolute and unambiguous. Phrases such as “owners will consider withdrawing/may withdraw/will rely on their rights to withdraw/will temporarily withdraw” ought to be avoided.
Ship Withdrawal Notice’s wording must explicitly state:
- The hire has not been paid promptly and in full; and
- Shipowners are presenting an ultimatum that unless the full hire owing is paid within the stipulated grace period, Shipowners will withdraw the ship.
Timing of the Ship Withdrawal Notice
The Ship Withdrawal Notice cannot be issued until after the hire is overdue, which means after midnight on the due date.
However, determining the precise midnight in a scenario where Shipowners are based in China, Charterers are based in New York, the ship is loading cargo in Argentina, hire payments are made in US Dollars through a New York clearing bank, and Shipowners’ bank account is in Singapore, becomes complex. The options to consider are:
- The place of business of Charterers
- The place of business of Shipowners
- The location of the ship
- The location of the paying or receiving bank account
Under English law, the answer to this question remains unclear. Therefore, to err on the side of caution, Shipowners should provide the Ship Withdrawal Notice on the latest date/time that might be applicable.
Duration of the Ship Withdrawal Notice
Frequently, the Anti-Technicality Clause (ATC) will specify a Grace Period based on working days or banking days. When calculating this period, particular attention must be paid to Banking Days/Working Days as they may differ from calendar days in various jurisdictions. Considerations for this include:
- Public Holidays
- Weekends which may differ in different countries
Once again, caution must be exercised. Should Shipowners withdraw the ship before the end of the grace period, Shipowners would be in repudiatory breach.
Ship Withdrawal Notice
The notice of termination requires no specific form or phrasing. Nevertheless, it must possess an elegant expression, signifying that the Shipowners consider the non-payment of hire as an act that culminates in the termination of the charter. Moreover, it is imperative that Ship Withdrawal Notice must be presented directly to the Charterers, as the Shipowners cannot merely convey it to the Ship Master.
Waiver through Conduct or Utterances
While Shipowners may have acquired the right to withdraw, Shipowners may forfeit this right in certain circumstances, should their subsequent conduct amount to a waiver. Shipowners must exercise caution to ensure that their words and actions do not imply a relinquishment of their right to withdraw the ship.
Can Shipowners renounce their right to withdraw the ship from the charter if Shipowners delay the withdrawal?
Upon the expiration of the grace period, Shipowners must withdraw within a reasonable time. Failure to do so may result in a waiver. The determination of what constitutes a reasonable time is essentially a factual matter. Shipowners will be granted time to verify the receipt of funds and seek prompt legal counsel.
In essence, the question is whether Shipowners have acted in a manner that indicates to charterers their decision to continue the charter, thereby waiving their right to withdraw the ship, for instance, by accepting a late payment of hire.
Can Shipowners accept full late payment and still withdraw the ship?
If the funds are accepted without any qualification, that is, “as if” the hire had been punctually paid, Shipowners will be unable to withdraw the ship, for example, The Brimnes Case.
A waiver could potentially be inferred against Shipowners, if the funds are retained for an extended period without withdrawal of the ship. However, the mere receipt of funds by the bank and their processing, without further actions, will not, by itself, constitute acceptance of the hire and a waiver of Shipowners’ right to withdraw, for example, The Laconia Case.
Can Shipowners retain funds received after a valid ship withdrawal notice was served?
The retention of funds by Shipowners will not, in itself, be interpreted as an affirmation of the contract or as Shipowners waiving their right to withdraw or having withdrawn the ship. However, Shipowners must exercise great care not to use language or act in a manner that might lead to the establishment of a new charter after the ship has been withdrawn from hire.
If Shipowners do intend to retain such funds, it is recommended that they explicitly state that the funds are being held not as hire but as security for other damages claims under the time charterparty, for example, The Brimnes Case.
Can Shipowners accept partial payment of hire and still withdraw the ship?
If Charterers make a timely but insufficient payment of hire, accepting such payment is unlikely to amount to a waiver by Shipowners of their right to withdraw. Nevertheless, Shipowners should bear in mind point above and proceed to withdraw within a Reasonable Time.
Is it possible for Shipowners to halt the operation of the ship and its crew if the Charterers are remiss in paying the ship hire?
Withdrawing a ship is an excessively severe measure and, in a declining market, it is frequently a course of action that Shipowners are hesitant to adopt. Instead, Shipowners may prefer to suspend the charter’s execution until the Charterers fulfill their payment obligations. However, unless the charter party bestows upon the Shipowners the right to suspend the charter’s performance, Shipowners will be unable to do so. If Shipowners were to take such action without possessing such a right, Shipowners may find themselves in violation of other terms within the charter, such as the duty to adhere to the Charterers’ lawful instructions. This, in turn, could entitle Charterers to declare the ship off hire or pursue a claim for breach of the charter.
If the charter party grants Shipowners the right to suspend the service, this privilege usually arises only after the grace period specified in the Anti-Technicality Clauses (ATC) of the withdrawal clause has lapsed. Shipowners must exercise caution and carefully review such clauses, refraining from suspending performance prematurely.
Another factor to consider is that if the ship carries cargo, the Shipowners will typically be party to the Bill of Lading (B/L) contract and assume responsibilities as the cargo’s bailee. Therefore, suspending performance under the time charter party could potentially result in a breach of their due despatch obligations towards the cargo interests, leading to claims for delay.
Withdrawing the Ship While Cargo on Board
In the event the ship still holds cargo, the Shipowners bear an obligation under the contract of carriage to deliver the cargo to the respective interests. Since the charter has concluded, all expenses previously borne by the Charterers such as loading, unloading, bunkers, will now be the responsibility of the Shipowners. The Shipowners may only lay claim to remuneration for services rendered post-withdrawal. Furthermore, Shipowners might have an Equitable Claim to the Bill of Lading (B/L) freights if the ship was withdrawn before the freights became due. Recovering these sums might prove to be both costly and unproductive if the Charterers find themselves insolvent.
Insolvent Charterers in Time Charter
Insolvency is a state of financial distress in which a person or business is unable to pay their debts. If a charterer becomes insolvent under a time charter contract, this could have several effects.
Under a time charter, a ship owner leases their ship to a charterer for a specified period of time. The charterer gains control of the ship, except for its navigation and management, which remains with the owner. During the lease, the charterer is responsible for the costs of loading and unloading cargo, port charges, and additional insurance costs. The owner, on the other hand, is responsible for the operational costs such as crew, maintenance, and fuel.
If a charterer becomes insolvent:
- Breach of Contract: Insolvency might prevent the charterer from fulfilling their obligations under the time charter party. This could be a breach of contract, allowing the shipowner to terminate the charter.
- Unpaid Hire: The charterer might not be able to pay the agreed hire. In this situation, the shipowner might have a maritime lien on the cargo or a contractual lien on sub-freights (payments by sub-charterers) to cover the unpaid hire.
- Repudiation of Contract: The charterer might repudiate the contract. If the shipowner accepts the repudiation, the contract is terminated and the owner can claim damages.
- Cargo Issues: If cargo is onboard when the charterer becomes insolvent, issues might arise related to the cargo’s delivery and who bears the cost of carrying it to its destination.
- Sub-charterers: If there are sub-charters, those agreements might also be affected. The shipowner might be able to claim directly from sub-charterers, depending on the terms of the head charter and sub-charter contracts.
Ultimately, how an insolvency is handled will depend on the specifics of the charter party agreement, applicable law (e.g., maritime, insolvency, and contract law), and the specific circumstances of the insolvency. The parties may seek to renegotiate the charter, or the matter may end up in court.
Unpaid Ship Hire and Damages
Unless the conduct of the Charterers in failing to fulfill their obligation to pay the hire also constitutes a repudiatory breach, the Shipowners cannot be assured that they will have a claim for damages regarding the unexpired period of the charter. Currently, English law presents conflicting cases on this matter (The Astra 2013 Case) and compare it with the earlier judgment in The Brimnes 1974 Case. As it currently stands, under English law, the Shipowners can only be certain of recovering unpaid hire up to the point of withdrawal and no further. Therefore, as a practical consideration, Shipowners may find withdrawal after a single missed payment more appealing in a rising charter market.
If a charter is lawfully terminated during a declining market due to a repudiatory breach by the Charterers, the appropriate measure of direct damages will be the disparity between the original charter rate and the prevailing market rate for equivalent business at the time of the breach. However, the determination of which losses are recoverable as damages and the methodology for calculating damages are subjects of numerous English law cases.
Ship Withdrawal under New York Produce Exchange (NYPE 2015) Charter Party Form
Clause 11 of the New York Produce Exchange (NYPE 2015) Charter Party Form pertains to the Shipowners’ entitlement to withdraw and suspend operations due to non-payment of hire. Concerning the suspension of ship performance, there is presently no necessity for issuing an Anti-Technicality Notice, as was the case in the previous NYPE 1993 version. As soon as the hire becomes outstanding, the Shipowners have the right to halt operations.
In the event that the Shipowners wish to withdraw the ship and terminate the charter due to non-payment of hire, they must dispatch a notice providing a grace period of three (3) banking days to rectify the failure. This notice does not qualify as an Anti-Technicality Notice in itself. Unlike the NYPE 1993 charter party, a notice can be served under the NYPE 2015 regardless of whether the failure to promptly pay hire is due to “oversight, errors, or omissions on the part of the Charterers or their bankers.” It is now an unqualified provision, meaning that regardless of the reason for the Charterers’ failure to make punctual payment of hire, they will be in breach of the charter party, entitling the Shipowners to serve a notice to rectify the breach. If the breach is not rectified within the grace period, the Shipowners can terminate the charter party. This new provision simplifies the procedure and spares the Shipowner from having to establish the reason for late payment of hire.
Furthermore, in addition to the right to withdraw the ship under the charter party for non-payment of hire, Shipowners shall also have the entitlement, under the ew York Produce Exchange (NYPE 2015) Charter Party Form, to seek damages for any loss suffered as a result of the early termination of the charter party for the remaining period of the charter. Shipowners do not need to prove that the breach is repudiatory. In contrast, in other NYPE versions, if there is no “repudiatory breach,” Shipowners’ sole remedy is a claim for the hire due at the time of withdrawal. This provision provides a clear means of compensation to the Shipowners should they be exposed to lower market rates than the charter hire rate due to the premature ending of the charter.
We kindly suggest that you visit the web page of BIMCO (Baltic and International Maritime Council) to learn more about BIMCO Non-Payment of Hire Clause for Time Charter Parties 2006 and to obtain the original Charter Party forms and documents. www.bimco.org
Unjust Ship Withdrawal by Shipowners in Time Charter Party
Issues pertaining to the notification of anti-technicality matters and the withdrawal of ships are predominantly approached from a Shipowners’ standpoint. However, these matters hold equal relevance for Charterers, both concerning contractual rights and the safeguards afforded to them when facing unwarranted attempts at withdrawal.
As Charterers are well aware, the customary recourse in a charterparty for a time charterer failing to meet their obligation to pay hire is the withdrawal of the ship from charter service. Nevertheless, there exists no automatic right to withdraw a ship for delayed or non-payment of hire. Therefore, a charterparty will nearly always incorporate an explicit clause granting the Shipowner the right to withdraw in case of default. Nonetheless, given the gravity of such withdrawal, and to shield Charterers from unjust withdrawal by Shipowners for trivial or inconsequential matters, the contractual right of withdrawal is typically expressed within the bounds of an Anti-Technicality Clause (ATC).
Anti-Technicality Clause (ATC) usually necessitates Shipowners to send charterers a specified Anti-Technicality Notice that grants Charterers a specific additional period to rectify the default and prevent ship withdrawal. Anti-Technicality Notice holds great importance as it provides a Grace Period for payment, thereby safeguarding charterers from forfeiture when they have a reasonable opportunity to correct inadvertent or unintentional breaches.
Furthermore, Charterers should be mindful that due to the severe nature and consequences of ship withdrawal, English Courts and Tribunals tend to interpret the operation of Anti-Technicality Notices in favor of Charterers when ambiguities or uncertainties arise. Hence, when confronted with an Anti-Technicality Notice, a Charterer should consider the following crucial aspects:
- Shipowners must promptly serve the Anti-Technicality Notice after the hire becomes overdue. An Anti-Technicality Notice cannot typically be served by a Shipowner until after midnight on the due date for payment. Subsequently, the Shipowner is obliged to serve the notice expeditiously. If Charterers receive a notice several days after a default, the notice may be deemed invalid. The acceptability of any delay will hinge on specific circumstances, but absent exceptional reasons, a substantial delay may be regarded as a waiver of the Shipowners’ right to withdraw, thus constituting an affirmation of the charterparty instead.
- Shipowners must strictly adhere to the terms of the Anti-Technicality Notice. Charterers must ensure that any Anti-Technicality Notice received has been served in the correct form, as this is a strict obligation on Shipowners. In a recent London arbitral decision, an Anti-Technicality Notice stipulated that prompt payment of hire should be made within three (3) clear banking days from the date the notice was given. However, the Shipowners miscalculated the date for withdrawal in the Anti-Technicality Notice. Consequently, when the Shipowners later withdrew the ship, the Tribunal ruled that the Shipowners had not adhered to the proper contractual Anti-Technicality Notice period, rendering the Anti-Technicality Notice invalid and entitling Charterers to damages for wrongful repudiation of the charterparty.
Additionally, the Anti-Technicality Notice must explicitly and unequivocally state that the ship will be withdrawn if the overdue hire is not paid. Anti-Technicality Notice received by Charterers that merely mentions the Shipowners’ intent to exercise their rights under the charterparty, without specific reference to ship withdrawal, will likely be deemed insufficiently clear and may be held to be invalid.
- Shipowners’ previous acceptance of late hire payments may hinder their ability to withdraw based on subsequent late payments. If Shipowners have previously accepted late payments of hire without protest or reservation, Shipowners may have waived or forfeited their right to withdraw. However, Charterers must exercise caution not to rely on this as an excuse for intentional late payments. Courts will examine the entirety of Charterers’ conduct in determining the right to withdraw and are unlikely to permit a charterer to utilize previous late payments as justification for a deliberate intention to default on their present hire obligations.
- Charterers have the right to make bona fide deductions from hire. Charterers should be aware that a Shipowner is not entitled to withdraw a ship for non-payment of hire if the charterer can demonstrate that the deduction from hire is genuine and reasonable, even if the deducted amount is subsequently found to be excessive. For example, The Nanfri 1978 Case.
- Shipowners’ subsequent conduct may affirm the charterparty. Shipowners can unintentionally affirm the charter contract through their subsequent actions, even after serving a valid Anti-Technicality Notice. Any attempt to terminate the charter thereafter may be considered a repudiation of the contract by Shipowners, entitling Charterers to claim damages. For instance, in the case of The Fortune Plum 2013, Shipowners served an Anti-Technicality Notice and indicated their intention to terminate the contract. However, Shipowners allowed the ship to continue Charterers’ service for the purpose of discharging the cargo despite the notice. The Court ruled that by permitting the ship’s continued service, the Shipowners had affirmed the charter, leading to their subsequent withdrawal of the ship constituting a repudiatory breach of the charter, thus allowing Charterers to claim damages.
The aforementioned illustrates that matters concerning the notification of Anti-Technicality Notices and the exercise of the right to withdraw a ship can be intricate, and it is incumbent upon Charterers, not solely Shipowners, to be cognizant of the rights and risks involved. Numerous factors need to be taken into consideration. While arbitrators and courts may narrowly interpret Anti-Technicality Clauses (ATC) in favor of Shipowners seeking to terminate the charterparty, significant risks exist for both parties.