Under a time charterparty, other than a demise or bareboat charter, the ship remains in the possession of the owner and is not actually delivered to the charterer. The ship is placed at the disposal of the charterer, in the sense that the time charterer can give voyage instructions to the owner as to where the ship is to go and what cargoes she is to carry, provided that the instructions are within the limits provided in the contract. In return the time charterer pays hire for the whole time that the ship is placed at its disposal and for the bunkers.
How long does the time charterer have the use of the ship for?
It is of great significance that both parties know how long the charterer has the ship at its disposal. The charterparty will no doubt provide the earliest date on which the charterer will become liable for time charter hire and contain an express cancellation clause entitling the charterer to cancel the charterparty without asking why the ship is late if it is not delivered ready by a specified time.
The charterer must redeliver the ship within the contractual period, failing which it will be in breach of charterparty and liable for damages. There is often some leeway as to when the ship must be redelivered as it is difficult for the charterer to predict exactly how long any particular voyage will take.
Any number of factors may disrupt the best laid plans, for example, the weather or a strike. Therefore, when fixing the length of the charter period the parties will often allow a degree of flexibility.
If the express terms of the charterparty do not provide any flexibility the courts will imply a margin or tolerance, unless the charterparty imposes an absolute obligation to redeliver the ship by a certain date. Where the charterparty already provides for an express margin, the courts will not extend the period further by adding an implied margin.
Sometimes the charterparty gives an express right to the charterer to add any periods of off hire to the charter period.
When the charterer will wish to redeliver the ship is often dictated by what the market is doing. Obviously if the market has risen sharply the charterer would be wise to keep the ship until the latest possible date permitted under the charterparty (the “final terminal date”), as the charterparty rate of hire is lower than the rate the charterer would have to pay for another ship. On the other hand, if the market has fallen, the charterer will wish to redeliver the ship as early as it is contractually entitled to (the “earliest terminal date”), so that it can charter in another ship at the lower market rate.
The charterparty is likely to have an express obligation on the charterer to give a notice of when and where the ship will be redelivered, in good time before the ship is redelivered to the owner, so that the owner has an opportunity to find employment for the ship at the end of her current charterparty.
- Early Redelivery
If the ship is redelivered prior to the earliest terminal date, the charterer is in breach and is liable for damages. The purpose of damages is to compensate the victim of the breach for the loss of its contractual bargain and the shipowner is therefore entitled to be put in the position that it would have been in had the contract been performed.
Where there is an available market, the damages are calculated by reference to the difference between the contract rate that would have been earned for the balance of the charter period and the market rate which would have been available to the owners had they entered the market on termination to find a substitute fixture of similar length to the balance of the charter period and for similar routes.
The market price on an available market at the date of termination is deemed by the law to represent reasonable mitigation.
Where the charterparty is wrongfully terminated by charterers and there is no available market then the court must assess the owners’ actual loss by reference to the difference between what the owner would have earned had the charter been performed and the actual position resulting from breach.
N/B: Usually where a charterparty is wrongfully terminated by charterers the owners’ loss is measured by calculating what the owners would have received under the charterparty for the remaining days of that charterparty and deducting what the owners in fact earned during that period. Where the owner has obtained a substitute charterparty the earnings under that charterparty will usually be taken into account up to the date when the original charterparty would have ended had it not been wrongfully terminated. Frequently the substitute charterparty lasts longer than this date and the question then arises whether those earnings should also be taken into account. The general position is that they would not be, unless the owners have obtained a benefit as a result of the longer duration of the substitute voyage. Otherwise, one would be involved in calculations to the end of the ship’s working life.
ii. Late Redelivery
If the charterer gives instructions to the shipowner for a final voyage which may reason ably be expected to result in redelivery by the final terminal date, this is a legitimate final voyage order and the owner must comply with it.
However, the time charterer takes all the risk of events delaying the anticipated final voyage between the time the last voyage order is given and the time for performance of that order.
If the charterer gives instructions for a voyage which cannot reasonably be expected to be completed by the final terminal date, the owner is entitled to refuse such instructions. The owner cannot at this point elect to terminate the charterparty but must ask for valid voyage instructions. Only if the charterer fails to give valid voyage instructions will it be in repudiatory breach of charterparty and the owner could then elect to terminate or affirm the charterparty.
Whether or not the order was legitimate, if the owner performs it and the ship is redelivered after the final terminal date, the charterer is in breach of charterparty, even though the delay was not due to any fault on its part. The owner is entitled to damages for the period between the final terminal date and redelivery (the “period of overlap”) at the charterparty rate or the market rate, whichever is the higher.
The parties may include an express clause entitling the charterer to complete any last voyage even if it runs beyond the final terminal date without being liable for damages and only paying hire at the charterparty rate until the actual date of redelivery, unless the delay in completion was due to the charterer’s breach of some other term. In The Peonia a provision that “Charterers have further option to complete last voyage” was held to give the charterers the right to complete a legitimate last voyage without any liability for damages for the period of overlap. The clause would not have entitled the charterer to order the ship to perform an illegitimate last voyage.
The Charterer’s Obligation to Pay Hire
The time charterer agrees to pay hire for every minute that the ship is at the charterer’s disposal from her delivery until redelivery. The hire is usually stipulated at a daily rate and payable in advance. It is of great importance to the owner in financing the operation of its ship to receive the hire on time and for the right amount. The shipowner will need to meet outgoings such as any principal and interest due under any loan which it took out to finance the purchase of the ship, insurance premiums and P&I Club calls, maintenance and crew wages.
There may be grave consequences for the owner if it cannot meet those outgoings on time. For example, if the owner fails to pay the principal and interest due to its bank on any loan it has taken out to buy the ship, the bank might have the right to sell the ship. In order to encourage the charterer to comply with the obligation to pay hire promptly, the standard form time charterparties give the owner an express right to withdraw the ship, i.e., to terminate the charterparty if the hire is not paid. This section will consider the owner’s right of withdrawal; the special typed clauses which are frequently inserted to give the charterer some measure of protection known as anti-technicality clauses; off hire clauses and the charterer’s limited right to make deductions from hire.
A time charterparty will typically provide that the charterer must pay the hire “in cash” by the due date. “Cash” includes inter- bank transfers with the correct value date and bankers’ drafts. Time charter hire will usually be paid by an inter- bank transfer and the money must be in the account of the owner designated in the charter party value the due date. If the due date falls on a weekend or a bank holiday the charterer must make sure that the hire is paid on the last banking day before the due date.
Withdrawal
If the hire is not paid by the due date, or too little hire is paid by that date, most standard form charterparties provide that the owner has the right to withdraw the ship. This means that the charterparty is terminated, i.e., that both parties are released from future performance of their obligations under the charterparty. It had previously been thought that the reason for including such a clause was that at common law the time for payment of hire was not a condition (or not of the essence) of the contract, unless expressly stated to be so.
Thus, late payment of hire would not entitle the owner to terminate the charterparty, unless the late payment constituted a repudiatory breach by the charterer because, for example, the charterer had evinced an intention not to perform and had said that it would not pay or could not pay.
Late payment by the charterer does not deprive the owner of its right to withdraw, but the owner must then return the hire payment.
There is no right to withdraw temporarily unless the contract so provides. If the contract does not so provide, this may place the owner in difficulties. If the hire falls due but is not paid and the ship is about to load a cargo, the owner would prefer not to load until it has been paid, although the Supreme Court has held that if the owner withdraws and there is cargo on board the charterer will be liable to pay for the time taken and the bunkers used under the express indemnity clause and in bailment.
Alternatively, if a bill of lading is issued the owner will be obliged to carry the cargo to the discharge port, whether or not the time charter hire has been paid. Even though the hire has not been paid the owner cannot refuse to load the cargo. It is all or nothing: the owner is entitled to withdraw or it must perform. There is no half way house. Therefore, more modern charterparties may expressly allow the owner to withhold performance while awaiting payment of hire.
The right to withdraw must be exercised promptly. Otherwise, the owner will waive its right to withdraw for that payment of hire. Where the owner affirms the charter party and then withdraws the vessel, the owner will be in repudiatory breach of charter party, unless the charterers are in continuing repudiatory breach or there is a later failure to pay the hire on time or for the correct amount when a new right to withdraw will arise.
- Can a charterer be entitled to an equitable relief from forfeiture as is the case of a lease? The House of Lords in The Scaptrade case distinguished a lease as the charterer, unlike the lessee of land, does not have possession of the ship and held that there is no equitable relief from forfeiture. The position is different under a demise charter where the charterer does have possession of the ship.
As the withdrawal clause may operate very harshly against the charterer, especially where the failure to pay hire is not due to any fault on its part, but is due, for example, to a bank error in transmission of the hire as in The Afovos, it is usual to include an anti- technicality clause to protect the charterer. Such a clause requires the owner to give notice to the charterer when default has occurred so that the charterer has an opportunity to rectify any error. Unless the charterparty expressly provides a time by which payment must be made on the due date the charterer has the whole of the due date to pay the hire and therefore the owner can only give the anti- technicality notice the following day. If the owner gives the notice as soon as banking hours close on the due date, it will not have given a valid notice and were it then to withdraw the ship, the owner would be in repudiatory breach of charterparty.
An “anti-technicality clause” in shipping ensures that shipowners provide charterers with a prescribed notice before withdrawing a vessel for non-payment, allowing the charterer a grace period to rectify the default.
Unless the charterparty expressly provides a time by which payment must be made on the due date the charterer has the whole of the due date to pay the hire and therefore the owner can only give the anti- technicality notice the following day. If the owner gives the notice as soon as banking hours close on the due date, it will not have given a valid notice and were it then to withdraw the ship, the owner would be in repudiatory breach of charterparty.
An anti- technicality notice must be in the form of a clear and unambiguous ultimatum that unless the hire overdue is paid within the specified period the owner will withdraw the ship.
Some anti- technicality clauses are very badly drafted as they only require the owner to give a notice in certain circumstances but it is difficult for the owner to determine whether such circumstances exist and whether a notice should be given. This was the case in Owneast Shipping Ltd v Qatar Navigation QSC in which an anti-technicality clause was considered “deeply unsatisfactory” by the arbitration tribunal.
The right to withdraw is an extremely important one for the owner. If the market is rising steeply the owner will be waiting to pounce the moment the charterer makes any small non- payment of hire so that it can withdraw the ship and go out into the market to obtain a new charter at a much higher rate of hire. However, the owner will not always wish to exercise its right to withdraw. It may take into account factors such as whether the market is rising or falling, the creditworthiness of the charterer, whether cargo has been loaded, its obligations to third parties under, for example, a bill of lading, whether it has a right to lien the cargo or sub- freights in respect of any sums which have not been paid or whether it can obtain security for sums unpaid, for example, by arrest or freezing injunction.
Off Hire
Standard forms of time charter provide that hire will cease to be payable on the occurrence of certain events which prevent the full working of the ship either for the time lost to the charterer as a result of such event or during the period that the event continues. Some charterparties provide for a list of specified events which will trigger the off-hire clause. Events which may be specified in the off-hire clause may include break down of the ship’s engines, the ship running aground, “detention by average accidents to ship or cargo” (an accident which causes damage), “default and/or deficiency of men” or capture and seizure or “any other cause”.
The list may culminate in the wording “or any other cause preventing the full working of the vessel”. The words “preventing the full working of the vessel” apply to all the causes and it should first be determined whether the cause does prevent the full working of the vessel. This will be the case, for example, if the ship is arrested or free pratique (medical clearance) is delayed due to suspected typhus on the ship at her previous port, but not where the ship is trapped by a boom across the Yangtze River, or her draft is too great for the Panama Canal or she is detained by Somali pirates.
“Any other cause” will be construed ejusdem generis, that is, it will be limited to the same type as those events which have been specifically identified in the list which has gone before or at least as Rix J, as he then was, said in The Laconian Confidence “in some limited way reflecting the general context of the charter and clause”.
Where the word “whatsoever” is added after the words “any other cause” there is no limit on the causes, although it must still satisfy any express requirement that it prevents the full working of the vessel.
The off-hire clause will not depend on the fault of the shipowner. If the shipowner is actually at fault, it may also be in breach of charterparty and the charterer may have remedies such as the right to terminate the charterparty or claim damages in addition to, or in substitution for, the ship being off hire. If the off-hire event is caused by a breach of charterparty by the charterer, the ship may still be off hire but the owner will be able to recover damages for the breach including any off hire.
The charterer is obliged to pay hire continuously unless it can show that the wording of the off-hire clause applies to the event which has occurred. Where the clause is a net loss of time clause the burden of proof is on the charterer to show not only that the off-hire event occurred but also that time has been lost as a result. Once the ship is again in full working order, the ship is no longer off hire even if time is lost thereafter.
The charterparty may expressly provide for the situation where the ship has to deviate and state that she will be off hire until she is again in an efficient state to resume her service and in a position not less favourable to the charterer than that at which such loss of time commenced. The ship will come on hire again when she is again in an efficient state and in a position not less favourable even though there is some external cause which will still delay her such as a sunken barge.
The charterparty may expressly provide that the charterer has an option to add any period of off hire on to the end of the charter period.
Deductions from Hire
It will be of vital importance to the cash flow of the charterer to be able to deduct claims from the hire rather than to have to pay the hire in full and subsequently seek to recover its claims from the owner. The charterer must be careful not to make wrongful deductions as this would entitle the owner to withdraw the ship. The charterer can make deductions from the hire in two situations: where there is an express right to do so or where there is an equitable right of set off. If there is no such right, the charterer must pursue its claim against the owner and, if it is not paid, bring court or arbitration proceedings. This may take considerable time and meanwhile the charterer should seek security for its claim.
It is usual for the charterer to have an express right to deduct a number of different claims from the hire including advances for the ship’s disbursements made by the charterer on behalf of the owner, off hire periods (but not anticipated off hire periods), fuel used while the ship is off hire, the cost of diesel oil consumed for domestic consumption, speed and performance claims and the cost of bunkers on board on redelivery from the last hire payment.
If there is no express provision in the charterparty permitting the charterer to make a deduction from hire for a particular sum, English law recognises limited circumstances in which the time charterer is entitled to deduct from hire by way of equitable set off. This contrasts sharply with the position of the voyage charterer who has no such right to deduct from freight.
Where the owner of the ship is in breach of time charter and the effect of such breach is wrongly to deprive the charterer of the use of the ship or to prejudice the charterer in the use of it, the time charterer is entitled to deduct the claim for such breach from hire. Thus, the time charterer may deduct a claim for speed and performance from the hire, failure to load a full cargo in breach of charterer’s instructions, but not a cargo claim, or claim for misappropriation of the charterer’s bunkers, or fee incurred by the charterers because a delivery of bunkers was cancelled.
Whether the deduction is made pursuant to an express clause or by way of equitable set off it must be a reasonable assessment made in good faith. The amount does not have to be agreed by the owner.
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