Falling markets, redelivery and notice

First published: Elborne Mitchell website [16th August 2005]

The recent dramatic fall in the Handymax and Panamax markets is likely to lead to more disputes over redelivery. Hire rates have dropped to as little as US$10,000 from a US$40,000 peak just a few months ago, and losses on breaches of existing charters could be substantial following such a steep decline. Indeed, it was reported last week that a Swiss-based company redelivered three panamaxes early, with one of the vessels now earning less than half the hire it previously commanded.

And it is not only these markets that are suffering - most size brackets have seen a decline recently. The Baltic Dry, Handymax, Panamax and Capesize indices all showed a fall in rates at the approximately the same time last year and then recovered throughout the later part of the year. However, the dip over recent months has been steeper, and gone lower, than that in 2004.
This decline is likely to lead to friction between owners - looking to maintain high value deals for as long as possible - and charterers who, tied into high hire rates, may well want to escape existing commitments in favour of lower hire rates and greater profits. Rapid changes in the market often trigger disputes related to redelivery or breach of charter and the frictions that arise are understandable when operators could easily be looking at losses in excess of US$20,000 per day.

In the current market the parties most likely to default will be charterers looking to escape punishing losses or to take advantage of more favourable rates of hire elsewhere. Whilst many deals will no doubt be renegotiated on commercial bases, there is generally no obligation on an owner to do so and this is where disputes as to redelivery may arise. Size matters, of course: larger operators may be able to pressure owners into accepting early redelivery using the promise of future business; smaller operators are less likely to be able to do so and many may seek to redeliver vessels early, or as early as they are permitted under the charter.

The difficulty for charterers is that redelivery provisions are usually very explicit. The charterparty will stipulate when the charterer may redeliver, where he may redeliver and how he is to do so (such as on proper notice, in like good order and condition etc.). Any redelivery earlier than the stated provisions will almost undoubtedly give rise to claims against the charterer and the owner will be able to recover hire from him - at the full charter rate - until such time as proper redelivery takes place.

Further, while the time and place of redelivery are usually plain enough on the face of the agreement, charterers should bear in mind the notice provisions for redelivery. These are more than just guidelines; they are binding terms of the contract and must be adhered to. Failure to give adequate notice may result in a claim for lost hire. If a charterer fails to comply with the notice obligation it may well continue to be responsible for the payment of such hire as would have been payable up to the proper time of redelivery, i.e. as if notice had been given correctly. In certain circumstances a charterer may even find himself liable for losses in excess of hire.
The need to give notice is often overlooked but failure to do so according to the terms of the charterparty can lead to substantial claims against the unwary operator.