Withdrawing Vessels From Time Charter

First published: P&I International [1st February 2003]

In a strong market, owners may be tempted to withdraw the vessel from service when charterers fail to pay hire, particularly if she is locked into a long-term charter fixed when the market was low. In practice, this course of action can be fraught with danger. Getting it wrong can cost millions of dollars. Common mistakes made by owners are withdrawing the vessel when hire is not yet due or owing and failing to give proper notice under an anti-technicality clause.

Owners should remember that charterers have right up to the last minute to make their payment. In The Afovos [1] hire had not been received by 1900 hours on the day payment was due. The owners withdrew the vessel. Even though hire could not have been credited to the owners' bank account until the opening of business the next day, the withdrawal was held to be unlawful. The court ruled that when payment had to be made on a certain day, it could be made at any time up to midnight. Until that time had passed charterers were not actually in default of their payment obligation.

Owners should also bear in mind that while the charterparty will frequently permit charterers to make deductions from hire, obvious examples being commissions and disbursements advanced to the vessel, the right to deduct may be wider. In The Nanfri [2] , charterers made deductions in respect of a speed and consumption claim. The charter was on the Baltime form. The court held (by reference to Clause 11 of that form) that charterers could deduct off-hire from subsequent hire payments, together with the cost of fuel consumed. It rejected owners' argument that deductions could not be made unless the amount had either been determined by arbitrators or agreed with owners. Lord Denning stated that a charterer "is entitled to quantify his loss by reasonable assessment made in good faith, and deduct the sum so quantified from hire".

Furthermore, charterers may also be entitled at law (and not just by agreement) to deduct claims for damages in respect of owners' breach of charter, again provided their assessment of their claim is made in good faith. The case law on this subject could do with clarification but it appears that this right is limited to situations in which charterers have been deprived of the use of the vessel by owners' breach. The court has allowed deductions for claims for breach of a speed warranty and a failure by owners to load a full cargo. But, in The Nanfri, a deduction in respect of a claim for cargo damage was held to be impermissible.

The fact that charterers may be acting in good faith in making a deduction will not help them if the deduction is not of a type permitted under the charterparty or recognised by law. Consequently charterers make deductions for damages claims very much at their own risk. A recent award illustrates this.

In London Arbitration 17/2002 [3] , the charterers failed to pay hire, claiming damages for loss of profits and for freight withheld by subcharterers as a result of the owners' failure to make the vessel fit for passage through ice to the intended loadport. The owners withdrew the vessel. The Tribunal held that there was no right under the charter or in law to deduct for these types of claim, and upheld the withdrawal.

In that same arbitration, the charterers also argued that if some of their deductions had been made on a premise that was later shown to be false or improper they could still defeat the owners' right to withdraw if they could now show that they were entitled to withhold hire on other grounds. The Tribunal rejected this submission stating that, were it to be accepted, it would mean that no owner could ever withdraw safe in the knowledge that he was acting justifiably; when seeking to justify a deduction from hire in the context of a withdrawal, a charterer could not go beyond what he had declared at the time to be his basis for withholding hire.

The harshness of the obligation upon charterers, especially in situations where hire is paid on time but is short because of the unexpected deduction of bank charges, led to the use of anti-technicality clauses, such as Clause 11(a) in NPYE 1993. These provide for a grace period (expressed in either days or hours) within which charterers, upon notice, can rectify a default in the payment of hire before owners can withdraw the vessel. But anti-technicality clauses can create problems for owners.

Just as with the notice of withdrawal itself, the notice under an anti-technicality clause must be clear and unequivocal. It must make it clear that hire has not been paid punctually and that the owners are giving an ultimatum that unless it is paid within a set period of time (as specified in the charter) they will withdraw the ship. In The Afovos, the notice given stated "Owners have instructed us that in case we do not receive the hire which is due today, to give charterers notice as per clause 31 of the charterparty for withdrawal of the vessel from their service". This was held not to be good notice because it was conditional. Equally, simply drawing the charterers' attention to the relevant clause may not be enough. The notice must leave the recipient in no doubt that unless hire is paid within the specified time allowed under the clause the vessel will be withdrawn.

Furthermore, the notice will be ineffective if it is premature; that is, if it is sent before charterers are actually in default of their payment obligation (although in theory the anti-technicality clause could be worded to permit this). A recent arbitration decision (reported in the context of an application for leave to appeal) dealt with the situation where notice under an anti-technicality clause was sent by email. It was sent before the charterers were in default but received in the charterers' inbox after the deadline for payment had passed. Applying The Afovos, the Tribunal held that the notice was invalid because it was premature [4]. Service of premature notices is a particular danger where the place for payment of hire instalments is in a different time zone to that operating at the owners or their brokers' offices.

In this context, it has been held [5] that a notice telexed by owners shortly before midnight on the day for payment (a Friday) was not premature because it would only be read by the charterers on the following Monday. However, it would be unwise to rely too much on this authority; it is widely felt to be wrong as it appears to conflict with House of Lords' authority in The Afovos.

If the charterers fail to pay hire in time, they are in default. Subsequent tender does not alter that. The danger here for the owners is that if they accept late payment without qualification or delay too long in giving notice of withdrawal they are quite likely to lose the right to withdraw. Owners are given a reasonable time to decide whether to exercise their right to withdraw or to let the charter continue. More time is likely to be allowed for the owners to take this decision where there is an underpayment of hire and they need to investigate whether the charterers have made proper deductions.

If the owners withdraw the vessel unlawfully they will face substantial damages claims. But if there is a silver lining here it seems that charterers have no right to demand that owners account for any additional or wrongful profits they have made by re-fixing the vessel at a higher rate. In another recent arbitration [6], the Tribunal rejected the charterers' argument that they were entitled to an account of the owners' profits, holding that the law did not and should not recognise such a remedy. The charterers were limited to recovering losses that were provable and reasonably foreseeable. So, in the right circumstances, it may still pay owners to withdraw the vessel (even where they suspect that the withdrawal is wrongful) if they have lucrative business for her up their sleeve.

The right of withdrawal remains a very useful way to extricate the vessel from the hands of a difficult charterer or to exploit new opportunities - provided the owners follow the rules. Whenever there is a wrongful withdrawal it is usually because the owners have failed to take simple steps or make checks to ensure that hire is owing, that payment deadlines have actually passed, and that clear notice is given. As a result, entirely avoidable mistakes can negate the intended financial benefits of getting the vessel back. Any owners considering withdrawal should therefore take extra care and, for those in any doubt, their Club or lawyers are there for advice. Using them could save a lot of time and money.

1. [1983] 1 Lloyds Rep, 335
2. [1979] 1 Lloyd's Rep, 201
3. LMLN 600, 14th November 2002
4. The Western Triumph [2002] 2 Lloyd's Rep, 1
5. The Pamela [1995] 2 Lloyd's Rep, 249
6. The reasoned award was, somewhat unusually, reported as The Sine Nomine [2002] 1 Lloyd's Rep, 806