Under English law, charterers’ obligation to pay hire as it falls due is absolute but the right to withdraw a vessel in case of default in charterers’ obligation to pay does not arise automatically. An express term will therefore be required.
To overcome these difficulties, most standard time-charter forms include an express right to withdraw a vessel for non-payment, or an unjustified underpayment of hire.
This right is typically qualified by the so-called “anti-technicality clause” which require that a notice of default is served on charterers allowing them a specific amount of time to rectify the breach – examples include clause 11(b) of the NYPE 1993 and clause 9(a) of the SHELLTIME4.
Whilst the ability to withdraw the vessel is a valuable right to owners, particularly in rising market conditions, it may not be the best solution when rates are stable or falling.
Mode of Payment
When assessing whether the right of withdrawal has arisen and can be exercised, owners need to be mindful of the mode of payment provisions. These days, the most common method used to effect payment is by electronic funds transfer. The order is sent by charterers’ bank to the owners’ bank instructing the latter to credit the owners’ account and advising how to seek reimbursement.
The general rule is that payment is made when owners’ bank decides to credit owners’ account. Charterers’ instructions to transfer the funds will not suffice on their own (“The Brimnes”  2 Lloyd’s Rep. 241). This is reflected expressly in clause 11(a) of NYPE 2015 which requires the funds to be received “into [the shipowner’s] bank account”.
Although less common, the rules are different if charterers make payment using an irrevocable payment order where they may be regarded as having made the payment as soon as the order is received by the Owners’ bank.
Waiver of Right to Withdraw
Waiver can arise through words or conduct. Typical examples include not exercising the right to withdraw within a “reasonable time” after it has arisen or accepting late funds from charterers without any qualification.
An interesting scenario arose in “The Caravos Liberty”  EWHC 3171 (Comm) where charterers underpaid the fourth instalment of hire on account of an overconsumption claim which subsequently turned out to be wrong. The owners protested but they did not serve an anti-technicality notice. Subsequently, charterers paid in full 15 days’ worth of hire in respect of the fifth and sixth instalment as required under the charterparty but did not make up the shortfall for the fourth instalment, although statements from the owners made clear that charterers were required to pay. Following settlement of the sixth instalment owners served an anti-technicality notice calling for payment of the full balance of the hire due, and then withdrew the vessel on the basis of that shortfall.
A dispute arose as to whether the owners were entitled to serve the anti-technicality notice and invoke the withdrawal procedure after payment of the sixth instalment, relating to an earlier payment default, namely charterers’ failure to pay the fourth instalment.
On appeal to the High Court, Mrs Justice Cockerill DBE dismissed owners’ appeal on the basis that the reference to “hire” in the BIMCO Non-Payment of Hire Clause for Time Charter Parties, which was incorporated into the charter, refers to individual instalments with individual due dates. It was held that the right to withdraw is tied to those individual instalments and their due dates, as opposed to the overall balance. This in turn meant that owners’ were in repudiatory breach by withdrawing the vessel without contractual justification.
The above case illustrates how important it is for owners to establish whether an underpayment is justified or not and to act promptly.
In practice, making the decision whether to withdraw in the short period of time available may be difficult as charterers may argue that they have the right to deduct, as was the case in “The Caravos Liberty”, and the risk of being faced with a wrongful withdrawal claim would need to be factored into any potential commercial advantages, such as more favourable 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. The point was raised but not decided in “The Mahakam”  1 Lloyd’s 87, where the demise charterers argued unsuccessfully that Owners’ demands for payment of subsequent instalments of hire amounted to a waiver of their right to terminate for non-payment. It was said that there was no authority to this effect in a chartering context. However, this appears to overlook previous authority “Modern Transport Co Ltd v Duneric Steamship Co”  1 K.B. 370, where it was held that an unqualified demand for payment of a particular hire instalment necessarily waives any entitlement to withdraw based on late payment of previous instalments.
Withdrawal and the right to damages
If at the time of a valid withdrawal there is hire both payable and earned, the owners clearly have the right to claim it, together with any other amounts due from the charterers at the time of withdrawal.
Owners often ask whether they can also claim damages for any loss of net earnings (for the balance of the charter) typically 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”  EWCA Civ 982 it is now settled that, in the absence of specific terms, hire payment obligations are not conditions. They are classified as innominate terms so that the seriousness and consequences of a breach must be assessed on a case-by-case basis.
In circumstances where the owners make their own commercial decision to exercise the right to terminate, courts have therefore been reluctant to accept owners’ entitlement to damages for the balance of the charter period unless, in the circumstances of the case, charterers’ conduct amounts to a repudiatory breach of the charter. In order to prove a repudiatory breach, owners would need to show that charterers’ default in payment evinced an intention not to perform or an inability to do so. This will always be a matter of fact and each case will need to be considered individually. Lawyers often become involved at this stage as owners try to coax out of charterers some indication that they no longer intend to be bound by the contract. If charterers so indicate, then owners can accept such conduct as repudiatory and terminate the contract. In such circumstances, there is trite authority ruling that the owners can recover damages for the balance of the charter period, being losses which are the natural and probable result of charterers’ default in payment the hire (“The Raithwaite”  3KB 420). Such entitlement is of course subject to owners’ mitigation of their losses by taking advantage (if possible) of an available market in existence at the time they accept the charterers’ repudiation. If they fail to do so, their damages may be reduced accordingly.
When considering whether to exercise their right to withdraw the vessel from charterers’ service on account of their failure to comply with their hire payment obligations, owners need to take into account a number of factors and considerations to protect their legal position.
The specific charter terms will need to be reviewed, and the context and seriousness of charterers’ breach will need to be assessed, in order to determine whether (i) owners can validly exercise their right to withdraw without themselves being in repudiatory breach of the charter and (ii) in addition to their right to withdraw, they will also be entitled to damages for the balance of the charter period.
Furthermore, the Commercial Court’s recent decision in “The Caravos Liberty”, set out a practical and common-sense approach to the construction of the BIMCO “Non-Payment of Hire Clause for Time Charter Parties”, under which the owners maintain their right to be paid previously unpaid (or underpaid) hire instalments but can only withdraw the vessel from the charter service in respect of the latest hire instalment that is due, by following the procedure and the strict timetable set out in the provision. Parties to time charterparties incorporating this particular clause will need to bear in mind the outcome of this decision moving forward.