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Please note: This is a PowerPoint 2003 file. Do not work on this file in PowerPoint 2007 or 2010. It will distort the template settings in this file (EVEN IN THE COMPATIBILITY MODE) Hire and Withdrawal Miranda Karali Partner
General Principles Hire is payable continuously and unconditionally from delivery of the vessel to redelivery. The obligation to pay hire is suspended only if there is a provision to that effect in the charterparty – e.g. off-hire clause. Generally there is no right of set-off against hire unless; –the charterparty provides for it, or –a set-off is possible under the applicable law. In examining hire clauses in time charterparties a distinction has to be drawn between; –when hire is earned, and –when and in what manner it is to be paid. Hire payments are usually payable in advance. These general principles are capable of being varied by express terms in the charterparty.
NYPE Clauses Clauses 4 and 5 of NYPE deal with the charterers’ obligation to pay hire. Clause 4 provides that the charterers are to “pay for the use and hire” of the ship from “the day of her delivery … until the hour of the day of her re-delivery” This obligation is qualified by Clause 15, the off-hire clause, which stipulates that “payment of hire shall cease” in certain circumstances. Clause 5 states that the charterers are to pay the “said hire … semi-monthly in advance”. Clause 5 also provides that, if hire is not paid punctually, the owners are to have the right to withdraw the ship. The right to withdraw is a right to terminate the charter. NYPE 93 contains an anti-technicality clause (clause 11). This operates where the failure to make punctual and regular payment is “due to oversight, negligence, errors or omissions on the part of the Charterers or their bankers”. The owners are then required to give notice to pay within an agreed number of “clear banking days” and may not withdraw before that period of grace has expired.
The right to withdraw Refusal or failure to pay hire according to the terms of the charter, or a late payment amount to a breach of contract. Refusal to pay is probably a repudiatory breach and the owner may elect to cancel the charter and withdraw the vessel. Failure to pay or late payment in the first instance gives a right to claim damages only, as the breach is not repudiatory. BUT as we have seen, the charter usually sets out an express right to withdraw the vessel.
The right to withdraw Where the charter gives an express right to withdraw the vessel, the owner can elect to adopt this remedy. If there has also been a breach of the charter the owner may also claim damages but as we will see, the right to withdraw is not necessarily associated with a breach of the charter and the right to claim damages. Where the owner elects to withdraw the vessel, clear notice of this intention must be provided. No particular form of words is required provided the notice adequately communicates the intent of the owners. Withdrawal is final. With the giving of notice the charter is terminated as to its future performance. Thereafter there is no right to hire and any hire paid in advance but not earned must be returned to the charterer.
Previous late payments - waiver The right to withdraw may be waived by the owner and the owner may also be estopped from exercising the right. Generally the acceptance of late payment does not amount to a waiver of the right to withdraw unless the owner accepts it on those terms. But a waiver will arise if the owner fails within a reasonable time of receipt of the late payment to give notice of withdrawal. Where there has been a history of late payments being accepted so as to establish a course of conduct, this may amount to a variation of the contract or establish an estoppel, with the owner required to give notice before it is possible to return to the original terms of the contract.
Anti-technicality clause Most time charterparties contain an anti-technicality clause which requires the owner to give the charterer notice of the default and to specify a period of time within which payment is to be made before the contract may be cancelled and the vessel withdrawn. The details of an anti-technicality clause must be meticulously followed by the owner if the notice is to be valid. The anti-technicality clause may include a right to suspend performance of the contract as an alternative to withdrawal of the vessel, with the charterer obliged to give the owner an indemnity for the consequences of the suspension. The right to suspend is without prejudice to the right to withdraw the vessel.
Effect of withdrawal – bills of lading A problem area in relation to withdrawal is where bills of lading have been issued to third parties. These represent distinct contracts between the owner and the holders of the bills. The owner must continue to perform in accordance with the bill of lading, so in such cases the right to withdraw may not be of much practical effect. Where the owners are not bound by bills of lading they will still have an obligation as bailees to take reasonable care of the cargo.
Can a shipowner withdraw the vessel and also claim damages? At the time of a valid withdrawal the owners can claim hire that they have earned, together with other amounts due from the charterers at the time of withdrawal. But what about damages, e.g. the loss caused by the market rate of hire at the time of the withdrawal being lower than the charter rate? If the obligation to pay hire punctually is a condition of the contract then any failure to pay promptly would give the owners the right both to terminate the contract and to claim damages. However, that obligation may not be a condition: for example, it might be argued that the NYPE Clause 5 obligation to pay punctually is an intermediate term reinforced with a contractual option to terminate. The owners would only, normally, be entitled to damages resulting from the termination of the charter if the charterers’ failure to pay had amounted to a repudiation of the charter: that is, that it amounted to an unambiguous representation that the charterers would not or could not perform their obligations under the charter.
When does non-payment amount to repudiation of the charterparty? Assuming that the obligation to pay hire punctually is not a condition of the charter, when will failure to pay it on time amount to a repudiation of the charter? Conduct may amount to repudiation where it shows: – an intention no longer to be bound by the contract, or –an inability to perform sufficient to have the effect of depriving the owners of substantially the whole benefit of the charter Failure to pay an instalment of hire on the due date would not satisfy this test However, where the conduct of the charterers is such that unwillingness or inability on their part to pay can be reasonably inferred, then there may well be repudiation. –For example, where the charterers had dishonoured a bill they had given for one month’s hire and the next had not been paid at all it was held that the owners were entitled to treat the charter as at an end and to claim damages as well.
Measure of damages The purpose of contract damages is to put the injured party in as good a financial position as he would have been in had the contract been performed. However, damages are limited to those that were foreseeable at the time the contract was entered into. Recovery of consequential damages will not be allowed unless at the time of the making of the contract, the parties contemplated that the loss or damage would be a probable result of a breach of the contract. The proper measure of direct damages for a wrongful withdrawal or cancellation of charter is the difference between the original charter rate and the prevailing market rate for equivalent business at the time of the breach. The market rate is usually determined by reference to other charters for comparable vessels in the same or comparable trade fixed on or about the date of the breach. BUT the shipowner will be required to mitigate any loss. In doing so, a shipowner is “required only to use good faith and reasonable diligence in so doing. He is not required to use the best judgment possible or adopt the wisest course which hindsight might have dictated.”
Remedies against parties other than the time charterer Lien on cargo Lien on sub-freights / sub-hires