1 1. A BRIEF OVERVIEW OF
TIME CHARTER AND DEFINITION OF TERMS
Payment
of Hire and withdrawal of vessel for non-payment of hire are very important
clauses usually included to constitute the core of the contract in a Time
Charter. The terms of a Time Charter vary completely from those of Demise or
bareboat Charter, the voyage charter and the Slot Charter. Scholars have
posited that this radical difference is as a result of the difference of its
function.
In
a time Charter, the owner of the ship places the vessel for an agreed period of
time in the care and at the disposal of the Charterer who is at liberty to
engage it for his own use within the ambit of the contractual terms. The
Charterer in a time charter is responsible for the ship throughout the duration
of the charter; he controls the commercial function of the vessel and is liable
for the consequential expenses and resultant risk that may arise from the
master obeying his instructions.
In
a Time charter, the charterer pays
for the bunker fuel, fresh water, port charges,
etc, in addition to charter hire[2]. However, the proficiency of the chartered
vessel is of vital importance to the charterer because the success of the
commercial initiative depends on it[3]. The
Charter party therefore sets out terms and conditions[4] upon
which liabilities and warranties are based. According to J. F. Wilson, “there are different views as to the legal
significance of such statements and the remedies available in the event of them
proving inaccurate. Thus, while the New
York Arbitrators generally regard specifications as to speed and fuel
consumption as constituting continuing
warranties that the vessel will maintain such capabilities throughout the
charter, English courts treat them merely as warranties as to the state of the
vessel at the time of delivery under the charter. In the event of breach of any
of these warranties, it would appear that the appropriate measure of damages
would be the difference in the market rate of hire between a vessel with the
intended specifications and chartered vessel. In the case of a breach of the
speed warranty, it has been suggested that an alternative remedy might be to
treat the vessel as off hire for the appropriate period”
Generally, the weight that will be attached to each situation will depend on
the fact and peculiarity of the series of event.
In
the course of this discuss, some phrases will be frequently used. It is however important that we define these phrases for easy understanding.
HIRE: Hire is the price paid for the
use of a vessel in a time charter and is usually calculated on the basis of a
fixed sum per ton of the vessel dead weight for a specific period of time, such
as 30 days or a calendar month.
OFF-HIRE:This is a Period of time
during which a vessel under time
charter is
unable to meet the requirements agreed between the charterer and
shipowner due to some reasons within the control of the latter; in this case,
e.g. machinery breakdown, the charterer is not required to pay hire money
2. PAYMENT
OF HIRE
Time charterparties usually
provide that hire is payable in advance, although the parties sometimes agree
that hire is payable in arrears. The charterparty will also specify whether
hire is to be paid monthly, semi-monthly, every 15 days or by reference to some
other period agreed by the parties[8].
One of the characteristic of maritime trade is such that takes the vessel away
for relatively long periods. The constant currency depreciation, fluctuation in
the rate of hire and cost of inflation on the aggregate vessel operational
cost, all borne by the shipowner, creates the need for explicit terms which
will regulate the payment of hire. This exigency thus necessitates clauses such
as “Currency Clause” providing for a fixed exchange rate between the stipulated
hire payment currency and any other currency of relevance and an “Escalator
Clause” providing for a periodic review of hire rate.
An example of a simple hire is
provided by Clause 11 of The New York Produce Exchange Time Charter revised 14
September 1993:
3. PAYMENT IN CASH
Most often, Time charters require payment of
hire in cash. This however is not construed in the literal form to mean liquid
money in paper or coin form. This simply implies that the money must be
available to the ship owner in usable form as at the due date for the payment
of hire. In the view of Brandon J in
The Brimnes[10]“these words must be interpreted against the
backdrop of modern commercial practice. Sointerpreted to me that they cannot
mean only payment in dollars bills or other legal tender of the US. They must …
have a wider meaning, comprehending any commercially recognized method of
transferring funds, the result of which is to give the transferring fund, the
result of which it is to give the transferee the unconditional right to the
immediate use of the funds transferred.”In practice, banker’s drafts,
banker’s payment slip, cheques and other negotiable instruments have been used,
the caveat being that the money must be available to the shipowner on the due
date for immediate use. On this premise, a charterer has no right to draw funds
from an account upon which a banker’s note was issued until the said note has
been processed. In The Laconai opinions of the House of Lords was divided as to whether payment order under
the London Currency Settlement Scheme falls within the category of bankers’s
notes acceptable for the payment of hire.
In The
Afovos,
Lord Lloyd held that payment of hire by telex transfer from one bank to
another constitute payment in cash. He stated that “when payment is made by telex transfer from one bank to another for
the account of a customer, the payment is complete when the telex is received
and tested by the receiving bank: so that if the owner were to make an enquiry
at their bank they would be told ‘Yes, the money has arrived for your account’
it is necessary that the fund should have been credited to the owners’ account.
Still less is it necessary that the owner should have been in a position to
transfer the funds out of the account. It is enough that the fund should have
been received for the owner’s account”.
A sharp contrast to the decision in The Afovos is the decision of the court
in The Chikuma.
In this case, monthly installment of hire had been paid into the owner’s bank
in Genoa on the due date, but the telex transfer included a “value date” four
days later. However, the practice among Italian bankers is that the money will
yield no interest whatsoever until the value date and if the owner intents to
withdraw same before the value date was due he will have to remit interest to
the bank. Following the above condition, the House of Lords held that such a
payment was not “equivalent to cash”.
A similar case is The Brimnes,where
the owner and the charterer both had accounts in the same branch of the same
bank, the telex receipt instruction from the charterer to transfer the sum of
the monthly installment of hire into the owner’s account did not have the
effect of a payment in cash until the appropriate amount was credited into the
account and the owner able to draw cash from same.
4. PAYMENT IN ADVANCE
A very vital requirement of payment of hire
is that it should be made in advance at monthly (or 30 day) or semi-monthly intervals.
Imbursement if required before performance and may be made on or before the
hire due date. Situations may arise where the due date falls on a Sunday or a
non-banking day, the Court has pronounced that such payment must be made not
later than the immediate prior banking day,
else the charterer would be held to have defaulted. However, some charters
provide that in such situations, the hire shall be paid on the next banking day.
The charterer is expected to pay the complete
period of hire up to midnight of the day which the installment is due in which
to make the payment. In The
Afovos Lord
Hailsham opined that “I take it to be
a general principle of law not requiring authority that where a person under an
obligation to do a particular act has to do it on or before a particular date
he has the whole of that day to perform his duty” According to Wilson,
it is immaterial that payment can only be effected during banking hours, as
long as the charterer is not in default until the expiry of that period. In the
judgment of Lord Griffiths, “it is far preferable that so important an
obligation …should be fixed at the certain time of midnight rather than it
should depend upon the particular hours of business of a particular bank named
in a charterparty which are likely, of course, to vary from country to country
and even from bank to bank and to be ready source of confusion”.
Where no such provision exists, the final
installment of hire due under the charter is payable in full to the owner. This
is notwithstanding the fact that the vessel will be redelivered to its owner before
the expiry of the relevant period.
It is immaterial in a charterparty that a
charters default in paying hire installment as at when due was not intentional.
The Obligation to pay hire promptly in advance is strictly construed and the
charterer is in default if he fails to make the payment on or before the
specified due date. This was given assent by Lord Porter in Tankexpress
v. Compaigne Financiere Belge des Petroles,
“Apart from some special circumstances
excusing performance, it is enough to constitute default that payment has not
in fact been made; neither deliberate non-performance nor negligence in
performing the contract is required”.
5. RIGHT TO WITHDRAW VESSEL FOR NON-PAYMENT
OF HIRE
At common law, time is not of essence of the
contract of hire and a shipowner cannot repudiate the charterparty and withdraw
his vessel for late payment of an installment unless the surrounding fact show
a clear intent on the part of the charterer not to perform the contract either
by for instance expressly repudiating his obligation by recurring non-payment.
Nevertheless, a charterparty customarily provide an express contractual right
to withdraw the vessel. An Example is found in Clause 6 of the Baltime form:
“In default of payment, the owners to have
the right of withdrawing the vessel from the service of the charterers without
noting any protest and without interference by any court or any other formality
whatsoever and without prejudice to any claim the owners may have on the
charterers under the charter.”
A
similar provision can be found in Clause 5 of the New York Produce Exchange Form where the shipowner is empowered to withdraw the vessel upon the charterer’s “failing
the punctual and regular payment of the hire”. The object of which is to exert some form of pressure on the charterer in
default or to re-gain possession of the vessel before it could become an object
of debt recovery in a bankruptcy /insolvency proceedings against an indigent
charterer.
The clause also enables the shipowner to re-possess the vessel where there is a
fluctuating hire rate, so that he can re-hire and or re-negotiate hire at the
current market rate to the same charterer or another. This inspired the popular
quote by Lord Denning MR., in The Tropwind that “when market rates are rising, the
shipowner keeps close watch on payments of hire. If the charterer makes a slip
of any kind- a few minutes too late or a few dollars too little – the shipowner
jump on him like a ton of bricks. They give notice of withdrawal and demand
thenceforward full payment of hire at the top of the market rate. Very rarely
is the vessel actually withdrawn. Arrangements are made by which she continues
in the service of the charterer just as if nothing had happened. Then there is
a contest before the arbitrators or in the courts. It is as to whether notice
of withdrawal was justified or not”. Though such conducts are devoid of
merit, the courts “do not suggest … that the
owners [are] guilty of any sharp practice … it [is] just a matter of business –
a matter of very hard business”.
However,
withdrawal is often only a sensible option if the vessel is free of cargo. This
is because withdrawal of the vessel from the charterers’ service does not bring
the bill of lading contract to an end. Where the owners are the carriers under
the bill of lading contract (as is commonly the case), they will remain under
an obligation to deliver the cargo at the port(s) named in the bills of lading
despite the withdrawal of the vessel from the charterers’ service. In such
situations, if the bills of lading in question are "freight prepaid"
bills of lading, the owners’ prospects of recovering any of the expenses
incurred in the carriage and delivery of the cargo to the port(s) named in the
bills of lading will be remote. Where the owners are not the carriers under the
bill of lading contract, their position will be somewhat better albeit they
will still owe a duty of care as bailees of the cargo to those interested in
it. It is clear therefore, that an owner should think carefully before
withdrawing a vessel which is laden with cargo when the charterers have
defaulted in its payment of hire.
6. REQUIREMENTS
FOR EXERCISE OF RIGHT OF WITHDRAWAL
For
a shipowner to be able to exercise his right to withdraw, the charterer must be
in default by either failing to pay an installment or failing to pay on time. It is established that the owners’ right of
withdrawal arises not only when a full hire installment is not paid, but also
when a timely payment has been made for a sum which is less than the amount due
and the outstanding balance is not paid by the due date.
The shipowner is
required to give notice to the charterer before withdrawing the vessel in the
form of a “Grace period” which
simply provides the charterer with an agreed extension to the payment date.
Once this grace period lapses and if payment has not been received by the
shipowner, then he would be in a position to withdraw the vessel provided
proper notice was given. Unless there are express provisions to
the contrary contained in the charter party, the notice of withdrawal must be
given to the charterers. The owners are not bound to give prior notice of their
intention to withdraw to the charterers. All that is required is that the
withdrawal notice is unequivocal: i.e., it states clearly that the owner is
treating the non-payment of hire as having terminated the charterparty and that
the vessel is withdrawn. Continuing to perform the bill of lading contract by
carrying the cargo to destination does not have the effect of reinstating the
charter.
In
recent development, owing to the hardship suffered by shipowners from perpetual
defaulting charterers, BIMCOhas reviewed its Non-payment hire clause to enable
a ship owner suspend performance under a time charter following a failure by
the charterer to pay hire when due. Due consideration was given to recent case
laws like The Pamela and The Li Hai .
Both cases emphasize that in the absence of any indication to the contrary, the
time for payment of hire will expire at midnight on the due date and the
necessity of making it very clear when issuing a notice for late payment of
hire that in the absence of payment, the vessel will be withdrawn.
7. WAIVER
OF RIGHT TO WITHDRAW
The shipowner’s
right to withdraw may appear absolute as contained in the charterparty.
However, he may lose his right to withdraw where he expressly or by implication
waives the breach committed by the charterer. Conduct such as acceptance of
late payment and subsequent demand for details of deduction coupled with delay
in withdrawing the vessel may amount to a waiver.
In The Mihalios Xilas Case, The MV Mihalios Xilas was chartered on the
Baltime form with hire to be paid monthly in advance. The charterers mistakenly
believed the ninth month to be the last month under the charter party and so
they remitted the ninth hire installment less US$31,000.00. The owners queried
the deduction and then withdrew the vessel five days later without returning
the part payment of the advance hire.The Court of Appeal held that the short
payment was not a proper payment and, in the circumstances, the owners could
elect to either accept the short payment and not withdraw the vessel or refuse
it and withdraw the vessel. The Court further held that the owners’ retention
of the short payment, coupled with their demand for further details about the
deduction and the fact that the owners took several days to decide to withdraw
the vessel, indicated that the owners had waived their right of withdrawal.
Another
instance where a shipowner could be said to have waived his right to withdraw
is where a course of dealing has been established by the owners accepting late
payment without protest, the owners will not be able to withdraw the vessel if
a subsequent hire installment is paid late pursuant to that course of dealing.
In order to re-establish their right to withdraw in such circumstances, the
owners need to give notice to the charterers that they require the charterers
to adhere strictly to the hire payment provisions in the charterparty. Only
once the owners have re-established that hire must be paid when it falls due
will the owners be in a position to exercise their right of withdrawal. This
was the position of the Court in The
Scaptrade.
8. EFFECT
OF EXERCISE OF RIGHT TO WITHDRAW
The
effect of the exercise of a right to withdrawal of vessel for default in
payment of hire is that it extinguishes the charterparty. The shipowner has no
right to temporally withdraw the vessel in an attempt to put pressure on the
charterer to pay the hire unless there is an express term in the charterparty
to that effect. Such actions by the owner amounts to a breach of contract for
which damages are recoverable. Nor is the owner entitled to take any other
action as, for example, withdrawing the charter’s contractual authority to sign
bills of lading or instructing the master not to sign pre-paid bills of lading
as was the case in The Nanfri.
The
effect of exercising a right to withdraw the vessel is to terminate the
contract from that point and the shipowner is not entitled to any hire for the
remainder of the charter period. Nor is he entitled to retain any unearned hire
already paid in advance. See The Mihalis
Xilas(supra). Damages for the unexpired period of the charter can only be
recovered where default of payment of hire amounts to a repudiation of the
contract by the charterer. As time is usually not of the essence of a time
charter, default in payment of hire by the charterer will rarely amount to
repudiation of the contract and the owner wishing to withdraw the vessel will customarily
have to rely on the contractual withdrawal clause.
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