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Hire payment in time charters: a condition or not – a legal perspective

maritime lawChartering is an important concept of the global maritime trade sector and it consists of different types. One of the forms of carrying out a maritime business is a time charter.

Under a time charter, the owners undertake to place their ship at the disposal of the charterers for a defined period of time for the carriage of goods in accordance with the charterer’s instruction, while the ship remains in both the ownership and possession of the owners, and the officers and crew who man her will be the employees of the owners, not the charterers.

In this article we are going to look at some particulars of time charters and, in particular, New York Produce Exchange Form 1993 (NYPE 1993) recommended by BIMCO and FONASBA.

Specifically, we will discuss the judgment by Popplewell J in Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2015] EWHC 718 (Comm) where it was held that payment of hire by the charterers was not a condition of NYPE 1993 charterparties.

The core issue of each time charter is payment of hire, time, amounts and manner of which brings various disputes between the parties on a regular basis.

In Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd, the Commercial Court had to decide whether the payment of hire by the charterers was a condition of NYPE 1993 or not.

In this case the shipowner owned three vessels which it had let on NYPE 1993 to the charterer. The charterer’s obligations were secured by a guarantee provided by his parent company.

The payment of hire was agreed to be in advance, but after a year of charter the charterer fell into arrears in payment of hire.

The shipowner withdrew the vessels, terminated the charterparties and commenced arbitration proceedings against the charterer.

The proceedings were stayed, however, because the charterer went into liquidation.

Consequently, the shipowner started immediate proceedings against the guarantor, claiming the balance due under the charter, damages and arbitration costs.

The guarantor, in its turn, argued that he was not liable for the unexpired periods because the right of withdrawal was a contractual option and there had been no repudiatory breach or renunciation.

The main issues the court dealt with in this case were: whether payment of hire was a condition of the charterparties; if not, whether the charterer had repudiated or renounced the charterparties.

ship charter

The Commercial Court found that the authorities were divided as to whether the payment of hire was a condition. Two conflicting decisions were found in The Brimnes and The Astra:

  1. In The Brimnes the charterers hired a vessel by mutual agreement to pay hire on the first day of each month. Payments were always late, and the charterers were asked to ensure that payments were punctual. In April 1970 the charterers made a payment on April 2. The shipowners withdrew the vessel as soon as they heard that the payment was made on April 2. The court held that charterers’ failure to pay on time did not amount to repudiation as there was no intention to repudiate the charterparty. Though it also held that the shipowners validly withdrew their vessel.
  2. In The Astra, there was an appeal on arbitration award where the appellants (the charterers) tried to dismiss the award arguing that they have not repudiated the charterparty. Nevertheless, the High Court upheld the arbitration award and stated that a punctual payment of hire was a condition of a contract, breach of which entitled the shipowners to withdraw the vessel and claim damages for loss of bargain.

In the discussed case of Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd, the Commercial Court followed the decision made in The Brimnes and declined to follow the decision made in The Astra.

There was no clear language in the given charterparties as to mandatory termination of the charterparties due to non-payment of hire, and so the withdrawal clause did not make payment of hire a condition.

The court explained that the language of the charterparty at hand treated a contractual termination clause as an option (not an obligation) which means that remedies available under the English law will be assessed differently.

The Court held that:

  • First, providing for an express right of withdrawal for non-payment suggested that, without such provision, there would be no such right. (It means that the withdrawal of the vessels was an option.)
  • Second, there was a presumption in commercial contracts that stipulations as to the time of payment were not conditions unless otherwise stated in the contract. (It means that it was implied term by English law that if it is not stated otherwise in the contract then stipulations as to the time of payment are to be regarded as warranty, not a condition.)
  • Third, breaches might range from the trivial to the serious, which made the withdrawal clause being innominate term. (It means that it should be directly expressed in the contract what type of breach of the charterparty will make the withdrawal clause a condition.)
  • Fourth, until The Astra, shipowners and charterers had operated on the grounds that the payment of hire was not a condition, and the standard forms of time charter had not been altered to indicate that it was.

The Court further held that the charterer had renounced the charterparties and did not recognize the charterer’s conduct as repudiation.

This invokes a critical difference in the possible remedies for an innocent party: in case of repudiation (if the condition is violated) the owners would have been entitled both to terminate the charter and claim damages, while in case of renunciation only damages would be recoverable, while termination of the agreement would not be available.

In this particular case the owners’ right to withdraw the vessel, in circumstances where there has been no breach of condition, was available only due to the presence of an express terms for withdrawal in the charter party, put prima facie there would be no such right.

As we can see from the judgement, the standard form of NYPE 1993 without any alterations to it implies that the payment of hire is not a condition.

And therefore, if the charterer refuses to pay or there is a late payment then the charterer is not liable for repudiation of the contract but rather for renunciation.

The shipowner is not required by the charterparty to withdraw vessels from the charterer. It is an optional clause of the contract which the shipowner may choose whether to exercise it or not.

If we compare NYPE 1993 to NYPE 1946 and BALTIME 1939 (as revised 2001) standard forms, we will clearly see that the NYPE 1946 has the same wording as NYPE 1993 in the abovementioned clause while the BALTIME provides the same right of withdrawal using the exact optional language as in the NYPE 1993 and NYPE 1946.

It means that if the charterparties are concluded on the basis of these standard forms and without any alterations to them, especially to the payment of hire clause, then the said clause will not be a condition of the charterparty what will result in different assessment of remedies if the shipowner decides to withdraw vessels because of the charterer’s late payment or non-payment of the hire.

Therefore, the parties should carefully negotiate and agree the terms of payment in the time charters, it is of crucial importance to decide, whether the time of payment is of the essence or not, insofar it would result in different remedies available for the innocent party in case of delays in payment.

Nikolay Kozachenko - Chartering - Shipping and Freight ResourceAbout the author : Mykola Kozachenko is a maritime lawyer with Interlegal, Ukraine specialising in Shipping Litigation & Arbitration, Ports and Terminals and English Law.

Interlegal provides shipping law services to clients who are mainly shipowners, managers, charterers, cargo owners, P&I clubs, insurance companies, ship chandlers, ship agents, fuel suppliers and ship repair yards.

Services include providing unique clauses for charter parties, Ship & Crew management, international maritime arbitrations, ship arrest and to litigate disputes.

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