UK: Withdrawing A Vessel For Unpaid Hire: Timing Is Crucial

Last Updated: 31 January 2012
Article by Ted Graham and Reema Shour

Parbulk II A/S v. Heritage Maritime Ltd SA (Mahakam) [2011] EWHC 2917 (Comm)

Where owners are considering withdrawing a vessel on time charter for non-payment of hire, timing is critical. If they withdraw the vessel too early, for example by not allowing the charterers the full grace period to rectify the failure to pay, they may find that they themselves are in breach of charterparty. On the other hand, if they withdraw too late, for example because they are deciding what to do, they may be held to have lost their right to withdraw and affirmed the charterparty – see, for example, Stocznia Gdanska SA v. Latvian Shipping [2002] 2 LLR 436, where the court held that "There is clearly a fine line between taking time to make a decision, and conduct which will be considered as affirming the contract".

In the present case, Mr Justice Eder took a commercial view of the negotiations and correspondence between the parties surrounding the non-payment of hire and upheld the arbitrators' award that the owners had been entitled to terminate the charterparty and withdraw the vessel. The judgment does, however, highlight that owners have to tread a very "fine line" between keeping a potentially viable and profitable charterparty alive by allowing charterers to make good the non-payment of hire without inadvertently waiving the right to withdraw the vessel when it transpires that the charterers are not going to pay.

The background facts

In December 2007, the parties entered into a bareboat charterparty on an amended BARECON 2001 form for 60 months at a daily rate of US$38,500.

Whilst the charterparty provided for hire to be paid punctually twice a month and for time to be of the essence, it also contained an anti-technicality provision whereby the charterers were to be allowed three banking days in which to rectify any failure to pay hire. A failure by the charterers to rectify the non-payment of hire within this grace period was an event of default under the charterparty, the occurrence of which would entitle the owners to terminate the charter and withdraw the vessel with immediate effect and recover any amounts outstanding. The owners' various rights on termination were set out in a separate provision and included, but were not limited to, the recovery of outstanding hire and any loss or damage suffered by the owners as a result of the early termination.

About eighteen months into the charter period, the charterers stopped paying hire. In broad terms:

  1. The charterers missed four consecutive hire instalments. After each missed payment, the owners sent a written notice to the charterers, calling on them to pay within three banking days, failing which non-payment would constitute an event of default under the charter. In each notice, the owners also stated that they reserved all their rights under the bareboat charter;
  2. After four unpaid instalments, a meeting took place between the parties, with the owners' solicitors also attending. There was no conclusive outcome;
  3. After that meeting, the owners' solicitors wrote to the charterers, putting them on notice that the owners were entitled at any point to serve notice terminating the charter and asking for the vessel to be redelivered. The solicitors asked the charterers to make a prompt commercial proposal to resolve the situation, which the charterers failed to do;
  4. The owners subsequently sent the charterers an invoice for the fifth hire instalment, which was not at that point due. This was not paid;
  5. The owners made a written demand for that fifth unpaid hire instalment once it had become due, which notice was also not complied with;
  6. After the grace period had expired, the owners gave notice that they were withdrawing the vessel from service and terminating the charterparty with immediate effect.

In arbitration the tribunal held that the owners had been entitled to terminate the charterparty. The arbitrators found that the owners had initially been anxious to keep the bareboat charter alive because the hire rate in the charterparty was above the prevailing market rate. They stated, however, that the owners' position had changed around the time that their solicitors wrote to the charterers putting them on notice of the owners' entitlement to serve notice of withdrawal of the vessel and terminate the charterparty if the charterers did not make satisfactory arrangements to pay the outstanding hire promptly. The tribunal, therefore, concluded that whilst the earlier successive demands for hire might have constituted waiver in that they evidenced an intention by the owners to keep the charterparty alive, the later notices from the owners did not. Rather, they simply recorded the owners' continuing entitlements both as to hire and as to the consequences of the charterers' failure to pay the further instalments.

The charterers appealed to the court.

The Commercial Court decision

The judge noted the arbitrators' findings that the owners' earlier demands for payment constituted a waiver of their right to withdraw. He chose, however, not to express a conclusive view in this regard because even if this were correct, it would not ultimately assist the charterers. Irrespective of the nature of the earlier successive demands for hire, the judge found on the facts that the fourth and fifth demands for unpaid hire did not amount to waivers. He, therefore, held that the owners' final notice to the charterers stating that they were withdrawing the vessel from service and terminating the charterparty with immediate effect was valid and effective to bring the charterparty to an end on the basis of the charterers' wrongful repudiation having regard to the totality of the charterers' conduct.

A further argument raised by the charterers was that the owners' notice of termination was insufficient to operate as both a contractual and a common law termination. The significance of this was that there were different consequences following on from (i) withdrawal of the vessel and termination of the charterparty pursuant to the provisions in the bareboat charter and (ii) accepting the charterers' repudiation of the charterparty at common law. Again, the judge did not wish to get into a detailed discussion of this issue. He simply agreed with the owners that, in an appropriate case, one letter can act both as a contractual termination and a common law acceptance of repudiation if the owners make this clear in the notice – see Dalkia v. Celtech International [2006] 1 LLR 559. In the present case, he held that on a fair construction, the owners' termination notice did say enough to communicate reliance on a repudiation at common law and not just exclusive reliance on a particular clause in the charterparty as the grounds for termination.

Finally, the charterers challenged the contents of the termination notice, arguing that it did not expressly identify the non-payment of hire in respect of the fifth unpaid instalment as an event of default being relied on and so the owners could not rely on that default to justify contractual termination. The judge said that nothing in the charterparty provisions in this case required the notice to be "comprehensive" as suggested by the tribunal nor that the precise default relied on had to be expressly identified. In his view, the owners' notice had fulfilled the requirements of the charterparty provisions and was valid and effective.

Comment

Mr Justice Eder took a pragmatic approach to the various technical arguments relied on by the charterers in this case. The dispute does, however, demonstrate the potential pitfalls that owners in similar circumstances can fall into. Firstly, they need to ensure that they do not inadvertently waive their right to withdraw the vessel by demonstrating an intention to keep the charterparty alive despite the charterers' non- or late payment of hire. It is worth noting that notwithstanding that the owners stated in all their demands for unpaid hire that they were reserving their rights, this did not prevent some of those demands from constituting waivers in the opinion of the tribunal and the judge. On the other hand, both the tribunal and the judge appeared to give weight to the owners' instruction of solicitors and the subsequent correspondence sent by those solicitors to the charterers as an indication that the owners had changed tack and were no longer willing to let the matter of unpaid hire slide.

Secondly, owners should ensure that the contents of any termination notice comply to the letter with the charterparty requirements. The judge was anxious to stress that the conclusion he reached that the owners' termination notice was adequate was based on the wording of the charterparty in the present case, rather than being an assessment of the adequacy of the termination notice generally. A court will normally construe any ambiguity in a termination notice against the owners because its effects are potentially severe.

Thirdly, owners should consider whether their notice of termination on the grounds of breach is aimed at terminating pursuant to a contractual right and/or a common law right because the consequences of the two can be materially different and, in some cases, may conflict. An argument has been raised in the past that a party who relies on a contractual right to terminate has thereby limited its subsequent entitlements and is, therefore, precluded from treating the contract as discharged at common law. This is a complicated area beyond the remit of this article. It is, however, advisable to take legal advice when drafting such notices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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