Payment of Hire and Off-hire Prof Martin Davies International Seminar: Tanker Chartering – A Legal Perspective Intertanko Houston, 29 March 2007

2 Payment of hire ► Charterers’ primary obligation ► Must be paid in full without deduction  Unless the charter permits deduction  Or Charterers are entitled to deduct by way of set-off ► Non- or under-payment permits Owners to withdraw  NYPE cl. 5: “…otherwise failing the punctual and regular payment of the hire…or on any breach of this Charter Party, the Owners shall be at liberty to withdraw the vessel from the service of the Charterers”  Disputed deductions  Rising market

3 Deductions from hire ► Express provision in the charter  E.g. Shelltime 4, cl 9(ii): “Payment of hire shall be made…less…(ii) any amounts disbursed on Owners’ behalf, any advances and commission thereon, and charges which are for Owners’ account pursuant to any provision hereof”  Ditto STB Form, cl 3(b) ► Equitable set-off  Charterers are entitled to make deductions for claims relating to loss of time  Only loss of time claims are sufficiently closely related to the obligation to pay hire  U.S. law generally stricter

4 Deduction must be reasonable ► Permitted deduction may be made even though the amount is still in dispute  No need to agree amount with Owners  No need to go to arbitration first ► The Nanfri [1978] QB 927 at 975 per Lord Denning MR:  “If the charterer quantifies his loss by a reasonable assessment made in good faith, and deducts the sum quantified, then he is not in default. The shipowner cannot withdraw his vessel on account of non-payment of hire nor hold him guilty at that point of any breach of contract.”

5 Reasonable deductions ► Shelltime 4, cl 9(iii)  “Payment of hire shall be made…less…(iii) any amounts due or reasonably estimated to become due to Charterers under Clause 3(ii) [deficiencies on delivery] or 24 [speed and consumption] hereof”

6 Equitable set-off ► The Nanfri: claims that “arise out of the same transaction or are closely connected with it” ► Deprivation of use of ship  Breach of speed warranty (The Chrysovalandou Dyo [1981] 1 Lloyd’s Rep. 159)  Not cargo damage claims: The Nanfri ► If Charterers are not entitled to deduct, Owners are entitled to summary judgment for hire (or can withdraw): The Aditya Vaibhav [1991] 1 Lloyd’s Rep. 573  Bona fide belief not enough

7 Not for any other reason ► Must pay last month’s (or half-month’s) hire in full even if it is obvious that redelivery will take place before end of month (or half- month) ► Unless specifically permitted by charter:  E.g. NYPE, lines 58-60: “for the last half month or part of same the approximate amount of hire…”  Cf. Baltime: no such provision

8 Withdrawal for non-payment of hire ► English law inflexible  Owners can withdraw for any late payment or under-payment, however technical ► Charter back to Charterers at increased market rate  No equitable relief against forfeiture: The Scaptrade [1983] 2 Lloyd’s Rep. 253 ► No matter what the hardship to Charterers

9 “Anti-technicality” clauses ► Designed to give relief against strictness of English law ► In effect, notice of withdrawal clauses ► Shelltime 4, cl 9(a)  “In default of such proper and timely payment, (a) Owners shall notify Charterers of such default and Charterers shall within seven days of receipt of such notice pay to Owners the amount due including interest, failing which Owners may withdraw the vessel from the service of Charterers…” (a) Owners shall notify Charterers of such default and Charterers shall within seven days of receipt of such notice pay to Owners the amount due including interest, failing which Owners may withdraw the vessel from the service of Charterers…”

10 “Anti-technicality” clauses ► Owners must give an ultimatum: must make it clear that withdrawal will take place if payment is not made ► The Afovos [1983] 1 Lloyd’s Rep. 335 (HL)  “Owners have instructed us that in case we do not receive the hire which is due today, to give charterers notice as per cl. 31…for withdrawal of the vessel from their service”  Insufficient

11 More strictness re anti-technicality ► The Pamela [1995] 2 Lloyd’s Rep. 249  Notice sent by telex late on Friday night not effective until received on Monday morning  Too late for anti-technicality clause ► The Western Triumph [2002] 2 Lloyd’s Rep. 1  Owners gave notice of withdrawal by before hire became overdue  not received until after hire was overdue  Arbitrators held notice invalid because premature  Immaterial that notice was received after hire became overdue

12 Waiver of the right to withdraw ► Owners lose their right to withdraw if they act in such a way as to communicate to Charterers that the charter is to continue  E.g., acceptance of a late payment  Not enough for Owners’ bank simply to receive payment  Must retain it for long enough to lead Charterers to believe that it will not be returned: The Laconia [1977] 1 Lloyd’s Rep. 315 (HL) ► Acceptance of timely but under-paid hire does not amount to waiver  Owners entitled to a reasonable time to calculate correctness of deductions before exercising right to withdraw: The Mihalios Xilas [1979] 2 Lloyd’s Rep. 303 (HL)

13 Effect of withdrawal ► In English law, charter comes to an end immediately upon effective notice of withdrawal ► If in mid-voyage, Owner must carry cargo to its destination and deliver on terms of BLs if they were signed by or on behalf of Owners  Cannot demand freight from receivers if pre-paid to Charterers: The Alev [1989] 1 Lloyd’s Rep. 138 (agreement to pay freight (again) held invalid because of economic duress) ► If BLs signed by or on behalf of Charterers, Owners assume Charterer’s obligations after withdrawal:The Lakatoi Express (1990) 20 NSWLR 57 ► In U.S. law, withdrawal only becomes effective at end of voyage and discharge of cargo: Diana v. Sub-freights of Admiralty Flyer, 280 F.Supp. 607 (SDNY 1968)

14 Effect of withdrawal ► Owners entitled to payment from Charterers on quantum meruit basis for carrying cargo after withdrawal?  Scrutton says so  Market rate, not contract rate?  Left unsettled in The Tropwind (No. 2) [1981] 1 Lloyd’s Rep. 45 (CA) ► Presumably only arises if Charterer insolvent, which makes the question moot  If Charterer solvent, it may choose to re-charter at new market rate anyway

15 Off-hire clauses ► “Period” = on/off ► “Net loss of time” = time lost ► Partial efficiency is the key to the difference  Still off-hire under a period clause  Lost time only under a “net loss of time” clause

16 Period clauses  E.g. Shelltime 3, cl. 21:  “In the event of loss of time (whether arising from [various specified events] or in any other manner)…hire shall cease to be due or payable from the commencement of such loss of time until she is again ready and in an efficient state to resume her service from a position not less favourable to Charterers than that at which such loss of time commenced.”  The Bridgestone Maru No. 3 [1985] 2 Lloyd’s Rep. 160

17 Net loss of time clauses  E.g. Shelltime 4, cl. 21: ► “On each and every occasion that there is loss of time (whether by way of interruption in the vessel’s service or from reduction in the vessel’s performance)…the vessel shall be off-hire from the commencement of such loss of time until she is again ready and in an efficient state to resume her service from a position not less favourable to Charterers than that at which such loss of time commenced; provided, however, that any service given or distance made good by the vessel whilst off-hire shall be taken into account in assessing the amount to be deducted from hire.”

18 Time lost after full efficiency restored ► No deduction under English law, even under “net loss of time”  The Marika M [1981] 2 Lloyd’s Rep. 622: vessel lost berthing turn after grounding; not off-hire while waiting for berth once in full working order  NYPE, cl. 15: “the payment of time shall cease for the time thereby lost” ► Deduction would be permitted under U.S. law  All time lost as a result of enumerated causes  Not so for “period” clauses

19 “…or any other cause” ► Eiusdem generis (of the same kind) with listed causes  Unless “whatsoever” is added ► Confined to causes related to physical condition of ship or crew  Not off-hire during delays from “extraneous” causes  The Aquacharm [1982] 1 Lloyd’s Rep. 7 (not off-hire during lightening to pass through Panama Canal)  The Manhattan Prince [1985] 1 Lloyd’s Rep. 140 (not off-hire under Shelltime 3 during boycott by ITF) ► Focus should be on effect – preventing full working – not cause

20 Practice tips ► Read the clause carefully before you do anything, whichever side you are on ► Charterers - if in doubt, pay in full (especially in a rising market) ► Owners - give clear and unequivocal notice of withdrawal (especially if there is an anti- technicality clause)