Payment of Hire and Off-hire

1
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 hireor 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 madeless(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 madeless(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 Lloyds 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 Lloyds
  Rep. 573
• Bona fide belief not enough

7
Not for any other reason

• Must pay last months (or half-months) 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 Lloyds 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

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 Lloyds 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. 31for withdrawal of
  the vessel from their service
• Insufficient

11
More strictness re anti-technicality

• The Pamela 1995 2 Lloyds 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 Lloyds Rep. 1
• Owners gave notice of withdrawal by e-mail before
  hire became overdue
• E-mail 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 Lloyds 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 Lloyds
  Rep. 303 (HL)

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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 Lloyds Rep. 138
  (agreement to pay freight (again) held invalid
  because of economic duress)
• If BLs signed by or on behalf of Charterers,
  Owners assume Charterers obligations after
  withdrawalThe 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)

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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
  Lloyds 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

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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 Lloyds Rep.
  160

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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
  vessels service or from reduction in the
  vessels 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.

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Time lost after full efficiency restored

• No deduction under English law, even under net
  loss of time
• The Marika M 1981 2 Lloyds 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

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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 Lloyds Rep. 7 (not
  off-hire during lightening to pass through Panama
  Canal)
• The Manhattan Prince 1985 1 Lloyds Rep. 140
  (not off-hire under Shelltime 3 during boycott by
  ITF)
• Focus should be on effect preventing full
  working not cause

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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)