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Legal Update: Non-Payment of Hire under a Charterparty

Below is an overview of a legal ruling and the impact and considerations for our customers.

The Law

In 2013, Flaux J argued in The Astra [2013] EWHC 865 (Comm), that payment of hire by Charterers was a condition of the Charterparty. Owners were therefore entitled to withdraw the vessel from service and claim loss of profits for the remaining charter period even in circumstances where the charterer failed to make a single payment.

In handing down his decision in Spar Shipping AS v Grand China Logistics Holding (Group) Co. Ltd [2015] EWHC 718 (Comm), Popplewell J dismissed each of the arguments made by Flaux J in The Astra. In particular, he argued that:

  • There is no right to terminate under a withdrawal clause for any failure to make punctual payments. It cannot have been the intention to allow Owners to terminate long-term charters for frivolous or non-serious breaches of the payment obligations;
  • Without express wording to that effect, the withdrawal clause cannot make payment of hire a condition;
  • There is no logical reason that payment of hire should be a condition (unless specifically stated in the charterparty) because Owners can withdraw the vessel from the Charterers’ service and once the Master and crew are no longer at the disposal of Charterers then Owners no longer have an interest in the prompt payment of hire;
  • The need for commercial certainty does not require payment of hire to be treated as a condition. It can instead, be achieved by the withdrawal clause which gives Owners the option to cancel without conferring on Owners a right to “unmerited” damages. In effect, the remedy for non-payment of hire has to be proportionate to the breach and in trivial cases e.g. delayed payment by a couple of days, this cannot justify contract termination and damages.

Owners’ Position Now

We are yet to see if Spar Shipping AS v Grand China Logistics Holding (Group) Co. Ltd [2015] EWHC 718 (Comm) will be appealed. However, it does indicate that The Astra is not settled law. Owners can still withdraw a vessel from service providing a withdrawal clause is incorporated. If, however, Owners want to recover damages for loss of bargain (i.e. hire for the remainder of the charter) they will now have to prove that the charterparty was terminated because of a repudiatory breach (i.e. owing to Charterers’ failure to pay hire in accordance with their obligations) and that Charterers’ default was so sufficiently serious as to deprive Owners of substantially the whole benefit of the charterparty. This will be determined on a case by case basis.

We hear regularly from Owners that the market is challenging and we think that timely hire payments are necessary for the sound running of the vessel. There are, however, other remedies that Owners may want to consider when it becomes clear that Charterers are suffering from financial difficulties and/or they are unlikely to pay hire in accordance with the charterparty. Liening sub-freights owed to Charterers is one remedy which, if incorporated into the charterparty, allows Owners to serve notice on sub-charterers that any outstanding freight owed under the sub-charter must be paid directly to them. Furthermore, charterparties generally incorporate the right to lien cargo carried on board. This is a problematic remedy and requires legal guidance in exercising it, however, it is one option to be explored when a Charterer defaults on payment. Other options may include freezing Charterers’ bank account (depending on the jurisdiction the account is located in) and this acts as an effective way of obtaining payment providing the account is in receipt of funds.

In any event, please do not hesitate to contact us should you require any further advice and guidance.