A recent arbitration award (London Arbitration 3/04 in Lloyds Maritime Law Newsletter 635) serves as a reminder that owners should always think twice before withdrawing from a time charter
Time charter withdrawal cases always make a reappearance in a rising market and the current market is no exception. Our experience is that timing is critical. If owners are too early in withdrawing the vessel from a charterparty, they could be held liable for anticipatory repudiatory breach of contract and face a damages claim from charterers. If owners are too late in withdrawing, they could be held to have affirmed or confirmed the contract and lost the right to withdraw. A wrong move here could also lead to owners facing damages claims from charterers. The sums involved can quickly become significant. A recent arbitration award in London involved the classic case of charterers making several hire payments late and then owners withdrawing the vessel on the day a hire payment was due.
In London Arbitration no. 03/04 the time charterers apparently had a history of making late payments and according to owners had given misleading excuses for such late payments. It seems that by the time the fifth payment of hire was due on 21 December the owners had had enough and withdrew the vessel from the charter that same afternoon. Owners argued that because hire was to be paid in advance it had to be paid before the due date (i.e. by midnight 20 December). It was argued that "in advance" referred to the due date and not to the period for which hire was paid. Perhaps not surprisingly, the arbitration tribunal held that this was "plainly wrong" and that withdrawal was made too early - the charterers had until midnight on the due date (i.e. by midnight 21 December) to make the payment and so owners had no right to withdraw the vessel until midnight on 21 December. Owners had essentially fired too early! Note that this is so even if banks might be closed making it impossible for charterers to get the money to owners in time (the tribunal referred to The "Afovos" [1983] Lloyd's Rep 335).
As many may know, owners lose the right to withdraw a vessel from a charter once late payment of hire is accepted. Although previous hire payments had been made late in this case, owners had failed to exercise any right to withdraw that might have existed at the time when a hire payment was outstanding. So, by their conduct, owners had accepted a series of late payments and in so doing confirmed the charter as continuing.
Owners also argued that the history of late payments and an alleged failure to pay for bunkers on board showed an intention on the part of charterers not to perform their fundamental obligation to pay hire – so that charterers no longer intended to be bound by their contract (repudiation). Owners believed that charterers would again make payment late on the due date of 21 December and withdrew on 21 December. However, belief alone is not sufficient. The tribunal were sympathetic to owner’s predicament and charterers had not behaved in a first-class fashion but this was not enough, as a matter of fact or law, to say that charterers were not going to pay hire before midnight on 21 December.
As the tribunal concluded " If the owners had only waited until they were legally entitled to withdraw, instead of jumping the gun, they would at least not have been facing a damages claim by the charterers". In other words, owners should not have anticipated that charterers would breach their contract. Owners should have waited until charterers were actually in breach (if hire was still outstanding after midnight on 21 December) before withdrawing the vessel. Care always needs to be taken when withdrawing a vessel from a time charter in order to avoid a counterclaim in damages for wrongful withdrawal – the sums involved can rapidly escalate and any mistake may become expensive. We recommend that Members always consult their Skuld defence lawyer before deciding to withdraw their vessel from a time charter.