When can owners withdraw a vessel from time charter? William Stansfield explains how the decision in The Caravos Liberty raised a point of general importance for the market on whether it is possible to withdraw a vessel under the BIMCO Non-Payment of Hire Clause for Time Charter Parties (the “BIMCO Clause”) when the non-payment relates to an earlier period of hire.
The facts in The Caravos Liberty are quite straightforward.
- The owners chartered The Caravos Liberty to the charterers on an amended NYPE contract which incorporated the BIMCO Clause.
- The charterers made a deduction of approximately US$8,000 from the 4th hire instalment, as the charterers said (wrongly) that the ship had over-consumed bunkers. The owners protested about the deduction, but they didn’t serve an anti-technicality notice (“ATN”) within the 24-hour period stipulated by the BIMCO Clause.
- The charterers then paid the 5th and 6th hire instalments in full. However, the day after the 6th hire instalment was paid, owners served an ATN calling for the full balance of outstanding hire to be paid. The deduction from the 4th hire instalment was not paid within the 72-hour grace period stipulated in the BIMCO Clause, and the ship was withdrawn from charterers’ service.
The legal issues
The question that arose for consideration in this case is whether an ATN can be served for historical underpayments of hire which, if not rectified by the charterers, could lead to the owners invoking the ‘nuclear option’ of withdrawing the ship from the charterers’ service.
A panel of three arbitrators found in favour of the charterers on this point and held that the owners had unlawfully withdrawn the ship from the charterers’ service. The owners appealed the tribunal’s award on a point of law.
The owners’ appeal was primarily based on the correct interpretation to be given to the BIMCO Clause, which the owners said supported their position. As a secondary position, the owners argued that commercial common sense required that the decision of the arbitrators be overturned.
The wording of the BIMCO Clause
The BIMCO Clause is too long to reproduce in full, but the operative part of the clause reads as follows:
If the hire is not received by the owners by midnight on the due date, the owners may immediately following such non-payment suspend the performance of any or all of their obligations under this Charter Party (and if they so suspend, inform the Charterers accordingly) until such time as the payment due is received by the owners…
The owners shall notify the Charterers in writing within 24 running hours that the payment is overdue and must be received within 72 running hours from the time hire was due. If the payment is not received by the owners within the number of running hours stated, the owners may by giving written notice within 12 running hours withdraw the Vessel.
The owners’ argument was that a number of individual words in the BIMCO Clause (e.g., “the hire”, “the payment”, and “the due date”) taken together referred to the full amount of hire currently outstanding on the due date, such that historic underpayments of hire could be taken into account.
However, the court disagreed, and said that the words of the clause that the owners relied on pointed in favour of the opposite view, namely that the right to withdraw was tied to a particular hire instalment.
Commercial common sense
The owners also argued that the charterers’ position was commercially unattractive, as it is possible that the owners might not have sufficient time to work out if they have a right to serve an ATN within the 24 hours specified by the BIMCO Clause. The owners also said that if charterers were correct, a ship owner would have inadequate leverage to obtain payment of all hire due to them.
The court disagreed with the owners on these points too, saying that it was less commercially attractive that the owners should be able to retain the right to withdraw the vessel at any time up until the debt became time barred, which would usually be six years after failure to make payment.
An owner can sue to recover hire earned but not paid as a debt up until the expiry of the limitation period. However, the court was not impressed by the suggestion that the owners could keep the threat of serving an ATN and withdrawing the vessel hanging over a time charterer like a “Sword of Damocles”, potentially for years after the hire payment first became due.
The owners’ appeal was dismissed.
The decision turns on the wording of BIMCO Clause. A different outcome could be achieved if the parties modified the wording of the BIMCO Clause to allow an ATN to be served for historic underpayments of hire.
As the appeal was on a single point of law, the judgment does not say what the financial consequences of the decision were for the two parties. However, as the court agreed with the tribunal’s decision that the owners had unlawfully withdrawn the ship from the charterers’ service, it is likely that the charterers would have been award damages to compensate them.
This case serves as a timely reminder that a ship owner contemplating withdrawing a ship from time charter needs to exercise extreme care to ensure that any contractual provisions such as the giving of anti-technicality notices are strictly complied with, as failure to follow those provisions will result in the withdrawal being held wrongful and the ship owner exposed to a claim from the time charterer for damages for breach of contract.