Owners – 10 things to consider when your time charterer is not paying hire?

1. Time charter hire is customarily payable in advance.  Whilst late payment can give rise to a right to withdraw the vessel from the service, there is usually a provision in the charter preventing this without certain notices being served.   The timing and wording of these notices is critical.  Doing the wrong thing can lead to a substantial damages claim against you and an arrest of your vessel.
2. Withdrawing the ship is rarely attractive in the current climate.   In most cases the time charter hire is better than the present market rate.   It is likely that the charterer has fallen behind because they are facing cash flow or financial difficulties.  The issue for the ship owner is – do you wish to continue with the time charter in the hope that the charterer will make good the outstanding sums or do you wish to cut your losses and take the ship back?   If the latter then you need to consider how to take the ship back and there are legal considerations if the vessel is mid voyage.   You may have to deliver the cargo as per the terms of the bills of lading or you may find that your ship is arrested.
3. Withdrawing the ship from the time charter service is a contractual remedy.  It does not give you the right to claim damages.  You will get the ship back and can then re-fix but you can’t bring a claim for damages if the market rate at which you re-fix is lower than lost charter rate.
4. The only way to claim damages is to establish that the charterers conduct in not paying the hire on time is a repudiation of the charter.   There is a lot of law on this.   In The Astra [2013] EWHC 865 Flaux J held that payment of hire was a condition of the contract and so one missed payment was enough for a ship owner to terminate and claim damages.   However, this was overruled by the Court of Appeal in Spar Shipping [2016] EWCA Civ. 982.    In summary, it’s not easy to assess the point at which the failure to pay hire becomes a repudiation.    You should consult a solicitor at an early stage.  If properly advised at the outset then you should be safe.   However, poor advice or a failure to protect your rights can lead to waiver of a repudiation.   A badly advised ship owner may end up giving away a potential claim for millions of dollars by doing or saying the wrong thing.
5. You may be able to put pressure on the charterer to clear the arrears.  In some cases there is a term in the charter allowing the ship owner to suspend the service pending payment – very useful if the ship is sitting off a port with a cargo which the charterer needs to deliver to earn freight.   In other cases, you may be able to lien the sub freight or sub hire – in other words to intercept payments due to the charterer from sub charterers or from shippers.    That can often put you in a strong position as you effectively receive all the freight and can hang on to it only having to reimburse the charterer for the sums over and above the outstanding hire.   If the time charterers own the cargo on board (which is rare) then you may be able to exercise a lien over their cargo.  However, where this right arises it can be messy and expensive and it may mean discharging the cargo ashore, storing it and selling it at your cost.
6. Check to see if the charterers have provided a parent company guarantee to secure their obligations.   If they have then you may be able to make a call under that guarantee to clear the arrears.   If the guarantor does not pay then in many cases you are better off suing the guarantor if they are a substantial company with assets.
7. Are the charterers likely to invoke Chapter 11 proceedings or the equivalent in other jurisdictions?  In other words, are they likely to seek protection from creditors?   This is often a tough call to make as the charterers will probably offer a restructuring proposal where they ask for a reduction in the hire rate and/or rescheduling of obligations.   The restructuring proposal is often more attractive than a Chapter 11 scenario.     You may be inclined to give them more time and eventually accept the proposal only to find that the charterer then defaults on that proposal and/or the proposal is dependent on other ship owners being in agreement.  Ultimately agreeing to hold off or wait is always risky. The recent Hanjin collapse is an example of where many owners held off in the hope of a restructuring and ended up in a far worse position.
8. Can you cut out the defaulting charterer?  This is often possible where there is a sub-charter.  The charterer may be reluctant to agree to this if the sub-charter rate is more favourable than the time charter rate.   However, if you can lien the sub hire then the sub charter hire will come to you in any event.  The excess over the time charter rate can often be held in escrow and you can fight over it later but the charter service is effectively continued with the defaulting charterer cut out of the chain.
9. If you decide to terminate then consider withdrawing the vessel and terminating for repudiatory breach at the same time and at a time when the ship is free of cargo.  This way you reduce the risk of a counterclaim and the risk of an arrest of your vessel.  You should seek legal advice on how to properly protect your rights as the position may differ depending on the circumstances of each case.  Consideration should also be given to obtaining security for your claims for the hire and/or damages by arresting or attaching assets of the charterer.   If the charterer owns or operates ships then it may be possible to arrest those ships.  If they own bunkers on other time chartered ships then it may be possible to attach those bunkers.  It may even be possible to freeze bank accounts and attach other assets in the jurisdiction where the charterer operates.
10. If in doubt, consider invoking arbitration and asking a Tribunal or the English Courts for a declaration.   The arbitration clause is there to resolve disputes and English arbitration is backed by the English Courts and the Arbitration Acts.  Where necessary, the proceedings can be expedited or abridged to obtain quick decisions on issues that are of importance.  For example, if there is any doubt as to whether a repudiatory breach has arisen in any particular scenario then it is theoretically possible to ask the Tribunal for a declaration that the charterers are in repudiatory breach.   The charterers might seek to frustrate that process but the Tribunal and the Courts will do their utmost to find a way around that.

BDM is a specialist shipping law firm offering high quality legal advice and representation at a reasonable price.  Our lawyers have advised owners in all the major charterer defaults including Eastwind, Britannia Bulk, Transfield, Korea Line, STX Pan Ocean, Genco, Daebo, GMI,  Shagang and Hanjin.  If your time charterer is not paying hire then please contact one of our founding partners for help and assistance.  Please check out our website or follow us on social media by clicking below.