Why pay legal costs?

It seems that the days of tardy hire payments may be over, at least in some sectors where spot markets are booming and predicted to remain high.

Tanker operators have for many years struggled to survive in a market where spot rates have long been below operational and finance costs. This has led to legal issues with operators being forced to renegotiate charter hire payments and, in some cases, to seek to agree moratoriums on hire payments. Those days now appear to be over. The recent spike in the VLCC market has seen some tankers being chartered at more than US$300K per day against breakeven estimates of US$27K per day. Those rates appear to be driven by a combination of the COSCO tanker capacity being taken out of the market and recent geopolitical events. However, there is also a dawning realisation that the supply side is well below demand in the tanker market. That is predicted to lead to sustained high spot charter rates over the medium term.

Whilst this is good news for those who have invested in tanker operators, it also brings into focus the terms of period charters that have been restructured. Ship owners with vessels on period charter to tanker operators are keen to see some of this upside. We have seen a number of recent enquiries from ship owners in relation to historic debts due to them under long term charters. In effect, ship owners are likely to take advantage of any opportunity to withdraw vessels from time charterers who fail to honour their charter obligations, including those charters where the charter hire payments have been restructured so as to depend on World Scale rates. Most time charters permit the ship owner to withdraw their vessel for late payment of hire, a remedy that is very advantageous in a booming market. Often this right is tempered by the need for the ship owner to serve a grace notice before withdrawing but, in some cases, that grace notice has been removed as part of the restructuring. It is important for tanker operators to check their charters and make sure that they pay hire on time at the specified rate and clear down any historic debts accordingly.

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