Time Charters - Remedies available to a shipowner where the time charterer redelivers the ship early

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Recently we have seen several early redeliveries. In difficult market conditions this is not a surprising development as it will be beneficial for a charterer to redeliver a chartered vessel as early as possible and go out into the market to charter another vessel at a lower rate. Where the charter is not specific as to the earliest date for redelivery, the charterer may be tempted to push the contractual limits. If the vessel is redelivered too early, the charterer will be in breach of the time charter and may be liable for damages. In our experience this may often be the source of dispute between shipowners and charterers, and many end up spending significant amounts of time and money in the judiciary system.

This article considers the position under English law with respect to the remedies available to a shipowner where the charterer redelivers the vessel early.
Wednesday, September 28, 2016

Authors: partner Guy Leonard and associate Armin Mehaj

 

Early redelivery?

To consider whether a time charterer has redelivered the vessel to the shipowner early, one must first establish how long the term of the charter, specifically the earliest redelivery date, actually is. This is normally, but not always, expressly specified in the time charter. If no such date is specified, the courts usually imply a margin of tolerance of some 5 per cent on the period stated in the charter.  The courts will not however imply a margin of tolerance where this is inconsistent with the expressed terms of the time charter, e.g., where there is an absolute obligation to redeliver the ship by a certain date.  For the purposes of predictability, it is generally advisable to specify the earliest redelivery date in the time charter by reference to a specific date, or margin.

Remedies available to a shipowner

Where the charterer has redelivered the vessel early and is thus in breach of the time charter, the remedies that are available to the shipowner will depend on the significance of the breach. Under contract law, the shipowner may be entitled to claim damages by way of compensation for the breach.  To claim damages, the shipowner must prove that he has suffered a loss, that the loss was caused by the breach and that the loss is not too remote, or otherwise excluded or limited.  The measure of damages in this scenario is discussed in more detail below.  The shipowner should ensure that all losses are fully and adequately documented since the courts have traditionally been strict on accepting losses that are not sufficiently documented.

Early redelivery by the time charterer may also be considered as evidence of the charterer’s intention not to perform his obligations under the charterparty. This would be a repudiatory breach of the charterparty entitling the shipowner to terminate the contract and claim damages.  The shipowner should be very careful when evaluating its position here however.  Firstly, if a charterer’s early redelivery is determined not in fact to have been a repudiatory breach, then the shipowner’s subsequent termination may be.  This would then expose the shipowner to liability for its own breach of contract.  Secondly, in the present difficult market conditions, where existing charter rates are generally higher than rates available in the market, termination may not be in the interests of the shipowner. He may be more interested in holding the charterer to the contract.  This raises the question of whether the shipowner is actually obliged to terminate the contract when the charterer redelivers the ship early or whether he can instead affirm the contract and demand payment of the charter hire for the remaining period of the charterparty.

Entitled to affirm or obliged to terminate the charterparty?

The general rule is that an innocent party can elect between accepting the repudiatory breach and terminating the contract or rejecting the repudiatory breach and claiming that the contract remains in full effect. The right to affirm the contract will not be available however if further performance is dependent on cooperation by the party in breach and if there is no ‘legitimate interest’ in performing the contract rather than claiming damages. The shipowner will have no such legitimate interest if damages are an adequate remedy and insistence on maintaining the contract would be “wholly unreasonable”, see Isabella Shipowner SA v Shagang Shipping Co Ltd (The Aquafaith) [2012] 2 Lloyd’s Rep. 61.

The bar for what constitutes “wholly unreasonable” is set relatively high. In the context of early redelivery, this may depend on how early the redelivery was.  If a vessel is redelivered years before the contractual redelivery date, it would most likely be considered “wholly unreasonable” for the shipowner to insist on affirming the contract.  Another factor may be disproportionality. In The Aquafaith, Cooke J refereed to “The Puerto Buitrago” ([1976] 1 Lloyd’s Rep. 250) to illustrate the level of unreasonableness required. In this case the particular vessel was redelivered early in a state of disrepair. The owners were not entitled to affirm the charter and insist that the charterers repaired the vessel prior to redelivery, since the “cost of repair was double the value of the ship when repaired and four times as much as its scrap value”. Affirming the contract in this situation in order for such repairs to be done would be wholly unreasonable or as stated in Cooke J’s judgment, “truly perverse”.

The Aquafaith confirms that the shipowner’s general right to elect whether to terminate or affirm the charter will apply in case of repudiatory breach, where a charterer redelivers a vessel before the earliest redelivery date. If the shipowner accepts the repudiatory breach, his remedy will be damages. Case law shows that the assessment of damages depends on whether there is an available market or not. If there is an available market, the damages the shipowner is entitled to will be the difference between the contract rate that would have been earned if the time charterparty would have been contractually performed and the market rate for the particular vessel, see Golden Strait Corporation v Nippon Yusen Kubishka Kaisha (The Golden Victory) [2007] 2 Lloyd’s Rep 164. If there is no available market, the damages the shipowner is entitled to recover as a result of the early redelivery will be the shipowner’s actual loss, see Zodiac Maritime Agencies Limited v Fortescue Metals Group Limited (The Kildare) [2011] 2 Lloyd’s Rep 360. This actual loss is measured by taking into account the difference between the contract price and the actual position resulting from the breach.

If the shipowner decides to affirm the charterparty he will be entitled to claim charter hire from the charterer for the remainder of the term. This said, affirming the contract could be risky from the shipowner’s point of view, since the charterer may have insufficient funds to pay the charter hire and the shipowner will not be able to mitigate its losses by re-deploying the vessel. Clearly a number of legal and commercial aspects should be taken into consideration by the shipowner when evaluating its options in such circumstances.

We hope that you will find this article interesting and informative. Any feedback on this topic is more than welcome. If you have any other questions or comments, please contact us.

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