Hire, Remedies for Non-Payment, ‘Off-Hire’ Clauses, Deductions from Hire and Liens on Freight and Sub-Freight  

Hire, Remedies For Non-Payment, ‘Off-Hire’ Clauses, Deductions From Hire And Liens On Freight And Sub-Freight

1. Mode And Time Of Payment

  1. Hire is invariably made payable in advance:
  2. every calendar month (SHELLTIME 4, clause 9)
  3. every 30 days (BALTIME 1939 (as revised 2001), Box 20 and clause 6)
  4. every 15 days (NYPE 93 and NYPE 2015, clause 11(a)).

Various expressions are used to describe the mode of payment:

  1. ‘immediately available funds’ (SHELLTIME 4, clause 9)
  2. ‘funds available to the Owners on the due date’ (NYPE 93 and NYPE 2015, clause 11(a))
  3. ‘in cash’ (BALTIME 1939 (as revised 2001), clause 6), in the specified currency, usually US dollars.

Even if cash is the stated method of payment, transfer between banks is intended.

The ancient common law rule that a debtor has until midnight at the end of the due date to make payment applies: the charterers are not in default until 00.01 on the following day, unless the charter specifies a time as well as a date (The Afovos). No period of grace is implied by the common law. If the due date falls on a non-banking day payment must be made by the last preceding banking day (The Laconia).

In principle, a breach of the duty to make punctual payments of hire cannot be cured by a late payment. However, if the owners accept a late payment without protest, they may be taken to have accepted that payment as if it had been made in time. The owner’s previous acceptance of late payments of hire may also in some cases give rise to an estoppel.

Whether the owners represent that they will accept late payments by accepting late payments in the past is a question of fact (The Laconia).

Modern time charters invariably provide that if hire is not paid punctually, the owners may withdraw the ship. Such clauses are applied strictly – there is no scope for equitable relief (The Scaptrade).

Many standard forms contain a so-called anti-technicality clause. This is a clause requiring the owners to serve a notice of default before the ship may be withdrawn:

a) either generally (SHELLTIME 4, clause 9)

b) or in specified cases (NYPE 93, clause 11(b) and NYPE 2015, clause

11(b) and (c)).

Notice served prematurely (e.g. at 23.00 on the due date) will be ineffective (The Afovos).

In practice ‘withdrawal’ will usually mean continuation of the charter under a without-prejudice agreement that will, if the withdrawal was justified, result in the substitution of a higher rate of hire from the time of withdrawal (The Afovos). Unless otherwise expressly provided in the charter party, the owners do not have a right to temporarily withdraw the vessel (The Nanfri and The Mihalios Xilas).

In The Astra, the vessel was time-chartered on the NYPE 1946 form. Clause 5 of that form provides that the charterer is to pay hire in advance and that ‘failing the punctual and regular payment of hire…the Owner shall be at liberty to withdraw the vessel’. Flaux J in The Astra took the view, obiter, that clause 5 of this form was a condition, inter alia, because provisions as to time are generally considered to be of the essence in commercial contracts. In so doing, Flaux J did not follow the obiter view of Brandon J in The Brimnes that clause 5 of that form was not a condition, but an intermediate term with a contractual option to withdraw in the event of the charterer’s failure to make punctual and regular payment of hire. In The Brimnes, the charter party was also on the NYPE 1946 form, but it did not contain an anti-technicality clause.

One of the reasons for Flaux J in The Astra to take an opposite view would appear to be based on the fact that the charter party in The Astra contained an anti-technicality clause.

However, Popplewell J in Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd took the obiter view that timely payment of hire was an innominate term. He did not follow the decision of Flaux J in the Astra, arguing, inter alia, that a withdrawal clause had the effect of making timely payment of hire a sufficiently serious breach and that it should thus be treated as a condition. This issue is now finally laid to rest following the Court of Appeal decision in Spar Shipping, where the court followed the decision of Popplewell J, endorsing his view that the obligation to make complete and punctual payment of hire was not a condition.

2. Off-Hire Clauses

In principle, the charterers take the risk that they will not be able to employ the ship profitably. The hire must be paid even if the ship cannot provide the services that the charterers require for reasons beyond the owners’ control.

In practice, all time charters provide for suspension of the charterers’ obligation to pay hire if certain events happen, usually referred to as ‘off-hire’ clauses.

Since off-hire clauses form an exception to the charterers’ primary obligation to pay the hire, it is for the charterers to show that the conditions for suspension of hire are satisfied. As Staughton LJ said in The Berge Sund, the only general rule that can be laid down with regard to off-hire clauses is that ‘one must consider the wording of the off-hire clause in every case’.

Read the first sentences of NYPE 93, clause 17 and NYPE 2015, clause

17, for a typical list of off-hire events. You will see that hire is to cease in the event of loss of time from the occurrence of these events ‘for the time thereby lost’. See also clause 11(A) of BALTIME 1939 (as revised 2001). This type of off-hire clause is described as a ‘net loss of time clause’. In essence, such off-hire clauses provide that, when certain events happen, no hire is payable for the time lost to the charterer as a result of such events (see, for instance, The Apollonius). In the context of these off-hire clauses, ‘loss of time’ means the period of time during which the ship is prevented from working (i.e. loss of a period of service). Loss of time is not taken to refer to the period of time by which the progress of the charter service has been delayed (see Vogemann v Zanzibar and The Athena). What needs to be considered is how much time is lost during the performance of the service that is immediately required of the vessel (see The Athena and The TS Singapore). 

In order to displace this rule, there must be an express provision to that effect in the charter party. In The Trade Nomad, the charter party contained aprovision stating that:

On each day and every occasion that there is a loss of time…due to…repairs… breakdown… of machinery, boilers… collision… preventing the efficient working of the vessel… the vessel shall be off-hire from the commencement of such loss of time until she is again ready and in an efficient state to resume her service from a position not less favourable to Charterers than that at which such loss of time commenced.

This or similar provisions are interpreted restrictively by the courts (The Trade Nomad). Hence, where a vessel loses her turn for a berth as a result of grounding, the time lost while waiting for a berth after she is refloated is not an off-hire event (The Marika M).

It may be difficult to establish how much time has been lost and some judges have suggested that it is more straightforward to base the suspension of hire on the period of the inefficiency (e.g. Lord Denning MR in The HR Macmillan). For a period of inefficiency clause, see The Bridgestone Maru.

Leaving aside net loss of time clauses and period of inefficiency clauses, 

the off-hire clause in a charter party can alternatively be a ‘period off-hire clause’ (see, for instance, BALTIME 1939 (as revised 2001), clause 11). 

Such clauses provide that hire is not payable for the duration of the off-hire event. Hence the off-hire begins with a specified event and ends with another specified event. In the case of partial inefficiency of a vessel that falls within the off-hire clause, the vessel will be treated as off-hire throughout the period as if there was full inefficiency (Hogarth v Miller).

The crucial question is whether the ship is unable, for one of the specified reasons, to provide the service required by the charterer at that particular time. A breakdown of the ship’s engines while she is berthed will not deprive the charterers of the service of loading or discharging the cargo, and a breakdown of the ship’s cranes will not deprive the charterers of the service of completing the voyage, so that hire will continue to be payable in both cases (see Hogarth v Miller and The HR Macmillan).

A need for normal tank cleaning or a delay caused by the need to lighten the ship in order to enter a harbour or pass through a canal are not periods of inefficiency and the ship is not off-hire (The Berge Sund, The Aquacharm).

Many off-hire clauses refer to ‘detention’ of the ship for various reasons. It is settled that detention does not mean that the ship is prevented from moving, but rather that she is prevented from proceeding in the way necessary to provide the service required. Thus in Vogemann v Zanzibar the ship was ‘detained by average accident’ while putting into a port for repairs and while being repaired.

In The Doric Pride, the ship was held to be ‘detained by authority’ when ordered by the US Coast Guard to wait for inspection outside New Orleans as part of increased security measures in the wake of 9/11. It was immaterial that she was theoretically free to proceed elsewhere. A proviso in the off-hire clause that the ship was not to be off-hire where detention was ‘occasioned by…calling port of trading’ did not assist the owners: the risk of detention as a first-time caller to the US fell within the owners’ area of responsibility, as it related to the ship’s status, not her employment. See also The Mareva AS, in which the off-hire clause provided that:

“…in the event of the loss of time from…detention by average accidents to ship or cargo… or by any other cause preventing the full working of the vessel, the payment of hire shall cease for the time thereby lost.”

In that case, the cargo was wet damaged owing to leakage through defective hatch covers. Because of this damage, discharge operations took 15 days longer than usual. It was held that this delay was not an off-hire event, as there was no detention in the present case.

In addition to listing particular off-hire events, the off-hire clause may refer to ‘any other cause’ preventing the full working of the ship, but these words are given a limited meaning and do not extend to delay caused by unexpected and unforeseeable interference by port authorities (see The Laconian Confidence).

In The Mastro Giorgis, the vessel was held to be ‘off-hire’ while under arrest as the wording of the off-hire clause was sufficient to cover the case of detention by the arrest of the vessel. The time charter party was on the NYPE 1946 form. In a very recent Supreme Court decision in The Global Santosh the question of whether the vessel was off-hire while under arrest also arose. The charter party contained the following off- hire clause:

“Should the vessel be captured or seizured or detained or arrested by any authority or by any legal process during the currency of this Charter Party, the payment of hire shall be suspended until the time of her release, unless such capture or seizure or detention or arrest is occasioned by any personal act or omission or default of the Charterers or their agents… (emphasis added)”.

Cargill, the time charterer, sub-voyage chartered the Global Santosh. The seller of the cargo, Transclear, was at the end of the charter party chain. Their buyers, IBG, incurred discharge port demurrage under the sale contract. In order to secure payment of the demurrage, Transclear arrested the cargo (and also the vessel). Cargill withheld hire for the period when the vessel was under arrest, but the shipowners denied that the vessel was off-hire, arguing that the arrest was occasioned by the act and/or omission of Transclear and IBG, and that these parties should be treated as the ‘agent’ of Cargill. It was clear that Cargill enjoyed the ‘right’ of directing the vessel as to where and when to discharge the cargo and that Transclear and IBG were the agents of Cargill in the context of exercising that right. However, not everything that Transclear and IBG did could be regarded as the exercise of a right or the performance of an obligation under the time charter. Consequently, the Supreme Court refused to hold that Transclear and IBG were Cargill’s agents when doing the particular acts that caused the arrest of the vessel.

More recently, the courts have also been asked to interpret off-hire clauses with a view to deciding if piracy events are off-hire events. In The Saldanha, the time charter party was on NYPE 93 (clause 17). It was held that detention of the vessel by Somali pirates could not be brought within the off-hire clause. 

The wording of the off-hire clause in NYPE 1946, clause 56 is different from that in NYPE 93, clause 17. In The Captain Stefanos, the time charter party was on NYPE 1946. The reference to ‘capture/seizure’ in the off-hire clause of that form was held apt to cover the piracy event and the vessel was held to be off-hire.

3. Deductions From Hire

Standard forms of time charter may make express provision for deductions to be made from the hire in respect of matters that do not put the ship off-hire – see clause 11 in BALTIME 1939 (as revised 2001); NYPE 93, clause 17; NYPE 2015, clause 17. The difficult question is the extent to which deductions may be made without an express provision in the charter.

It is established that the principle of Dakin v Oxley – that claims against the owner may not be offset against the freight under a voyage charter party– does not apply to hire under a time charter (see The Nanfri). The dilemma for the charterers, however, is that an unjustified deduction will mean that there is a failure in punctual payment of the hire that will expose them to the risk of ‘withdrawal’ of the ship. The deductions must be in respect of some matter which relates to the use of the vessel, that is to say, a claim that the charterers have been deprived of the use of the vessel or prejudiced in their use of it. Thus, a deduction could be made in respect of failure to load cargo, but not for failing to comply with the charterers’ orders to take on bunkers at a particular port, or for claims in respect of loss or damage to cargo (see The Leon, The Li Hai and The Aliakmon Progress). Any deduction must be by ‘a reasonable assessment made in good faith’ (see The Nanfri).

4. Owners’ Liens On Freight And Sub-Freight

In most cases the charterers’ purpose in chartering the ship will be to trade by entering into sub-charters. The typical scenario is that O lets the ship on time charter to T who enters into a voyage (sub-) charter with V. At common law O has no claim against V if T becomes insolvent and hire is unpaid. It is therefore important for the owners to include a clause such as BALTIME 1939 (as revised 2001), clause 17 giving the owners a ‘lien’ upon all cargoes and sub-freights belonging to the time charterers and any bill of lading freight for all claims under the charter ( see NYPE 93, clause 23 and NYPE 2015, clause 23). In The Cebu it was held that the word ‘sub-freights’ in the lien clause could be taken to refer to sub-hire. 

Consequently, the shipowner in that case could not intercept sub-hire due to the time charterer. In NYPE 2015, the lien clause (clause 23) is now different. It has been extended to cover sub-hires from sub-time charterers.

  1. Nature of lien

Whereas a lien upon cargo is a right to retain possession until paid, in relation to (sub-) freights it means the right to intercept the money due to the charterer by giving notice to the debtor to pay the money directly to the owners. If the debtor has already paid when notice is given, the lien is lost: the debtor cannot be made to pay twice. The position is succinctly stated in The Spiros C, where the owners sought to exercise the right against the bill of lading holders and the issue was whether the freight had already been paid ‘as per charter party’.

This line of thinking was also followed by the Court of Appeal in The Bulk Chile. This case suggests that where the time charter party is in NYPE 1993 form, the shipowner is arguably prevented from exercising such a right where the time charterer is not in default of their payment obligations.

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