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25 May 2021

Help yourself – Owners' self-help remedies against a defaulting time charterer

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Introduction

It not unusual for an owner to suddenly find itself tied into a charterparty with an impecunious time charterer. The cargo may be on board the vessel and the owner therefore has obligations to the cargo interests under the bill of lading, but the charterer has defaulted in paying the hire due under the charterparty. The owner is faced with the unenviable prospect of continuing the voyage at its own cost and having to pursue the charterer through arbitration. Thankfully for the owner, there are a number of self-help remedies, which will enable recovery of some or all of the unpaid hire.

Rights under the Time Charterparty

A. Lien

The time charterparty will often contain a clause entitling the owner to exercise a lien over cargo, hire or freight. Under the NYPE 1946 form, clause 18 provides that the owner "shall have a lien upon all cargoes, and all sub-freights for any amounts due under the Charter…".

Lien over cargo

The exercise of a lien over cargo is usually exercised at, or as close as possible to, the discharge port. The lien is exercised by service of a notice on the charterer. Whilst the owner is lawfully exercising the lien, the owner continues to earn hire and the lien will continue until the owner withdraws the lien or the lien is lost.

As to the latter, the lien can be lost if the owner does something which is inconsistent with the continued existence of the lien, such as giving up physical possession or taking security for charterer’s liability (see The Lehmann Timber, 2013). The owner should therefore ensure that any steps it takes are consistent with the exercise of the lien, until such time as it is adequately secured.

Importantly, it is worth noting that the costs of exercising the lien over cargo will be for the owner, at least in the first instance. The owner will therefore need to assess the practicalities of exercising a lien over cargo, including how it keeps control of the cargo if forced to discharge it, perhaps into a bonded warehouse, and the associated costs. These considerations are in addition to the likely delay and potential claims that could arise against the owner.

The right to exercise a lien over cargo is a contractual right between the owner and the charterer arising from the charterparty. The owner can only exercise a lien over cargo belonging to a third party if the terms of the charterparty, including the lien clause, are incorporated into the bill of lading. Care must therefore be taken to check entitlement to exercise the lien, otherwise the owner will face claims from cargo interests. A further pitfall that can arise is the interplay between owner's contractual right to exercise a lien over cargo and the law at the discharge port. It is therefore prudent to take local legal advice before exercising a lien over cargo.

Lien over sub-freight

The owner's lien over sub-freight entitles the owner to demand from the voyage charterer payment of the voyage charter freight that would otherwise have been paid to the time charterer. The lien over sub-freight is relatively straightforward in comparison with exercising a lien over cargo. The lien is exercised by service of a notice on the sub-charterer. If the sub-charterer does not pay the sub-freight in accordance with the notice, the owner will have a separate right against the sub-charterer for the sums due.

With a chain of charterparties, there can be a corresponding chain of liens, but only if each charterparty in the chain contains a lien over sub-freight (or sub-hire) clause. The charterer effectively assigns to the owner both the charterer's contractual right to receive sub-freight from the sub-charterers and also any sub-freight due under any sub-sub-charter. There is some uncertainty in the authorities (The Cebu, 1983) as to whether "sub-freights" is wide enough to cover freight, hire and sub-hire. Therefore, the owner will often, sensibly, amend the lien clause to ensure that it has a lien over "cargo, hire, sub-hire, freight and sub-freight".

It is important to note that in relation to both the lien over cargo and the lien over sub-freight, the owner is entitled to exercise the lien for "any amounts due under the Charter". The wording does not generally include a potential damages claim (although different wording can be used). Further, the exercise of the lien requires a breach of the terms of the charterparty, namely non-payment. This position can be contrasted with the owner's right to intercept bill of lading freight (see below).

B. Withdrawal

The owner's right to withdraw the vessel is found in clause 5 of the NYPE 1946 form. The owner has the right to withdraw the vessel from charterer's service owing to charterer's failure to pay hire punctually and in accordance with the terms of the charterparty.

Once again, this right is exercised by service of a notice of withdrawal. It is important to note that the charterparty is often amended to give the charterer a short grace period to rectify late payment. The owner must serve an ‘anti-technicality’ notice giving a specified number of days for the charterer to make the payment, failing which the vessel will be withdrawn. If paid within the grace period, the payment will stand as regular and punctual.

The pitfalls of withdrawal are numerous and could lead to very serious consequences. The main points are to ensure that the right is exercised promptly. The case law suggests that the word ‘promptly’ in this context means within a matter of 24-48 hours from the right arising (see The Balder London, 1980 and The Scaptrade, 1981), otherwise the owner is treated as having waived their right, and any withdrawal may be considered as wrongful (and of itself a repudiatory breach of the charterparty entitling the charterer to terminate and seek damages). Further, it is important that the owner gives sufficient notice in accordance with the anti-technicality clause and that the form of the notice makes clear the consequences of non-payment of hire (see The Li Hai, 2005).

Given the very serious repercussions of a wrongful withdrawal, it is prudent to obtain legal advice as soon as the charterer starts to fall behind in payments.

C. Withholding service

In NYPE 1993 (clause 1(a), lines 153 to 158), there is an express contractual right to withhold service pending payment of hire. Again, before exercising this right, the owner often has to give the charterer notice to enable it to remedy this defect. There is no general right to withhold service following charterer's non-payment of hire; this is a contractual right only. Therefore, if the owner wishes to rely on such right, it must ensure that an appropriate clause is incorporated in the charterparty.

Rights under the bill of lading

This right is probably the most powerful right available to an owner against a charterer and has been bolstered by recent clarification from the court as to when an owner can exercise the right (see our bulletin on The Smart, 2021). 

The right to intercept freight arises only if the relevant bill of lading is an owner's bill of lading. An owner has no rights under a charterer's bill of lading. Typically, the bill of lading will state on its face that freight is "payable as per charterparty dated …..". The charterparty will in turn usually provide for such freight to be paid to the charterer.

The court in The Smart confirmed that an owner's bill of lading is the owner's contract and so the owner is entitled to demand the bill of lading freight from the holder of the bill as consideration for the agreed carriage. Where the bill provides for freight to be paid as per charterparty to the charterer, the owner can countermand that direction and require direct payment to it. Crucially, the owner can demand that all freight is paid to it, not only the amount due from the charterer, save that the owner will of course have to account to the charterer for the balance. Further, The Smart clarified there is no requirement for the charterer to be in default before the owner can exercise this right.

Again, this right is exercised by service of a notice on the party paying the freight directing that freight is paid to the owner. In practice, the owner will not have seen the relevant charterparty and so will usually serve the notice on the shipper and consignee, as well as the charterer. Once the notice is served on the relevant party, the owner has a direct right against that party, with a separate claim should the freight not be paid in accordance with owner's instructions. This may place significant commercial pressure on the charterer where the total freight may very well exceed the sum due to the owner. Of course, if the freight has already been paid, then the right is lost.

Conclusion

An owner faced with a defaulting charterer has a number of options. Many of these can put significant commercial and legal pressure on a defaulting charterer as well as assist the owner in recovering sums due from the charterer. However, the effectiveness of these ‘self-help’ remedies generally depends on the owner exercising its rights promptly and accurately. Given that they are all contractual remedies, it is important to comply with any contractual provisions governing the exercise of these rights, otherwise the owner risks losing that right or at worst, facing a claim for wrongful termination. Owners should therefore act quickly to seek immediate legal advice as soon as they are faced with a defaulting charterer in order to place them in the best position possible.

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Kirsty MacHardy

Kirsty MacHardy
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T:  +44 20 7809 2440 M:  +44 7798 635 760 Email Kirsty Office:  London

Joanne Champkins

Joanne Champkins
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