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BIMCO Non-Payment of Hire Clause for Time Charter Parties: Can an owner withdraw for a previous non-payment of hire?

02.12.2019 Maritime

William Blagbrough

William Blagbrough Partner

James Rose

James Rose Managing Associate

Quiana Navigation SA v Pacific Gulf Shipping (Singapore) Pte Ltd (Caravos Liberty) [2019] EWHC 3171 (Comm)

The Court has upheld the decision of a tribunal that the Owners in this case were not entitled to rely on the BIMCO Non-Payment of Hire Clause for Time Charter Parties (“BIMCO Clause”) to withdraw the vessel from a time charter for a previous non-payment of hire.

The background facts

Quiana Navigation SA (“Owners”) and Pacific Gulf Shipping (Singapore) Pte Ltd (“Charterers”) entered into a time charter for the hire of the Caravos Liberty (“Vessel”) on an amended NYPE form with rider clauses and a fixture recap (“Charterparty”).

The relevant parts of the BIMCO Clause that was incorporated into the Charterparty stated as follows:

BIMCO Non-Payment of Hire Clause for Time Charter Parties

If the hire is not received by the Owners by midnight on the due date, the Owners may immediately following such non-payment suspend the performance of any or all of their obligations under this Charter Party (and if they so suspend, inform the Charterers accordingly) until such time as the payment due is received by the Owners. Throughout any period of suspended performance under this Clause, the Vessel is to be and shall remain on hire. The Owners' right to suspend performance under this Clause shall be without prejudice to any other rights they may have under this Charter Party.

The Owners shall notify the Charterers in writing within 24 running hours that the payment is overdue and must be received within 72 running hours from the time hire was due. If the payment is not received by the Owners within the number of running hours stated, the Owners may by giving written notice within 12 running hours withdraw the Vessel.

Hire was payable every 15 days in advance.  Each instalment was preceded by the parties producing hire statements, which set out the previous and current instalments, and provided a running account of sums due.

Following an exchange of statements showing different amounts, the Charterers underpaid the 4th instalment by approximately USD8,000. They contended (wrongly) that there had been an overconsumption of fuel. The Owners protested, but no anti-technicality notice was served.

The Charterers paid the 5th and 6th instalments in full. The Owners’ statements leading up to the 5th and 6th instalments asked the Charterers to pay the shortfall from the 4th instalment. The shortfall was not paid. No anti-technicality notice was served after the 5th instalment. However, after the 6th instalment, the Owners served anti-technicality notices under the BIMCO Clause, calling for payment of the full balance of hire due. When payment was not made, the Vessel was withdrawn.

The Tribunal found that the BIMCO Clause was not engaged. It held that the Charterers’ deduction of the 4th instalment was wrongful; it resulted in short payment and this shortfall continued and remained due thereafter. However, the BIMCO Clause was only concerned with the hire that fell due for the first time on the relevant date, not for all hire due as at that date. Payment of the 6th instalment had been made in full and so the withdrawal procedure could not be invoked at that point in relation to outstanding sums owed from the 4th instalment.  As the Owners were unable to rely on the withdrawal procedure set out under the BIMCO Clause, they were held to be in renunciatory/repudiatory breach of the Charterparty.

The Owners appealed.

The Commercial Court decision

In dismissing the Owners’ appeal, the Court dealt with arguments based both on construction of the BIMCO Clause, as well as on commercial context. It concluded, in agreement with the Tribunal, that the BIMCO Clause was not engaged.

Construction

The parties agreed that, legally, an underpayment of hire of any size was the same as non-payment and therefore a default that, subject to any contrary withdrawal/anti-technicality provision, entitled the Owners to withdraw the Vessel.

However, the Owners argued that the terms of the BIMCO Clause allowed them to withdraw the Vessel following a subsequent instalment date for underpayments of previous instalments. That was on the basis that, they said:

  1. the natural and ordinary meaning of the words in the BIMCO Clause favoured their construction; and
  2. the Tribunal’s approach undermined the essential nature of the bargain struck between the parties to a time charter by depriving the Owners of the opportunity to take action on an underpayment that may not be obvious within 24 hours of the due date; and
  3. commercial common sense favoured the Owners’ approach.

The Court, however, stated as follows:

  1. The words “if the hire is not received by the Owners by midnight on the due date” were an initial indicator in favour of the right to withdraw being tied to a particular hire instalment – even more so as each claim for an instalment of hire was a separate cause of action.
  2. It was not natural to say that where a sum is not paid for the 4th instalment, the due date for payment was the date of the 6th instalment.
  3. The wording in the BIMCO Clause reinforced the necessary connection between the relevant hire instalment and the single due date and prescribed a condition for withdrawal that could not be satisfied in respect of historic arrears.
  4. The outstanding sum was no more due on 10 August than it had been on 9 August and it was illogical to say that a withdrawal notice in which time was key should run from a date that meant nothing in the context of that particular sum.
  5. There was a very real distinction between the continuing entitlement to recover hire as a debt and the independent contractual entitlement to withdraw. The latter was a “nuclear option” and was hedged by careful contractual requirements. As legal cases have made clear, such right could easily be lost.
  6. The time at which hire was due must, therefore, refer back to hire not being received by midnight on the “due date”.

Commercial context

The Owners argued that: (i) there was inadequate protection if they were unable within 24 hours to ascertain whether they had a right to serve an anti-technicality notice and: (ii) there was inadequate leverage for the Owners to obtain payment of everything payable to them without forcing them almost immediately into threatening the nuclear option of withdrawal - that approach should be considered unlikely in a time charter where there is the need for on-going cooperation.

The Court was not persuaded by these arguments; there was often a tension in the operation of commercial contracts that the contract could not resolve in every case. The effect of the Owners’ construction would be that they would retain the right to withdraw the Vessel at any time until the debt became time-barred (6 years after the failure to make payment). The Charterers would be under a constant threat of the Vessel being withdrawn (albeit this right would only be triggered every 15 days and activated when a notice was served).

The Court ultimately found that if the Owners’ argument was accepted, late hire could be a basis for withdrawal, possibly for a period of years, but only at the time of some later, completely distinct payment. That was a commercially uncomfortable result.

Comment

This decision highlights the potential pitfalls in withdrawing a vessel from service. Withdrawal rights are a strong weapon for owners but are based on, and limited to, the terms of the contract. If an owner is considering withdrawal, they should take care to review the right(s) afforded to them under the relevant charterparty to ensure that the strict contractual requirements for withdrawal have been met.  The financial consequences of getting it wrong can be large.

Article authors:

William Blagbrough James Rose