Law Of The Carriage Of Goods By Sea (PART 8)
Pursuant to the earlier topic of Introduction to Maritime Law in Malaysia, published on 22 February 2021, in the coming series, the basis and elements of the Law Of The Carriage Of Goods By Sea will be explored.
Charter Period And Redelivery
Charter Periods And Tolerances
The most straight forward type of time charter is for a period defined by reference to the calendar (e.g. ‘90 days’, ‘six months’). These are commonly qualified by use of the word ‘about’. See, for example, The Peonia, where it was accepted that this would cover an overrun of 14 days on a 12-month charter, but not one of five weeks.
The courts recognise the charterers’ difficulty in arranging voyages that fit neatly into the charter period: if no margin or tolerance is expressed, a reasonable margin will be implied (Watson v Merryweather, but if a margin is stated no further tolerance will be implied (The Gregos – where the period of hire was ‘about 50, maximum 70 days’). For the period covered by the margin, the charterer is entitled to use the services of the ship at the charter rate of hire.
As in The Peonia, it is common practice for the charter to state minimum and maximum periods at the charterer’s option, for example:
- ‘about minimum 10 months maximum 12 months time charter, Exact duration in Charterer’s option’
- ‘six months fifteen days more or less in Charterer’s option’ (see The World Symphony).
The acronym MOLCOPT is often used for ‘more or less in charterer’s option’. The period of tolerance counts as part of the charter period (The Kriti Akti), but no further margin is implied.
- Non-Calendar-Based Time Charters
It has become increasingly common in recent years to make use of the legal framework of time charters for what are effectively voyage charter parties in shipping terms, namely trip charters (e.g. ‘one round trip UK–West Africa’).Here the duration of the charter is determined by the length of the voyage and the question of tolerances does not arise.
In The Lendoudis Evangelos II the agreement was for ‘one time charter trip duration 70/80 days without guarantee’, thus combining the two concepts of trip and calendar:
- The charterer’s obligation with regard to the statement of duration was merely to make the estimate in good faith.
- The owner had no remedy when the trip took 102 days, the estimate having been made in good faith.
Redelivery, Overrunning The Final Terminal Date And Early Redelivery
The terms of the charter decide what the date for ‘redelivery’ is. Though inaccurate, this is the name traditionally given to the latest date to which the charterer is entitled to make use of the services of the ship at the agreed rate of hire. The expression ‘final terminal date’ was coined by Bingham LJ in The Peonia as a more accurate alternative. It is clearly in the commercial interest of the charterer to ensure that the final voyage under the charter ends as closely as possible to the final terminal date, in order to avoid having to pay hire for a ship that is lying idle.
However, if the final voyage overruns the final terminal date there can be significant financial implications for the owner, such as:
- loss of a new fixture
- delay in taking advantage of a favourable market.
It is not likely to be a question of unscrupulous charterers tempted to push their luck: the charterers’ planning may have been entirely reasonable and realistic but events beyond the charterers’ control may cause the voyage to overrun (e.g. the only shipping channel is blocked by the grounding of another ship). The extent of the charterers’ responsibility in this situation has exercised the courts for some time and views have changed.
Originally, the solution was found by drawing a distinction between a ‘legitimate’ last voyage and an ‘illegitimate’ last voyage. If the overrunning last voyage was, when ordered, reasonably expected to be completed by the final terminal date, the voyage was legitimate. The charterer was entitled to complete the voyage, paying only the charter rate of hire during the period of overrun even if the market had risen.
If, however, it was not reasonable to expect the voyage to be completed in time, the voyage was illegitimate and the charterer was liable in damages – that is, to pay hire at the market rate during the period of overrun if the market had risen.
This simple solution was based on the understanding that the overrun was not a breach of the charter if the last voyage was legitimate in the above sense. This was the interpretation put upon the House of Lords’ decision in The London Explorer until 1991. Then, however, the Court of Appeal held, in The Peonia, that:
- This view was not that of a majority of the House of Lords.
- The true view is that the charterers are in breach of the charter by the mere fact of using the services of the ship beyond the final terminal date and will be liable in damages in all cases unless excused by the terms of the charter.
Therefore, if the final voyage overruns the final terminal date, the charter party continues until actual redelivery and the charterers will be required to pay hire at a contractual rate also for the overrun period. In addition, the charterers will be liable for damages (being the difference between the charter rate and the market rate if the market rate is higher than the charter rate) for the period between the final terminal date and actual redelivery, even in cases where the overrun of the last voyage is not caused by the charterers’ fault. In relation to assessment of damages in the case of late redelivery, the charterer is not, in principle, liable to the shipowner for lost profits arising from the shipowner’s loss of a follow-on fixture (see The Archilleas).
In The Paragon, the charter party provided that: The Charterers hereby undertake the obligation / responsibility to make thorough investigations and every arrangement in order to ensure that the last voyage of this Charter will in no way exceed the maximum period under this Charter Party. If, however, Charterers fail to comply with this obligation and the last voyage will exceed the maximum period, should the market rise above the Charter Party rate in the meantime, it is hereby agreed that the charter hire will be adjusted to reflect the prevailing market level from the 30th day prior to the maximum period [d]ate until actual redelivery of the vessel to the Owners.
Holding that the provision did not provide a genuine pre-estimate of recoverable damages, the court struck down the provision as a penalty (which is usually considered to be unenforceable under English law). However, the decision in The Paragon should now be treated with caution following the Supreme Court decision in El Makdessi v Cavendish Square Holdings. There, it was held that penalty clauses were no longer considered to be unenforceable where they had a commercial justification.
If the vessel is redelivered early, the shipowner has the option to accept this as repudiation and claim for damages or affirm the charter party to claim the hire due as a debt. Under English contract law, it is for the innocent party to decide whether to accept the breach. However, the innocent party is not entitled to affirm the contract, if the party in breach proves that:
- the innocent party had no legitimate interest in completing the contract, as opposed to accepting the breach as repudiation, and
- the innocent party cannot perform their contractual obligations without the cooperation of the party in breach.
In The Aquafaith, it was held that time charter parties are contracts that could, in principle, be performed by owners without charterers’ cooperation.
Furthermore, the owners were held to have a legitimate interest in electing to affirm the charter party. Considering the charterers’ fragile financial position, it was reasonable for the owners to affirm the contract in order to obtain quickly an arbitration award to recover the hire due as a debt, as opposed to claiming for damages, which would require assessment of expert evidence on market rates, as well as the owners’ duty to mitigate their losses.
If the shipowner accepts the early redelivery as repudiation and claim for damages, damages can be assessed by taking into account events that occur after repudiation but prior to the assessment of damages, if doing so is necessary to prevent over-compensation of the shipowner (The Golden Victory).
In the case of the owner’s acceptance of the early redelivery as repudiation, the amount of damages will be largely based on the question of whether there is an available market for a substitute charter. If there is an available market, the owner will be expected to mitigate his/her loss by chartering the vessel. In the absence of an available market, if the owner sells the vessel, the consequential benefit of the sale will not be taken into account when assessing damages, see The New Flamenco.
- Effect of giving orders for an illegitimate last voyage
The House of Lords in The Gregos brought clarity to this area of the law by deciding the following points of principle:
- The legitimacy of last voyage orders is to be judged as with any orders at the time when the service called for is to be performed (i.e. at the time when the voyage is to be undertaken, not the time when the order is given).
- If the voyage could reasonably have been expected to be completed before the final terminal date when the order was given, but events between then and the start of the final voyage (such as the grounding of another vessel in the Orinoco river, as in The Gregos) make it impossible for the last voyage now to be completed before the final terminal date, the owners can require the charterers to give fresh orders. Alternatively, the owners can comply with an llegitimate order and reserve their right to claim damages.
- The position is thus the same as with any other order for a service that the owners are not obliged to provide, such as orders for a voyage to an unsafe port.
However, Lord Mustill preferred to avoid the language of primary and secondary obligations used in relation to the safety of nominated ports in The Evia (No 2) and to refer only to continuing primary obligations. The Gregos also decided that the giving of an illegitimate order is not a repudiation of the contract, though it was assumed to be a breach: only insistence on an invalid order may show an intention no longer to be bound.
Finally, it was decided that the obligation to make timely redelivery is not a condition, but an innominate term.
- Option to complete last voyage
As in The Peonia itself, time charters may give the charterers an option ‘to complete last voyage’. As interpreted in The Peonia, such a clause refers in principle to the situation in which a legitimate last voyage unexpectedly overruns through no fault of the charterers and enables them to complete that voyage at the charter rate of hire.
However, if clear words are used the option may have the effect of allowing the charterers to extend the period of the charter by the time needed to complete whatever voyage the ship is engaged upon at the final terminal date, even if that is an illegitimate last voyage (The World Renown).
- Off-hire periods
In The Kriti Akti the charter provided that time when the ship was off-hire could be used by the charterers at their option as an extension of the charter period. It was held that the time off-hire became part of the basic period and the charterers could also exercise their ‘15 days more (or less)’ option in addition to including the off-hire time.
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This article is written by our Principal Associate, Chakaravarthi
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