The poor state of the market over the last few years, and in particular the dry bulk market, has meant that many shipping companies find themselves in financial difficulty. A number of these have become insolvent, or have gone into administration or other protective proceedings, with the latest being Daiichi Chuo, which filed for rehabilitation proceedings in Japan on 29 September 2015. This article provides a general overview of the steps an owner may consider if his time charterer gets into financial difficulty, and cannot pay the hire.

Agreement

An agreement as to how the parties affected will deal with the charterers’ non-payments can be the most efficient and cost-effective means of resolving the issues. Such agreements can take a number of forms, such as the defaulting charterer “dropping out” of the charterparty chain, or his granting to owners an assignment of his right to receive hire from the sub-charterers. A negotiated solution would require the parties being able to reach agreement on any new arrangement, and this can often be problematic because of the number of entities that could potentially be affected by any change in the contractual arrangements - for example sub-charterers, receivers and, in the case of protective proceedings, the court or its appointed receiver. In most cases no agreement will be possible, and the following courses of action should be considered.

Withholding performance – slow steaming and delaying discharge

Owners could seek to withhold temporarily the services of the ship to try to force payment. Temporary withholding usually involves not proceeding on the voyage, or ceasing cargo operations. This right is only available if there is an express term to this effect in the charter, without which temporarily suspension of the services would be a breach of charter. Owners should also note that, even if they have the right to take this step under the charter, if they deliberately slow steam or delay loading or discharge, this may be a breach of owners’ obligations under the bill of lading to undertake the voyage with due despatch.

Lien on cargo

Liening cargo is a further option for the owner, but he will need to make sure that doing so is permissible under local law. It also remains an open question whether an owner may validly exercise a lien where the charter allows it, but the bill of lading does not, and the cargo is not owned by the charterer. In practice, maintaining a lien sometimes means that the owner will have to discharge and store the cargo ashore.

Seeking to intercept subhire or subfreights

Using this remedy, the owner requires his sub-charterer, or other charterers down the chain, to pay the sub-charter hires directly to him. The owner must ensure that the charter enables him to exercise this right for non-payment of hire, rather than subfreight, and that there is an unbroken chain of assignments in the charter chain supporting that right. The lien will only catch sums unpaid at the time the lien notice is received. Practically speaking, the owner should expect that in the immediate term the sub-charterer may well refuse to pay anyone. An owner may also seek to intercept freight payable under the bill of lading, which requires a separate lien notice to be sent to the shippers and/or consignees.

Withdrawal of the vessel

Most charters contain a contractual option to withdraw if any installment of hire is unpaid. If an owner wishes to take this drastic step, he will need to act promptly, as he may otherwise lose his right to withdraw, and that he fully complies with any grace period notice provisions. Normally, he will also wish to ensure that the vessel is cargo free when exercising his right, since if the vessel is withdrawn with cargo on board, then owners will still be obliged to deliver the cargo to destination under the bill of lading contract. The owner will be entitled to be paid all hire owed up to the time of withdrawal. However, he should also bear in mind that, whilst this area of the law is not yet finally settled, the better view is currently that he will probably not be entitled to damages for loss of charterparty earnings that would have become due after withdrawal.

Termination of the charter

It may also be possible for the owners to terminate the charter. To do so lawfully, an owner will need to be able to show that the charterer will not, or cannot, perform the charter so as to be in repudiatory breach. If so, an owner may accept that breach and end the charter. In that case an owner will be able to maintain a claim for any losses he has suffered in the way of future earnings, for example if the available market rate is lower than the charter rate.

Conclusion

Prior to entering into a charter with a counterparty it is essential to undertake due diligence to ascertain the financial worth of the other party. However, even rigorous due diligence can never rule out the possibility of a charterer counterparty getting into financial difficulty. If this occurs, taking legal advice early will enable an owner to assess the full range of his available options according to his own particular circumstances.