Charlie Weller, a Partner, and Philippa Davy, a Trainee Solicitor, both in our Dry Shipping Group, consider a case arising in a falling market, where charterers locked into fixtures at an unprofitable rate look closely at any charter clauses entitling them to cancel if the vessel is off-hire for a prolonged period.

This was the position facing the charterers of The Fu Ning Hai.

There were three relevant clauses dealing with off-hire in the Charterparty:

(i) Clause 15 NYPE 1946, unamended,

(ii) Clause 56: a supplementary off-hire clause, providing that the vessel was to go off-hire in cases where the Charterer was prevented from using it due to “accident or breakdown…sickness…refusal to perform duties, oil pollution…capture/ seizure or detention.” It also included the provision that “if the vessel has been off-hire for a period of more than 30 days, the Charterers are at liberty to cancel.”

(iii) The vessel was due to be dry-docked during the term of the C/P, and so, on fixing, clause 70 was inserted. This provided that the “vessel to be placed off-hire upon DLOSP one safe port Singapore/ Japan range…put back on hire at DLOSP dockyard.”

The Facts of the Case

In fact, the dry-docking did not occur precisely as contemplated. Instead, prior to the dry-docking, the vessel’s Owners wished to fit in an extra voyage from South Kalimantan to South China for their own account, before taking the vessel to North China for dry-docking. Accordingly, the Owners requested permission from the Charterers, to take back the vessel earlier than anticipated so that this additional voyage could be performed. The Owners said that the voyage was to take approximately 15 days. The dry-docking was estimated at a further 15 days.

Charterers confirmed their consent:

“on the understanding that for the purposes of C/P clause 70 the Vessel will be off-hire on DLOSP discharge port…All rights/obligations under the C/P to be otherwise unaffected.”

On 23 September, the Owners wrote to the Charterers giving an estimated time from taking redelivery of the vessel until delivery back the Charterers,

“if all goes well, weather permitting, without guarantee”, of 36 days.

Pursuant to this agreement, the vessel was redelivered to the Owners on 9 October, and proceeded to complete its voyage and dry-dock. However, on 9 November, three days before the Head Owners were due to return the vessel into the charter service, Charterers sent a message stating that:

“Pursuant to C/P clause 56 of the subject C/P, we are at liberty to cancel the balance of the Charterparty…and we hereby given notice exercisng our right under clause 56 to cancel the balance of the Charterparty.”

The Owners disagreed, and accepted the Charterers’ conduct as a repudiatory breach of the charterparty. The dispute went to arbitration.

The Arbitration Award

The Charterers’ case was that they were entitled under clause 56 to cancel the contract as the vessel had been off-hire for more than 30 days. The Owners contended that the condition was not fulfilled, as clause 56 did not apply to off-hire arising under the dry-docking clause. Alternatively, the Owners submitted that the Charterers’ claim was defeated by estoppel or waiver, on the basis that the Charterers had agreed to the vessel being taken out of their service for a preliminary voyage for Owners’ own account before the agreed dry-docking, and this was not ‘off-hire’ for the purposes of the charter.

The Arbitrator did not agree with the Owners, reasoning that drydocking is “the occasion most likely to result in a delay of thirty days” and consequently Charterers would wish to protect themselves against it. However, he did not agree with the Charterers either, but on grounds which Charterers said, on appeal, had not been put to him in argument by either party.

The Arbitrator concluded that the agreement between the Head Owners, disponent Owners and Charterers was a different contract, the effect of which was to suspend the performance of the charter. As a result, the time out of service did not come within clause 56 at all. He held that while the period after the Owners’ preliminary voyage, when the vessel was actually in dry-dock, was ‘off hire’ within the meaning of clause 56, this period was less than thirty days and therefore did not assist Charterers. Further, the Arbitrator held that the Charterers’ repeated reservations of “All rights/ obligations under the C/P otherwise to be unaffected” were too general to preserve the right to cancel. Any attempt to reserve Charterers’ rights would have needed to be clearer to be effective.

The Appeal

The Charterers appealed on three points:

(a) Whether the vessel was off hire from 9 October 2005 within the meaning of clause 70, so that the Charterers were entitled to cancel on 9 November 2005;

(b) Whether the vessel was off hire within the meaning of clause 15 and whether the full working of the vessel was prevented by the relevant off hire event; and

(c) That there was a serious irregularity affecting the Award, as the point on which the Owners succeeded was one thought of by the Arbitrator himself, and that the Arbitrator failed to deal with the arguments central to the issues between the parties.

Mr Justice Morison agreed with the Arbitrator that what was established between the Owners and Charterers was an ad hoc agreement which, even though the precise terms were not known, “took the vessel out of the service of the C/P in a way not contemplated” at the time of fixing. During the period when no hire was being paid by Charterers to Owners, the vessel was therefore not ‘off hire’ within the meaning of clauses 15, 56 and 70; it was a period when hire was not paid pursuant to a special arrangement. “Effectively, the Charterparty was suspended during [Owners’] use of the vessel”.

An important point arises out of this decision for parties fixing period business which straddles scheduled dry-dockings. It is significant that both the Arbitrator and the Court found that had the dry-docking exceeded 30 days, the Charterers would have been entitled to cancel the charterparty. Accordingly, it appears that any express right to dry-dock the vessel given at the time of fixing will, in the absence of clear language to the contrary, be subject to the same cancellation regime as any other off-hire event.

The Court gave short shrift to the Charterers’ argument that there was a serious irregularity affecting the Award. He held that “not only was the Arbitrator not obviously wrong; rather he was obviously right.” The significance of this finding is that an appeal based on the claim that the Arbitrator used his own reasoning and arguments in deciding a case (rather than being confined to the parties’ submissions) is likely to fail where, in the view of the Judge on Appeal, the conclusions reached are clearly correct. A final point to note, although this did not appear in the parties’ arguments, was that the clause did not make it clear that it was concerned only with 30 consecutive days of off-hire, and not 30 days cumulated throughout the duration of the charterparty.