DMC Category Rating: Confirmed

This case note is based on an Article in the June 2005 Edition of the ‘Marine Bulletin’, published by the Marine team at the international firm of lawyers, DLA Piper Rudnick Gray Cary. DLA Piper is an International Contributor to this website

Background
The "Li Hai", a "handymax" bulk carrier, had been under charter to the claimants more or less continuously since 1999 and was performing under its fourth time charterparty when the owners purported to serve a notice of withdrawal for non-payment of US$500.

The charterparty, dated 27 September 2002, was on the NYPE form as amended and was for a period of about 5/7 months in charterers' option with a further option for another 5/7 months. Under clause 5, payment of the hire was to be made to the owners' nominated bank 15 days in advance, otherwise the owners would be entitled to withdraw the vessel. Under clause 18, the charterers had a lien on the ship for moneys paid in advance and not earned and any overpaid hire or excess deposit was to be returned at once.

Clause 47 provided:
"Before exercising the option of withdrawing the vessel from the charter the Owners will give the Charterers seventy-two hours (Saturdays, Sundays and holidays and banking holidays excluded) official notice in writing and will not withdraw the vessel if the hire is paid or the alleged breach is rectified within the seventy-two hours allowed for notice from time the Charterers received such notice…"

The charter rate at the relevant time was US$9,100 per month. But as from early 2003, the market rate for handymax vessels began to rise. By October 2003, it was about two and a half times the charter rate.

The notice
It was the practice of the charterers to send the owners, a few days before the hire was due, a statement setting out the hire they would instruct their bankers to pay and indicating any deductions they intended to make. Vouchers supporting the deductions were sent with a hard copy of the statement by post, but would not be received until after the hire was due. Disputes over deductions arose from time to time, but were generally resolved by agreement.

In August 2003, there was a disagreement over some fuel oil that the owners said was impure and was causing engine problems. The charterers maintained the fuel was only marginally off specification and was fit for use and gave orders to the master to load further fuel oil at Hong Kong. The master, however, insisted that the poor quality fuel was offloaded first and the tanks cleaned. As a result, the charterers incurred a bunker cancellation fee of US$500.

A hire payment was due on 13 October 2003. On 9 October, the charterers sent their statement proposing to deduct seven days' hire on account of the estimated length of a routine dry-docking and special survey due to take place at Shanghai. In addition, they deducted US$500 for the bunker cancellation fee. The net sum of US$68,980 was paid on 13 October.

On 14 October, the owners sent a message requesting the charterers to pay the hire in full and confirming that the off-hire would be refunded in due course. They rejected the claim for US$500 and reiterated their request for the tanks to be cleaned. This was followed on 15 October by a further message headed "Notice of Withdrawal" which stated that the charterers were in breach of clause 5 of the charterparty:

"Owners hereby give seventy-two hours notice that owners will withdraw the vessel from the service of the charterers without prejudice to any claims that owners may otherwise have upon the charterers".

The charterers understood the notice as referring to the deduction they had made for the off-hire period and remitted this amount on 17 October. But they made no payment in respect of the US$500. On 22 October 2003, the owners withdrew the vessel.

The charterers issued proceedings for wrongful withdrawal and repudiation of the charterparty. They claimed that, when one took into account the anticipated period of off-hire, there had actually been an overpayment. In fact, by the time the 72-hour notice period had expired, the vessel had been off-hire for some time. Alternatively, they argued that the owners were estopped from withdrawing the vessel for non-payment of such a small sum when there was a settled practice between the parties for dealing with such disputes. In any event, the withdrawal notice was not valid as it represented that only the off-hire deduction needed to be paid.

The amount due
The judge was satisfied that, when the payment was made, it was virtually certain that the vessel would be off-hire for a considerable part of the period covered by the advance instalment – far in excess of the approximately two hours of hire represented by US$500.

But there was no term in the charterparty that entitled the charterers to withhold hire on the basis that it would not be earned. In the absence of a provision to the contrary, charterers are not entitled to make a deduction for anticipated off-hire, however certain it may be. This principle has been established by a long line of cases going back to Tonnelier and Bolckow, Vaughan & Co v Smith and Weatherill & Co [1897] 2 Com Cas 258 and was more recently confirmed by the House of Lords in Pan Ocean Shipping Ltd v Credit Corp Ltd "Trident Beauty" [1994] 1 WLR 161.

Clause 18 of this charterparty provided for any overpaid hire to be returned. But this did not change the fact that the full amount was due on the payment date. The right to repayment did not accrue until after the hire was due and payable, but it could not in some way rectify the non-payment of hire.

Nor were the charterers entitled to set-off the US$500 against the hire due. An equitable set-off is only available against payment of advance hire under a time charter if the ship owner has wrongly deprived the charterer of the use of the vessel or has prejudiced him in the use of it (The Nanfri [1978] 2 Lloyd's Rep 132). This was not the case here. All that had happened was that the vessel had rather less fuel oil on board than it otherwise would have had. There was no failure to comply with an order with regard to the vessel's employment and its trading was in no way impeded.

Consequently, there was an underpayment of hire of US$500.

No estoppel
Although the evidence showed that, in the past, disputes over deductions had been resolved by discussion, the judge was not satisfied that this amounted to an unequivocal representation by the owners that they would not seek to withdraw the vessel for small deductions improperly made. In any event, previous deductions had been for disbursements and owners' expenses. The US$500 was effectively a claim for damages for an alleged breach of the charterparty.

Even if there had been any general understanding or practice between the parties, this had come to an end the previous July when the owners had lost no time in serving a formal withdrawal notice and the outstanding amount had been paid within the 72 hours.

Invalid notice
However, the judge was not satisfied that the notice sent on 15 October complied with the provisions of clause 47.

So-called "anti-technicality" clauses were introduced to modify the draconian nature of the withdrawal clause. But their scope depends on the exact wording used by the parties.

A notice is sufficient as long as it states unambiguously, one way or another, that payment has not been received and gives the charterer a period in which to pay or lose the ship (Afovos Shipping Co SA v Pagnan and F. lli [1983] 1 WLR 195). It does not need to specify what is due (it can leave that to the charterers) but there must be no ambiguity. It also has to be judged objectively. The question is whether it complied with the contractual requirements of the charterparty, not how the recipient may have understood it.

In this case, the requirement was that the owners give 72 hours' official notice in writing that they would withdraw the vessel unless the hire was paid or the alleged breach rectified within that period. But the notice the owners served simply stated that the charterers were in breach of clause 5 and that the "owners will withdraw" the vessel in 72 hours. It did not give an ultimatum; it simply stated, unconditionally, that the vessel would be withdrawn.

In the judge's view, this came nowhere near to complying with the contractual requirement. As a result, the owners were in breach of the charterparty in withdrawing the vessel.

Even if the notice had otherwise been effective, the judge would have found the owners were estopped from withdrawing the vessel because, taken with the message of the day before, the notice amounted to an unequivocal representation that the owners were only referring to the off-hire deductions.

The charterers' damages were the difference between the contract rate and the market rate for chartering a substitute vessel for the balance of the charterparty, which amounted to US$2,036,211.

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