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22 July 2015
If a time charterer redelivers a vessel before the end of the agreed charter period, the owner is faced with the choice of either accepting redelivery and claiming damages or maintaining the charterparty and continuing to claim hire. This decision has both commercial and legal implications.
If the owner accepts early redelivery and claims damages, the duty to mitigate losses will require it to exercise reasonable efforts to find new employment for the vessel. If the market is strong, the owner may be able to charter the vessel out at a higher rate and suffer no loss.
However, the charterer is more likely to want to redeliver the vessel early where the market has deteriorated. In such case the owner is likely to suffer loss. Even if the owner finds new employment for the vessel, there may be disagreement in respect of the level of the market conditions and therefore also the level of damages. In these circumstances it will often be beneficial for the owner to maintain the charterparty and continue to claim hire. On the other hand, if the issue is the non-payment of hire, the charterer's solvency may be questionable – and it may be better to accept early redelivery and employ the vessel with solvent charterers.
The legal position in respect of whether the owner is entitled to maintain the charterparty is different under English and Norwegian law.
The general rule under English law is that, when faced with repudiation by reason of early redelivery, the owner may choose to accept redelivery (and bring the charter to an end) or to reject it, maintain the charter and continue to claim hire.(1) However, at a certain point the courts will consider that it is wholly unreasonable or "perverse" for the owner to insist on maintaining the charterparty.
In The Aquafaith(2) the High Court considered these issues in respect of a time charter. The charterer wished to redeliver the vessel, which had been chartered on an amended New York Produce Exchange form, 94 days before the minimum period of 59 months had expired. The court held that the owner had a choice between accepting repudiation and claiming damages or maintaining the charterparty and continuing to claim hire, provided that the vessel was placed at the charterer's disposal ready to perform any services required by the charterer. However, if the owner had no legitimate interest in maintaining the charter and damages were an adequate remedy, it had to accept redelivery and be restricted to claiming damages for any losses. The court held that this was a narrow exception and that the owner could be denied the right to maintain the contract only in extreme cases. Justice Cooke considered that the owner's refusal to accept the repudiation must be "beyond all reason" or "perverse" before the owner will be disentitled to full hire under the charter.
Norwegian law also imposes some limitations on the innocent party's right to maintain the contract. The innocent party cannot maintain the contract if this cannot be done without the cooperation of the party in breach, unless the innocent party can obtain a court order for specific performance of cooperation. However, this principle does not prevent the owner from maintaining a time charterparty if the charterer redelivers the vessel early because cooperation is not required for the owner to claim hire.
There are further limitations on the innocent party's right to maintain the contract in specific instances. Such exceptions have been established in relation to construction contracts and certain types of purchase contract, where maintaining the contract could constitute a significant waste of resources. However, there are no Norwegian cases in which similar principles have been applied to time charterparties. While the waste of resources is more pronounced when it comes to maintaining contracts regarding construction or manufacturing, similar considerations must be made in relation to a vessel that lies idle while the owner continues to claim hire. Further, refusing to mitigate losses in this situation may be a breach of the general duty of loyalty between contracting parties which applies even to commercial ventures such as time charterparties.
Therefore, under Norwegian law, the owner may more easily be prevented from maintaining a time charterparty than under English law and in such case may be forced to take redelivery and be restricted to claiming damages.
The owner's dilemma remains the same under a bareboat charterparty as under a time charterparty. However, since the charterer is responsible for the crewing of the vessel under a bareboat charterparty, instead of claiming redelivery the charterer may simply abandon the vessel. In practice, the situation might be less favourable to the owner than under a time charterparty where the owner is responsible for crewing of the vessel and is in physical control of the vessel. The owner will have a claim for damages; but due to the duty to mitigate loss, it will be left in more or less the same position as if it had accepted early redelivery.
For example, in the English Court of Appeal case of Puerto Buitrago,(3) the charterer abandoned the vessel, which was bareboat chartered, while it was docked for repairs, leaving it with only a repair watch supplied by a third party. This gave the owner no other practical option but to place its own personnel on board, thus regaining possession of the vessel. In The Aquafaith the court compared a bareboat charterparty to landlord and tenant cases in that repossession by the owner ends the right to rent or hire. This means that in practice, the owner may have a stronger position under a time charterparty than under a bareboat charterparty.
For further information on this topic please contact Bård Breda Bjerken, Herman Steen or Clare Calnan at Wikborg Rein by telephone (+47 22 82 75 00) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Wikborg Rein website can be accessed at www.wr.no.
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