EARLY REDELIVERY
– What is the damage?
A difficult challenge that owners face in a volatile market is having a vessel redelivered early under a profitable charter.
Early redelivery may arise because charterers are no longer willing or able to perform the charter or where, faced with non-payment of hire, owners decide that they have no choice but to withdraw the vessel and terminate the charter.
TERMINATE OR NOT TO TERMINATE?
Where a failure by the charterers to perform their obligations amounts to repudiation of the charter, then it gives owners, at least initially, a choice: they can decide either to maintain the charter and insist on charterers’ performance, or they can immediately terminate. Both options may seem equally unpalatable to an owner faced with the prospect of having a vessel redelivered early. However, owners will need to give careful consideration to the consequences which follow any decision that is subsequently made.
Where owners decide to maintain the charter they can continue to invoice charterers for the hire, but they must continue to keep the vessel available to perform any services required by charterers.
A recent decision by the English High Court in The Aquafaith[1] confirmed that in certain circumstances it was legitimate for an owner to maintain the charter, and to continue to invoice the charterer for hire due up to the earliest redelivery date under the charter. The rationale behind this decision is that the Courts consider time charters to be different from other service contracts where a greater degree of co-operation is required from the defaulting party in order for the contract to be maintained. In the case of a time charter, an owner does not require the assistance of charterers to continue to give orders to the vessel to maintain its position and to perform the service required, despite a lack of any orders or payment from charterers.
Such a course might be attractive for owners to follow, at least in short term, since there is no obligation on an owner to mitigate losses. However, in the case of longer term charters, owners may need to balance the financial ramifications of having to fund the escalating costs of running the vessel against the prospects of actually recovering their losses from charterers (whose solvency may be become an issue).
WHEN THE CHARTER CANNOT BE KEPT ALIVE
There are two situations where the owners do not have the choice to maintain the charter. The first is where owners have no legitimate interest in continuing the performance of the charter, such that to insist upon further performance would be unreasonable. This may arise, for example, where the charterers are clearly insolvent or where it is abundantly clear that the charterers will not engage in any further performance of the charter. The second is where performance of the charter is reliant upon charterers’ own performance. In such case, an owner has no choice but to accept that the charter is at an end, and to act accordingly.
MEASURE OF DAMAGES
In order to protect their claim for dam-ages when the charter is terminated, owners need to be aware of the mitigation steps they must take. Where a vessel is redelivered early, owners are entitled to be placed in the position that they would have found themselves in had the charter been performed.
The standard approach by the Courts for measuring damages for early redelivery is the difference between the charter rate and the market rate for the vessel, determined as at the date of the termination of the charter, for the unexpired term of the charter.
It is important to note that where there is an available market rate for the vessel, then the damages calculation is based on that market level and hence is a theoretical one. The fact that owners may charter the vessel at a higher or lower rate than the market rate is ignored unless owners can show either that the replacement fixture rate is representative of the market, or that there is no available market rate for the vessel and the terms achieved were the best available. In difficult market conditions it may be challenging to establish what the correct market rate should be. Thus it will always be in an owner’s interests to take all reasonable steps to mitigate their losses by entering into a replacement charter at market rates for the balance of the term of the original charter.
RECENT EXAMPLES FROM ENGLISH COURTS
Where there is no available market at the time the charter is terminated, but such a market subsequently emerges, then damages will be assessed by reference to the actual loss of the owner. In the decision in The Wren[2], charterers prematurely redelivered the vessel at the height of the economic crisis. The Court held that there was no available market at the time of termination and owners therefore chartered the vessel on the spot market at a loss. When the market subsequently revived, owners continued to trade the vessel on the spot market which had become more profitable than enter into a “like for like” charter. Owners based their claim for damages on the initial losses suffered on the spot market and thereafter by reference to the market rate. The Court held that this approach was not correct and that owners were under a duty to take all reasonable steps to mitigate their losses. As a result the damages payable by charterers were assessed by reference to the actual losses the owners suffered.
The decision in The Golden Victory[3] further established that any assessment of damages must take account of the charter terms, and where a supervening event arose after termination then its effect must be reflected in the assessment of damages. In this case the charter was prematurely terminated in 2001 and owners sought to recover damages for their losses during the remaining unexpired period of the charter of four years. However, in 2003 war broke out in Iraq and the charter’s war clause would have entitled charterers to subsequently cancel the charter. The Court held that owners could only recover damages for the period up to when charterers would have been entitled to terminate.
REMARKS
The decision in The Golden Victory is perhaps a dramatic example of where subsequent events can influence the damages that owners are entitled to recover. Although accepting early redelivery allows owners to enter into replacement fixtures and earn revenue from the vessel, there are often disagreements with charterers as to how damages should be assessed. Disputes may arise over whether there is a market and what the applicable hire rate should be, or what deductions need to be made to reflect the likely off-hire periods and what credit should be given for accelerated payment of damages as compared with hire payments made over a period of time.
Given the frequency with which early delivery cases appear before the Courts there is now a wealth of case law to guide owners when faced with the early delivery. Whilst this does not always make the commercial decisions any easier (particularly during difficult market conditions) owners can perhaps derive some benefit from the experiences of others who have faced similar problems.