Payment disputes with charterers are not unusual in the tanker business. Jeremy Biggs, partner, and Adam Swierczewski, associate, of Ince & Co., outline the different options that may be available in this situation.
A failure to pay hire on time, or at all, is a common complaint in the tanker industry. Under an English law charter, an owner will not normally have any default right to suspend performance or withdraw the vessel, unless the charter provides the owner with such a right.
As regards suspension of performance, many commonly used time charter forms do not include any such right to suspend. Refusing to perform the charterer’s orders in the absence of payment of hire is usually not a permissible pressure point for an owner. Most time charters will provide the owner with an express right to withdraw, although that right will usually be subject to an anti-technicality clause requiring the owner first to serve the charterer with a notice demanding payment and stating that the vessel will be withdrawn if payment is not made.
However, withdrawal of the vessel is not a decision that can be taken lightly. If there is cargo on board the owner will most likely still have to carry the cargo to destination in order to fulfil the bill of lading, and if the time charter has been terminated the owner may not be entitled to claim hire during that period and will have to seek compensation by other means. Nonetheless, the threat of withdrawal can be a powerful weapon to procure payment, especially if the charterer has the vessel at an attractive hire rate compared to the market.
Furthermore, it must be remembered that withdrawing a vessel incorrectly could place the owner in breach of the charter and liable for the charterer’s losses, so proper legal advice should always be sought in drafting the anti-technicality notice correctly and before withdrawing a vessel.
One of the most effective self-help remedies is a contractual lien. Most charters give an owner two rights of lien which are very different in their legal nature, and how and when they can be exercised:
1. A right of lien on hire/freight payments due to the charterer. This is a right for an owner to write to a sub-charterer who owes money to the charterer, and demand that the sub-charterer pays the owner directly, i.e. to 'intercept' a payment between those parties.
2. A right of lien over cargo. This is a right for an owner to maintain possession of the cargo on-board the vessel and refuse to discharge it until hire is paid. This right is much more difficult to exercise and requires a “case-by-case” analysis of ownership rights in the cargo, as well as careful consideration of the charterparty terms
Although a right to exercise a lien can be a very effective method of compelling charterers to pay, each situation must be carefully considered before action is taken, as the effectiveness of a lien clause will depend on a number of factors.
Another way to exercise pressure on some charterers (depending where they are based/incorporated) is to serve charterers with a 'statutory demand'. Under English law, and other countries with similar insolvency systems such as Singapore and Hong Kong, a statutory demand is a legal notice which must be served by a creditor before applying for winding up of the debtor’s company. In short, if the charterer does not pay the debt within 21 days the owner can apply to wind up/liquidate the charterer.
The threat of winding up is often a powerful tool, as it could place the charterer in breach of loan and mortgage agreements, as well as prevent the charterer from trading. Many companies will therefore pay their debts promptly after receiving a statutory demand.
An alternative is to commence arbitration if that is allowed under the charter. Appointing an arbitrator and serving notice gives the charterer the clear message that matters are escalating and legal costs are being incurred, which will ultimately be for their account.
The reason for non-payment may simply be that the charterer has to prioritise its cash flow. The key is for an owner to get their invoice to the top of the pile. Taking some or all of the above steps should have that effect and lead to prompter payment.