In an arbitration case, considered by the LMAA, the written expression of the parties’ intention prevailed over spoken word. The arbitration court held that a shipowner cannot be required to perform something which is not contractually required even though oral promise was made.
By a Bareboat Charterparty on the BIMCO Standard Bareboat Charter (hereinafter referred to as “the charterparty”), the shipowners (hereinafter referred to as “the Claimants”) agreed to let the Charterers (hereinafter referred to as “the Respondents”) agreed to hire a vessel for a period of 366 days commencing in a delivery range of April and May 2016. The vessel was delivered by the Claimants and taken over by the Respondents in a port in May 2016.
The vessel was delivered under the charterparty on May 2016 and it was agreed that the vessel would fly under the Russian flag for one or two months and then under the Cook Islands flag for the following period.
The Claimants submitted that the vessel was properly documented in accordance with the laws of the flag of Russia and the Requirements of Russian Maritime Register of Shipping. They also said that the vessel was inspected twice, once prior to making the contract on March 2016 and again when the contract was signed in May 2016.
Although the bareboat charter placed the obligation to hire a crew on the charterer, as is usual for such a contract, the Respondents asked the Claimants to supply the vessel with a crew and the Claimants agreed to do so.
The Respondents failed to pay in accordance with the payment provisions in the charterparty, claiming that there were problems relating to the change of flag. The Claimants terminated the charterparty under the payment provisions of the charterparty. Following termination, the Respondents presented certain further objections, particularly that they had suffered from loss of profits due to the inability to change the flag and that the vessel had serious flaws on delivery.
The Claimants demonstrated that they fulfilled their obligations under the charterparty by procuring timely delivery of the vessel to the Respondents and contend that the Respondents have a corresponding obligation to make the payments under Clause 33 of the Charterparty.
The Respondents failed to pay any of the sums due under the charterparty on the grounds that they had problems relating to the change of flag claiming, in their email that this was a repudiatory breach of the charterparty.
In their email, the Claimants notified the Respondents that they were in breach of the charterparty due to their failure to make payment in accordance with the contractual terms and terminated the charterparty. In their response to the Claimant’s email, the Respondents stated that they suffered loss of profits due to the inability to change the flag and also contended that the vessel had serious flaws on delivery.
The Claimants contended the email exchanges demonstrate the Respondents’ failure to pay the hire due or to pay the salaries of the crew and also the Respondents acceptance of their obligation to pay the hire and other expenses. The Claimants also pointed to Box 44 of the charterparty which stipulates that the vessel should fly the Russian flag for two months and only thereafter the flag of the Cook Islands. The change of flag was, therefore, not a basis for failure to make the initial payments under the charterparty as Box 44 defines and/or overrides clause 10 (d) of the charterparty.
The Claimants said the Owners effectively abandoned the vessel at the anchorage position in the delivery port while failing to make the payments due under the charterparty. Although initially assuring the Claimants that they were going to make the payments due, and asking for more time to do so, at a later stage the Respondents ignored the Claimant’s communications and ceased to respond.
The Claimants eventually sent their representatives in Greece where a meeting was held. At that meeting the Claimants were assured of the Respondents intention to continue with the charter and the Respondents indicated their intention to make payment the following week. No payment was received.
Further, during the period following delivery of the vessel the Mater made numerous requests to the Respondents to supply fresh water, provisions and other essentials, most of which were not met by the Respondents. In May, with no prospect of being paid by the Respondents and with growing cocern for the vessel and her crew’s safety, the vessel having been effectively abandoned by the Respondents, the Claimants gave notice of their intention to terminate the charterparty and withdraw the vessel and gave Respondents 3 banking days to rectify the situation. The Respondents were eventually notified of the withdrawal of the vessel from the charterparty in June 2016 and the Claimants took possession of the vessel again.
After taking possession, the Claimants decided to bring a claim in arbitration. They appointed their arbitrator and served a Notice of Arbitration on the Respondents, advising of its appointment and requiring the Respondents to appoint its own arbitrator within 14 calendar days of the notice, stating also that if the Respondents failed to appoint its arbitrator as sole arbitrator within that time, than the Claimants would appoint its own arbitrator as sole arbitrator without the requirement of any further prior notice, all in accordance with Clause 30 of the charterparty.
By Clause 30 of the charterparty, the contract was to be governed by English law and any dispute arising out of or in connection with the contract is to be referred to arbitration in London in accordance with the Arbitration Act 1996, the arbitration to be conducted under the current London Maritime Arbitrators Association (LMAA) Terms.
During the arbitration proceedings, the Claimant claimed the hire for 22,5 days at the rate of 950 USD per day, expenses being port costs, bunkers used during the period in port, crew wages and victualing. The Claimants also claimed for loss of earnings in excess of charter hire and interest from the date of vessel withdrawal as well as legal and arbitration costs.
The Arbitral Tribunal’s Position
Having considered all documents with all facts and circumstances, the Arbitral Panel particularly found that the Respondents had two opportunities to inspect the vessel prior to signing the charterparty and prior to delivery taking place. In particular, Respondents inspected and accepted the vessel on or about March 2016. Clause 3 (c) of the Charterparty provides that delivery shall constitute full performance of the Claimant’s obligations and thereafter Respondents shall not be entitled to make or assert any claims against Claimant on account of any condition, representation or warranty. Box 44 clearly states that the flag of the vessel shall be Russian for the first two months of the charterparty. It would appear that Respondents decided that they wanted to change the flag immediately and this appears to be the grounds stated for their breach of charter in failing to make the payments due. In the opinion of the Arbitral Tribunal, the Respondent’s email purporting to claim a repudiatory breach of the charterparty on that basis was, therefore, misguided.
The Arbitral Tribunal found and held that the Claimants were not in repudiatory breach on the grounds asserted by the Respondents. In fact, the Claimants indicated that they would facilitate Respondents in the early change of flag but that this required discharge of the mortgage on the vessel and would take a few days once Respondents had made the first payment due. Respondents failed to make that payment and therefore Claimants were unable to facilitate the early change of flag, which was not contractually required.
Respondents failed to pay hire due under Box 44, payable 72 banking hours after delivery, under the charterparty. In the opinion of the Arbitral Tribunal, as English law applies to the charterparty, time is of the essence in making charter hire payments. The Claimants were, therefore, entitled to give notice of termination under Clause 28 28 (a) (i) in the end of May 2016, the vessel having been delivered in early May 2016. That notice required Respondents to rectify the failure to pay. Respondents failed to do so and Claimants withdrew the vessel in June 2016, six days after the Notice was served.
The Tribunal found and held that the Respondents were, therefore, in repudiatory breach of the charterparty by failing to make the payments due by them to Claimants.
Although Respondents argued that the vessel came with “serious flaws”, in the opinion of the Tribunal, these claims are wholly unparticularised and Respondents had inspected the vessel and are precluded from claiming in relation to the condition of the vessel due to their inspection.
The Panel was not able to find nothing that indicates that the vessel met with any particular incident or breakdown between the time of inspection and the time of delivery and no indication that Respondents raised such an issue either in the email correspondence concerning payment or at the meeting between the parties in Greece when they promised to pay.
Having carefully and conscientiously considered the submissions and evidence, the Arbitral Tribunal held the following:
The Claimants are entitled to be paid forthwith, and the Respondents are obliged to pay forthwith the amount due for hire and expenses arising from the breach of charterparty.
The Claimant’s claim for loss of earnings in excess of charter hire fails.
The Claimants are entitled to interest on the amount due for hire and expenses arising from the breach of charterparty at the rate of 4,5% compounded with three monthly rests from the date of the withdrawal of the vessel until the date of payment under the arbitral award.
The Arbitral Tribunal also held that the Respondents should pay the legal costs of arbitration together with interest at the rate of 4,5% compounded with three monthly rests from the date of the arbitral award until payment.
This case is a clear example of growing tendency where charterers would unjustifiably abandon vessels once a contract for hire was made without any fear for consequences. Having done so, the charterers were convinced that they can hide behind the shipowner’s unwritten promise that the ship’s flag would be changed immediately after the contract was made. Being convinced in it, however, they forgot an important duty, embedded in English law – the duty to pay on time.
We strongly recommend to all shipowners that they separately negotiate the duty to change flag by making it dependent on the duty to pay on time.