Early redelivery under the CP – Skuld

Zachary W Simon, Claims Executive, Lawyer, at Skuld has reported that in the past few months Skuld had received an uptick in activity surrounding early redelivery disputes under time charters.

Skuld said it knew that its chartering clients were “only too aware that the shipping market is rife with falling hire rates and oil prices under the global pandemic-triggered recession”. Simon noted that in such a “highly pressured environment” it was “tempting for charterers in certain circumstances to want to redeliver vessels early, outside of contractual terms, in order take advantage of more profitable trade elsewhere”.

However, Simon warned that, depending on how this was approached, there could be great litigation risk and attendant defence costs.

Skuld shared considerations on determining the liability at stake when it comes to charterers’ deliberate redelivery ahead of the agreed minimum charter duration. It then addressed one of the common pitfalls made in compliance with strict redelivery notification requirements under the charter’s terms, which collides with otherwise reasonably timely redelivery.

“Deliberate” early redelivery ahead of the minimum agreed charter duration

Skuld said that charterers should be reminded that an owner’s claim against early delivery might not be so black-and-white as owners first may threaten. Simon said that there were many grey areas that owners needed to overcome to lodge an effective claim against charterers. Both the quality and duration of the current charter (both elapsed and remaining), as well as the availability of owners’ prospective replacement fixture play a critical role, he wrote.

How does early redelivery trigger a contractual claim against charterers?

Under English law, where there is a breach of performance of a contract’s terms between one contractual party against the other, the “innocent”, non-breaching party has the right to be made whole under the contract. The breaching party is obliged to put the innocent party back into the same place as if the contract was performed through to its natural completion.

The success of an owner’s claim is linked to the charter’s agreed duration – how much time has both elapsed and is remaining.

The breach described by Simon is known as a repudiatory breach under the law, where the breach (for example, early redelivery) is considered to go to the heart of the performance of the contract.

A tribunal might make this determination of whether such a breach was made after carefully considering the facts.

Determining whether a breach exists would be fact-specific and made on a case-by-case basis and considering the good faith intentions of the party at the time of entering the contract.

An owner’s claim for loss is dependent on their success of mitigating losses caused by the breach.

As a starting point under English contract law, the innocent, non-breaching party is out of fairness obliged to act to mitigate its losses brought about by the breaching party, and that a claim would reflect these efforts. The extent to which owners will be seen to have acted to mitigate damages or not will depend on case-specific factors, most critical among them the availability of a substitute fixture on the market. Skuld said that in some circumstances “it would be wise for chartering members to attempt to cooperate on a without-prejudice basis to assist owners locating this replacement fixture, as doing so will only reduce charterers’ own liability exposure”.

An owner’s claim for damages will ultimately be a claim for loss of profit that they have been earned if the charter was performed to completion per the charter’s agreed terms.

“Non-deliberate” early redelivery claims for breach of notification requirements

The second issue concerns a more technical breach, centred on the charterer’s breach of the redelivery notification requirements. Skuld advises chartering members not to try to cut corners when it comes to strict compliance with redelivery approximate and final notification requirements. Skuld said that it recognized that strict compliance sometimes seemed burdensome. However Skuld said that the agreed notification requirement terms agreed in the charterparty fulfilled an important role. They removed some of the guesswork and uncertainty accompanying the redelivery process and the myriad of commercial and operational tasks that needed to be carried out between both parties toward the charter’s termination.

Charterers will not be held liable for deviating their redelivery against their advance redelivery notices so long as they these were given in good faith and on reasonable grounds. They will nevertheless be in breach if they do not properly tender these notices, where required.

Skuld observed that “determining whether there was a breach by non-adherence to these requirements can be contentious and heavily reliant on the evidence of voyage instructions between the parties through their correspondence”.

The landmark English case – Maestro Bulk Ltd v. Cosco Bulk Carrier Ltd (The “Great Creation”) [2014] EWHC 3978 (Comm) – stands for the proposition that the breach occurs at the time of the early redelivery that is not made in accordance with previous redelivery notices. Owners are therefore prima facie entitled to earn hire between the time of this early redelivery and the time the vessel should have been redelivered per contractual notice.

Skuld noted that owners would give charterers the credit of a beneficial market rate against the charter rate if a market rate is available.

However, Simon noted that, even with the best of intentions, it was easy for disputes on both “deliberate” and “technical” early redelivery scenarios to quickly escalate and for external costs to accrue quickly.