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The last chance saloon: hire default and anti technicality notices

Charter termination and withdrawal has been a feature of the shipping landscape since the 2008 market slump.

Compliance with anti technicality clauses

Owneast Shipping Ltd v Qatar Navigation QSC

Charter termination and withdrawal has been a feature of the shipping landscape since the 2008 market slump. This Commercial Court decision (on appeal from a London arbitration award) illustrates the importance of ship owners adhering to the correct contractual notices as and when termination situations arise. 

So called anti-technicality clauses are found in many time charters.  Their purpose is to avoid a situation where owners could otherwise withdraw a vessel for a breach of any obligation (e.g. to pay hire on time) however minimal or inconsequential, and to give the charterer some measure of relief against possible forfeiture in allowing opportunity to rectify inadvertent breaches. 

Here, owners had time chartered a vessel on an amended NYPE form for a period of 48 months.  The charter contained an anti-technicality clause which provided that:

“Where there is any failure to make punctual and regular payment due to errors or omission of charterers’ employees, bankers or agents or otherwise for any reason where there is absence of intention to follow to make payment as set out, charterers shall be given by owners 3 banking days notice to rectify the failure…”

The charterers had a patchy payment record, with 17 of 30 semi monthly payments having been paid late.  Matters came to ahead in August 2006 when the semi monthly advance hire fell due on 24 August.

Earlier in the month the vessel had been discharging a log cargo at Kandla when there had been a series of breakdowns. Charterers had been awaiting the statement of facts so as to deduct lost time from that payment, but there were delays in production of the documentation. As a result, charterers’ personnel deferred from putting in place the timely approvals and payment requests which their internal processes required.  By the time payment was in hand (so as to factor in the deductions) it was evident that remittance would not reach owners’ bank by 24 August. Accordingly, owners terminated with immediate effect, citing charterers’ persistent failure to pay hire on time.

Charterers argued the termination was wrongful, since owners had failed to give them notice to rectify the breach.

Owners, however, contended an anti-technicality notice was not required: charterers purposely delayed payment while awaiting documents to support an off hire deduction. This delay, together with their internal approval hurdles, made it obvious that if payment was not sanctioned by 22 August, then its arrival by the 24th would be unlikely. In fact, the payment request was not filed with the bank until after hours on the deadline day. There was therefore an “intention to fail to make payment” that disentitled charterers being granted a three day grace period. 

Further, if the deduction from hire was unjustified (lacking good faith) it could not be “regular payment” as the clause required. 

The court, as at the majority tribunal, rejected owners’ arguments relying upon authorities including The “Libyaville” [1975] 1 Lloyd’s Rep 537 and The “Rio Sun” [1981] 2 Lloyd’s Rep 418 which showed that the court looked favourably on anti technicality clauses and did its best to give effect to them.

Intention had to be interpreted narrowly, equating to a wilful and deliberate decision to pay late. It could not be extended so as to encompass recklessness.

On balance, it did not appear that charterers knew there was a specific deadline by which the payment instruction had to be given to the Bank, and with that knowledge consciously decided not to send the instructions so as to meet it. Nonetheless Christopher Clarke J. acknowledged that “the dividing line between serious incompetence and deliberate delay amounting to an intention not to make punctual payment is sometimes thin”.

In relation to the deduction, The “Libyaville” decision provided guidance. There, despite the deliberate payment of a lower and disputed rate of hire (which owners have previously warned against), there was no intention to fail to make a “regular” payment in the absence of evidence of bad faith. In the present case, there was no suggestion that charterers’ deduction was not bona fide.

Therefore, Owners had wrongfully terminated: charterers has been entitled to service of the anti-technicality notice.

This decision illustrates the exposure to owners in cutting corners, rather than erring on the side of caution in adhering to contractual notice requirements. Making assumptions will often import a heavy risk since – where intention is under scrutiny - it will only be after the event that intention (or in the case of deductions, bad faith) can be established, even if, at the time, it looks like charterers appreciate what they are (not) doing. The courts will always seek to construe such clauses in charterers’ favour, absent wording which softens/widens the meaning of intention in the context of a failure to pay hire.

Mike Burns, Partner

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