My charterer has threatened to cut my charter rate, despite the charterparty not allowing for this. What damages can I claim if I refuse their request and they walk away from the charter?
By Helen McCormick
The usual ‘rule of thumb’ measure of damages for a charterer’s repudiatory breach of a charterparty is the difference between the hire that you would have earned under the charterparty and the hire that you would earn from a reasonably similar replacement fixture on an available market, for the balance of the period.
So, for example, say you entered into a charterparty for a period of two years plus or minus 15 days at charterers’ option at a rate of US$ 10,000 a day, and you delivered the vessel into charterparty service on 1 January 2016. The earliest date on which charterers could redeliver would be 17 December 2017. If they redeliver before that date, that would be a repudiatory breach of the charterparty.
Let’s say charterers redeliver your vessel on 1 October 2016. The balance of the charterparty at that date would be one year three months (plus or minus 15 days in charterers’ option). Suppose that the market rate for a charterparty for your vessel for one year three months (plus or minus 15 days in charterers’ option) was by that point US$ 7,500 per day.
You would calculate your damages as follows:
You would also need to deduct any commissions which might apply. This method depends on owners being able to show:
- That there is an ‘available market’ for this type of vessel for the balance of the charter period
- What the available market rate is.
This usually requires expert evidence. An ‘available market’ is one where there are sufficient potential charterers to evidence a market in which the owner could charter out the vessel for the balance of the period if he wished to. If there is an available market, whether owners decide to take advantage of it or not is usually viewed by the courts as an independent business decision and therefore irrelevant for the purposes of calculating owners’ damages.
If there is no available market (which might be the case for very specialised trades or vessels, or a very long charterparty period) then it becomes necessary to compare what you would have earned under the charterparty, and what you have actually earned during the balance of the period, for example, by chartering the vessel on the spot market. If it is not possible to do this straight away because, for example, the balance of the period has not yet ended, the courts will accept evidence of what owners would be likely to earn, on a balance of probabilities.
But remember, if charterers walk away from a charter and commit a repudiatory breach, owners might also have the option of affirming the charter and claiming hire, instead of damages. Owners can do this unless it is ‘wholly unreasonable’ to do so. This is likely to depend on factors such as the duration of the balance of the charterparty and the prevailing state of the charter market.
The advantage of this course of action is that a claim for hire does not require any expert evidence on available markets or the appropriate rate. This could make litigation to recover sums owed quicker and cheaper. However, owners will have to continue to perform the charterparty and keep the vessel available for charterers until the contractual redelivery date. In circumstances where your ability to recover outstanding hire looks doubtful, you might consider it more commercially sensible to accept the early redelivery, seek alternative employment, and claim damages on the basis set out above.
Remember, when faced with a charterer who is refusing to pay hire, you must be careful when exercising any rights to withdraw the vessel or terminate for their repudiatory breach. If you end the contract prematurely, you could be on the receiving end of a claim for damages from your charterers. Always seek legal advice first.
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Source: The Shipowners’ Club
