Explanatory note to Non-Payment of Hire Clause for Time Charter Parties

BIMCO has recently carried out a study of the various hire payment anti-technicality/grace period clauses that appear in many time charter parties. The purpose of the study has been to examine ways in which the use of anti-technicality and grace period clauses as regular hire payment “holidays” by less reputable charterers could be reduced or prevented.

The end result of the study has been the development of a new time charter party clause dealing specifically with non-payment of hire. Prior to the introduction of anti-technicality clauses an owner would have the right to withdraw his vessel from a time charter party immediately after midnight on the day hire was payable if the charterers, for any reason, failed to make payment. This rather draconian measure was softened by the introduction of the so-called “anti-technicality” clause. 

This clause took into account the possibility that the charterers had arranged for payment of hire to be made but that the hire was delayed in its arrival at the owners’ bank by a technical failure or oversight in the banking system outside the control of the charterers. In recent years some time charter parties have incorporated simple “grace period” clauses with regard to hire which simply provide the charterers with an agreed extension to the payment date. Once the grace period lapses and if payment has not been received then, like the anti-technicality clause, the owners would be in a position to suspend performance or terminate the agreement provided proper notice was given.

The downside to these clauses has been that less-reputable charterers have, on occasion, taken advantage of the provision to withhold hire payments by several days each month or whenever it suited their purposes. To address this potential problem the new BIMCO Non-Payment of Hire Clause gives owners the right, if they so choose, to immediately suspend performance under a timecharter following a failure by the charterers to pay hire when due. 

In drafting the new Clause due consideration has been given to recent case law - namely the “Pamela”, [1995] 2 Lloyds Rep. 249 and the “Li Hai” [2005] 2 Lloyds Rep. 389.

These cases indicated that:

•  In the absence of any indication to the contrary, the time for payment will expire at midnight on the due date; and
  
  
• It is necessary to make it abundantly clear when issuing a notice for late payment of hire that, in the absence of payment, the vessel will be withdrawn.
   

Sub-clause (a) of the new Non-Payment of Hire Clause deals with suspension of performance. The provision reflects the “midnight-rule” in that if payment of hire is not received by midnight on the due date then the owners may suspend performance. It should be noted that the owners are not obliged to suspend performance – it is merely a right that they can exercise if they so wish and if circumstances dictate such a measure. It is recognized that many owners have good and well-established relationships with charterers and would not wish to prejudice their business relationships for a minor oversight easily resolved by a quick phone call. The owners are not required to give formal notice to the charterers that they are suspending performance. They are, however, required to let the charterers know that performance has been suspended if they choose to exercise their right.

The suspension of part or all of the services under the charter party is seen as a powerful commercial tool which can provide effective leverage in getting the charterers to make the necessary overdue payment or payments.

Sub-clause (b) deals with withdrawal of the vessel whereby the owners must give the charterers a formal ultimatum within 24 running hours of non-payment stating that the outstanding hire should be received within 72 running hours of being due – failing which the owners will give notice of withdrawal. It should be noted that recent cases have emphasized the importance of giving clear and unambiguous notices in this respect. Any owner contemplating withdrawing a vessel from a time charter would be well advised to first consult with their P&I Club or legal counsel. Sub-clause (b) also makes it clear that the owners’ right to withdraw is not dependent upon a previous suspension of performance.

Sub-clause (c) provides the owners with an indemnity from the charterers in respect of any liabilities under a bill of lading that the owners might incur as a result of suspension and/or withdrawal of the vessel. This provision is similar to the indemnities found in the anti-technicality and grace period clauses found in other time charter parties and is an essential feature.

Finally, sub-clause (d) relates to the owners’ right to apply the provisions of the Clause to subsequent late payments even if the owners do not exercise their rights on an earlier default.

Originally published in BIMCO Special Circular No. 4, 31 August 2006 - Non-Payment of Hire Clause for Time Charter Parties