Time is money

Written by Tim Schommer, Partner at Clyde & Co

Written by Tim Schommer, Partner at Clyde & Co

Tim Schommer advises on all matters relating to shipping, aviation and trade law, contentious and non-contentious. He has significant experience of commercial litigation and arbitration, and represents for more than 15 years clients in relation to all aspects of the yachting industry

There are numerous reasons – private or business ones – why, from time to time, charter agreements are cancelled. Here, Clyde & Co provide an overview on how the cancellation process is usually structured, under systems like the MYBA Charter Agreement. 

The parties will agree in the Charter Agreement when the charter fee has to be paid. Usually, the parties agree to instalments. Most often, the first instalment becomes due with the signature of the charter agreement. 

While the charterer, as a matter of principle, can give notice of cancellation at any time prior to the beginning of the charter, the owner, as a matter of principle, is entitled to retain a certain percentage of the charter fee. Under the MYBA Charter Agreement, for example, the owner can claim the amount of the charter fee, which is due at the time of the cancellation of the charter. This rule applies irrespective of whether the charter fee due has, in fact, been paid or not. If a certain amount is due, but has not been paid by the charterer, the owner has a claim against the charterer. 

The later the charterer terminates, the more expensive it becomes to cancel. This makes sense. A cancellation right after the conclusion of the charter contract allows the owner to look for another charter; a cancellation at the last minute makes it more difficult for the owner to arrange for a replacement charter. 

When the parties agree upon the timing of instalments that are to be paid by the Charterer under the Charter Agreement, the parties, therefore, should keep the above in mind. 

Charter agreements usually also contain express cancellation rights of the owner. Often the contract differentiates between a cancellation due to force majeure and a cancellation which is not due to force majeure. But what’s the different? And what does force majeure mean in the context of a charter agreement?

Usually, charter agreements contain definitions of ‘force majeure’. They might, for instance, define force majeure as any cause which is immediately attributable to circumstances that are beyond the reasonable control of the owner, the charterer or the crew. Such clauses will, more often than not, include examples of such causes. This might be ‘acts of God’, ‘war’, ‘fire’, ‘acts of terrorism’, etc. Often, also a major mechanical or electrical breakdown is agreed as a force majeure event – provided they are not caused by the owner’s negligence or due to inadequate maintenance.  

In the cancellation by the owner is due to a force majeure event, the charterer is entitled to receive immediate repayment of the charter fees paid to the owner thus far. There is no claim for damages on top.

In contrast, in cases where the cancellation cannot be attributed to force majeure, the charterer can usually claim damages. Most charter contracts contain ‘liquidated damages clauses’, which foresee what amount for damages is owed. The mechanism is similar to the one in the scenario in which the charterer terminates; the earlier the charter agreement is cancelled, the less liquidated damages the owner has to pay. If the cancellation, for instance, is declared at least 30 days prior to the beginning of the charter period, the charterer can claim, let’s say, liquidated damages in the equivalent of 25% the charter fee. If the owner cancels the charter contract 14 days or less before the beginning of the charter period, the charterer is entitled to an amount equivalent to 50% of the charter fee. 

Naturally, the charterer only has limited access to the relevant information. If the owner claims that a cancellation is due to force majeure, and the charterer suspects this, he should ask for proof. Assuming a technical breakdown is not caused by force majeure, but rather due to a lack of maintenance, the charterer might be entitled to liquidated damages on top of the repayment of the charter fees paid. 

Legal dispute with regard to the respective rights and duties under a charter contract can be avoided. Just read the small print and do not be afraid to suggest amendments! 


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