Shipowners' Club warns on charter parties

Writing on the company's website, LCC manager Daisy Rayner says that the difficult conditions currently existing in the shipping market, particularly in the offshore sector, members of The Shipowners' Club are increasingly contacting the Club regarding claims against charterers for unpaid hire.

She writes that in some cases there is little prospect of successfully enforcing any judgement or award against charterers, as they often have few or no assets against which to enforce.

In such a situation, the Club's Legal Costs Cover, regardless of the strength of a member's claim against the charterer, is unlikely to respond as there is no realistic prospect of recovering the hire.

Although there are other ways in which members can pursue charterers for unpaid hire, Rayner says that the most straightforward and effective solution is for members to carry out thorough due diligence on potential charterers before entering into any charter party to determine whether any problems could arise from entering into a charter party with them.

Most importantly, she advises this should involve investigating the financial solvency and assets of a potential charterer so that members can satisfy themselves that charterers will be able to pay hire as it falls due and if problems do arise, members will be able to obtain security for any claim for unpaid hire.

Rayner acknowledges that the level of appropriate due diligence will vary in each case, but says that the Club would expect a member, as a prudent insured, to make enquiries regarding the potential charterer's reputation within the industry - there may have been occasions when the potential charterer has not paid hire or forced a vessel to wait long periods before loading cargo or sending vessels to ports where loading is not possible.

The potential charterer may have been involved in previous litigation or arbitration with vessel owners regarding hire payment or other issues, and may have been blacklisted by various parties within the shipping market as a result.

The potential charterer may be subject to economic sanctions.

Aside from any specific contacts a member may have, the Club recommends approaching BIMCO, or other trade-specific entities such as Intertanko or Intercargo, in order to conduct enquiries in relation to the aforementioned issues. Brokers, P&I clubs and correspondents can also be good sources of information regarding potential charterers, and basic internet searches are also helpful. If more detail is needed then specialist investigation companies such as Infospectrum, Gray Page, Dynamar, Marine Forensics or Lloyd's Maritime Intelligence unit can be employed to conduct further checks for an agreed fee.

Rayner argues that assuming a potential charterer has a consistent trading pattern then it should not be too difficult to obtain information regarding their reputation using the above sources. If information regarding a potential charterer is hard to find then this is a potentially worrying sign, as it suggests that the potential charterer may not have any assets against which to secure or enforce any subsequent claim for unpaid hire.

It is important that the terms of the charter party negotiated between the member and the potential charterer are clear and unambiguous regarding charterers' obligations to pay hire. In this regard, the Club suggests seeking legal advice from lawyers regarding any confusing or otherwise potentially ambiguous terms of a draft charter party (whether relating to the payment of hire or otherwise).

Further, where possible members should ensure that the terms of the charter party give them a lien over the cargo that is carried, as this may help protect their position in the event that charterers do not pay hire.

Where possible members should also obtain guarantees from a party whose financial position is stronger than that of the potential charterer (in practice this is usually the parent company of the potential charterer). This should reduce the risk of non-payment of hire by providing a member with a more substantial entity to pursue in the event that a charterer fails to pay hire. However, we appreciate this won't always be possible, especially given the relative bargaining power when negotiating a lot of offshore contracts.

By way of an example, Rayner points to an event in 2014, the Club was asked to assist a member that was owed large sums of unpaid hire by a charterer based in Nigeria. The charter party was subject to English law and arbitration and the member eventually obtained an English arbitration award requiring the charterer to pay the unpaid hire to the member.

An expert asset investigation company report revealed that the charterer's only discoverable assets were located in Nigeria. Attempts to enforce the arbitration award against those assets were consistently opposed by the charterer by a series of appeals in the Nigerian Courts, on the basis that the Nigerian Courts should not recognise the English arbitration award.

Those appeal proceedings are likely to take a number of years, during which time the member is unable to enforce the arbitration award.

Rayner concludes that this case shows the importance of carrying out due diligence when entering into a new charter party. If members had been aware that the charterer's only assets were in Nigeria, they might have been more aware to the likely difficulties of enforcing an award for unpaid hire. They could therefore have insisted on the charterer providing some security for the performance of their obligations under the charter party and/or a guarantee from a more substantial entity with assets that were more accessible.

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