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Friday, April 20, 2018

FREIGHT PAYMENTS – THE LAW AND POSSIBLE OPTIONS OF RECOURSE WHERE PAYMENTS ARE DELAYED

We are grateful to Harvey Williams, Vice-Chairman of INTERTANKO’s Documentary Committee for the following which is based on an article he has written.

“This has been a subject, which has vexed INTERTANKO's members over the years as much as almost any other.  It is a recurrent source of complaint from tanker owners that the freight payment terms in the charter parties are largely ignored by their charterers.

Charterers who would otherwise be regarded as first class pay their freight late.  They do so partly (so they say) for administrative reasons.  They cite for example the need to verify outturn figures (for oil "ROB" let us say) before the payment mechanism is initiated.  However, freight is principally paid late because the charterers believe that there is no really practical sanction, which can be brought to bear to compel compliance with the charter terms.  If it were not for this widely held belief, the "administrative reasons" would never have arisen.

The law in relation to freight payment is easily if unhelpfully stated.  At common law freight is due concurrently with discharge.  This is true in just about every country with an established commercial law system.  The rule has been a standard and entirely unquestioned principle of law going back to the very origins of maritime transport.  It is, however, subject to any contrary intention expressed in the contract.  Expressions such as "upon right and true discharge" do not alter the basic legal understanding as above.  "Before breaking bulk" alters the understanding in owner's favour in that the vessel cannot be required to commence discharge until the freight has been paid, the owner receives value for it and has unfettered access to the funds.  Until 30 years ago "before breaking bulk" charters were commonplace, but owners lost this battle in the 1970's.  At about that time, terms were seen increasingly which made freight payable after discharge was completed.  Such terms do, of course, displace the general rule.

The legal position as to the due time for payment of freight is not, however, a useful starting point  in any discussion of this subject.  For two different reasons even a "before breaking bulk" charter, or any other which preserves the traditional understanding, is of limited value to the carrier.

It is very difficult in practice to exercise a lien in most tanker discharge ports.  The lien for freight is founded upon possession of the cargo.  Except in rare cases, e.g. of charterer insolvency, retention of the cargo on board in exercise of a lien is an unattractive proposition.  For a start, such action will almost certainly result in the vessel being required to leave the berth with the result that there is then a total stand off between owners and charterers.  Quite apart from the points considered below, an owner would be unlikely to follow this course of action because he would be far from certain to recover all the expenses of exercising the lien.  A shipowner's normal means of exercising his possessory lien is to discharge sufficient of the goods to an independent storage contractor to secure his claim.  Few of the world's tanker discharging areas afford the carrier the opportunity of discharging to independent tankage for the simple reason that it is likely to be the receiver at the port in question who owns or controls the area to which the cargo is discharged.  In so doing the owner surrenders possession to the very party against whom his claim is likely to lie and the lien is thus lost.

Even if the practical difficulties above noted did not prevent the effective exercise of a lien, commercial pressures would probably do so.  Not many owners, even if they have the legal right, would wish to antagonize a charterer upon whom they are likely to depend for future business by attempting to detain his cargo.

In short, liens are not the answer except in a very small minority of cases.  Any experienced person would regard the above propositions and explanation as elementary.  The next pair of propositions is scarcely more sophisticated.

In proceedings in both London and New York (again as mirrored in most mature legal systems), courts and arbitrators now have power to award interest even where the principal sum was unpaid when the action was commenced but is paid during the course of the proceedings.  Arbitrators have the further useful power to penalize deliberate default by an award of compound interest running not just to the date of the award but to the date of payment.  These rules, which are gradually being rationalized still further so as to deter defaulters, may be helpful weapons against the wilful late payment of demurrage, but they will only rarely be useful in combating late payment of freight.  Where it is, or may be, useful an approach as outlined in Appendix 1 is worth considering.  However, the daily loss of interest claim on even the largest cargo is not likely to be much beyond US$200 per day and few owners (or clubs) will be willing to commence proceedings for such sums, even if the concern about gratuitously antagonizing the charterer as discussed above did not itself act as a further deterrent.

This last concern will also deter most owners from arresting charterers' assets.  This, however, is a possibility which should be considered if late payment is systematic and serious.  We are aware of one major tanker owner who found a suitable jurisdiction to arrest their charterers' cargoes being discharged from other vessels.  This not only got freight arrears paid quickly, it did so in the particular case without the owner being "blacked" from further business.  Timing, detailed market knowledge and understanding of other key factors are essential, however.

We thus see that liens and legal action are not often likely to provide the answer to this problem.

There is always the possibility to amend the terms of the charter so that interest is contractually payable for late payment of freight.  In most cases, one would not then need to take the "sledge hammer to nut" approach of commencing legal proceedings to recover one's entitlement in most cases.  The suggestion of building in contractual interest would be regarded, however, by most tanker owners and brokers as an equally impracticable solution. 

For reasons founded in the anti-trust (competition) laws tanker owners as a group, or INTERTANKO members as a group could not even consider a concerted attempt only to fix on terms that interest at an appropriate rate was payable for late payment of freight. 

Any agreement only to fix on "before breaking bulk" terms would be likewise unthinkable and even if these principles were not themselves an insuperable obstacle it is obvious there would be a steady stream of owners ready to break ranks as soon as it came to a question of breaking the agreement or not getting the vessel fixed.  Zeal to obtain tough terms on freight payment usually evaporates in a competitive race for the only available cargo.

In all these circumstances, one is forced to conclude that neither law nor charter terms hold the answer to this problem.  In short, in the real world this is not a matter of legal rights or of words.

The sum total of the above will have contained no surprises to those who have followed this debate on the not infrequent occasions it has been raised as an issue in the past.  However, here are some suggestions of what perhaps can be done to improve this situation:

1.       This is an era of Total Quality Management.  No one is more conscious of this need than the major oil companies, who may find their whole operation scrutinized or pilloried if they are unlucky enough to be involved in a pollution disaster.  How does the visible pursuit of quality (inter alia by the insertion of vetting procedures into every stage of the chartering process) square with the cynical disregard of the charter party terms about money payment?

2.       In isolated cases, it has been pointed out to charterers that their non-payment of freight is in breach of their claims to operate in conformity with standards such as ISO9002.  Why should this point not be hammered home with tiresome regularity?

3.       Although a concerted agreement to seek contractual interest for late payment of freight is not feasible on anti-trust grounds, it is very easy for an individual owner to seek this protection.  Such a term is too easily evolved to require our setting it out here.

4.       Even if an owner does not believe (on grounds of his assessment of the market) that he can ask directly for interest on late paid freight, he may feel able to consider a clause along the lines of Appendix 2. 

5.       This, together with the veiled threat to proceed in the manner referred to in Appendix 1 could perhaps be used as a method of persuading charterers to refrain from this particular abuse of agreed charter terms.”

Appendix 1
Using the Law to Prevent Late Freight Payment

The English legal system has just undergone radical procedural change.

One of the primary stated objectives of the reform is to make it simpler to proceed against debtors.

Thus a claimant can indicate, with or without starting proceedings, that he will accept a certain settlement of indebtedness (e.g. freight and daily interest until payment).  ("a Part 36 Offer").

If subsequently the matter comes to the court and the claimant recovers at least what he offered to accept the court has wide direction to award paid interest (at up to 10% over base rate) and so called 'indemnity' costs (i.e. the totality of all legal costs incurred).

Although arbitration procedure is not yet so explicit, arbitrators are broadly encouraged to follow the spirit of the new court rules.  It may be expected that better arbitrators will do just that to prevent procedural abuses occurring.

Appendix 2
Charter Terms to Discourage Late Freight Payment
Total Quality Management

“Owners and charterers each confirm to the other their commitment to the total quality of their performance under this charter and will so act in relation to all aspects of their contractual obligations as to ensure that they each accord to the other the full rights set out in the terms hereof.”