Shipping is a cyclical business and so are the disputes that come and go with the various cycles.
In recent weeks, we’ve seen more enquiries from our ship owner clients and those who insure them concerning charterers trying to find ways out of what are now unprofitable period charters concluded at the peak of the market. In 2021 there was frantic activity in the container market with some lines taking on additional tonnage and deferring scrapping of older tonnage to meet demand. Operators chartered in tonnage at record levels to meet the demand and, for a time, they made huge profits as the world economy reopened after the Covid induced lockdowns. It seems however that what goes up must come down and we have seen a dramatic collapse in container freight rates. We are dealing with one matter now where the operators were making US$12,000 a day on a 40ft box from China to the US in early 2022. Now that same box is commanding around US$2,000 and the prediction is that it will drop further. This decline is a result of the cooling US economy and the reduction in demand for imported goods due to the US Federal Reserve’s aggressive monetary policy designed to combat soaring inflation. The same pattern is now being seen on China-EU routes. In short, those who fixed at the peak of the market on period business are desperate to find ways out of those charters.
Some years ago we dealt with a large case for Korean clients which involved the early redelivery of three product tankers which were on long term charters. When dealing with potentially very serious losses, it is vital that clients take steps to ensure that they do the right things to reserve their rights. In the case of an intention to redeliver early, it is important not to act precipitously and terminate too early or the ship owner may find themselves in repudiatory breach such that they are unable to claim damages. We would urge all clients facing this dilemma and those who insure them to take legal advice to make sure that the correct messages are sent to reserve the owners rights to claim damages.
The other key issue on an early redelivery is quantum and how to assess this. The ship owners’ losses will be assessed on the assumption that they took all necessary and proper steps to mitigate their losses by going into the market to obtain a substitute period charter if available. There are complications when the ship owner decides to sell the ship rather than find a substitute fixture. One needs to assess the profit that would have been earned for the balance of the charter period versus the profit (or loss) earned on the replacement fixture. Finally, one may need to take into account accelerated receipt of funds, for example, where there is a balance left to run on the charter.
To sum up, there is little that owners can do to stop early redelivery but they can, if they act properly, take the necessary steps to preserve their rights and obtain security for their claim. In those cases where we are involved at an early stage we have managed to help clients take the right steps to protect their rights. By the same token, we are also aware of the tactics that charterers often use to seek to find a way out of unprofitable charters without incurring severe legal consequences.