UK: The Distinction Between A "Performance Option" And A "Contract Option" Under A Time Charterparty

Previously published in London Arbitration 1/11, Lloyds Maritime Newsletter, 18 March 2011

In the first reported LMAA arbitration decision of 2011, the Tribunal considered a time charterparty on an amended NYPE 1946 form and whether the charterers were entitled to add 159 days off-hire onto the basic charter period. The issue was whether the option to do so in the charterparty was a "contract option" or a "performance option". The distinction for the purposes of the present dispute was that the former would have required the charterers to give notice of their intention to exercise the option, whereas the latter would not. The Tribunal held that it was a performance option and it was not therefore necessary for charterers to expressly exercise the option and give notice of their intention to do so in order to be entitled to add off-hire to the basic charter period.

Background facts

The vessel was chartered out by disponent owners ("owners") on the NYPE 1946 form, as amended, for a period of 13-15 months, +/- 15 days more or less at charterers' option. During the basic charter period, the vessel was off-hire for about 159 days due to repairs undertaken by the registered owners. A dispute subsequently arose as to whether the charterers were entitled to add these 159 days on to the basic charter period.

The relevant charter provisions stated as follows:

Line 17: "Charterers' option to add any off-hire period",

Clause 58: "Charterers have the option to add any off-hire period to the charter period".

Clause 13 of the NYPE printed form had been deleted. That clause provides for charterers to exercise an option to continue the charter period provisional on written notice thereof being given to owners a number of days in advance of the expiry of the basic charter period.

The owners argued that the charterers were in breach of charterparty because they continued to use the vessel after the time for redelivery. According to the owners, the option to add any off-hire period to the basic charter period was a "contract option" because every time charter must have a final date and this contract option had to be exercised within a reasonable time and had to be communicated to the owners, which the charterers had failed to do.

The Tribunal's decision

Contract or performance option?

The Tribunal found in favour of charterers and held that on a true construction of lines 17 and clause 58 of the charter, the option in relation to adding off-hire was a performance option and accordingly, it was unnecessary for charterers to give notice of their intention to add on all or any of the off-hire which had accrued during the basic period of charter service.

In coming to their decision, the Tribunal found that had the parties viewed the off-hire "bolt-on" as a contract option, then they would have provided a mechanism for its exercise, which they did not do. This view of the parties' intentions was reinforced by the deletion of clause 13 of the NYPE printed form.

As to the owners' argument that all charterparties must have a final terminal date, the Tribunal referred to the case of The Kriti Akti [2004] 1 Lloyd's Rep 712 which makes it clear that it is, in fact, not necessary for every time charter to have a final terminal date, ascertainable at the time the contract is made.

Finally, in the Tribunal's view, there was no need to imply a term that the charterers had to give notice of the exercise of the option because the charterparty was workable without such a term. The arbitrators held that the redelivery notice provisions in the charterparty gave the owners as much notice as they could reasonably expect.

Was the option exercised in time?

The Tribunal then considered what the position would be if they were wrong and the option was a contract option. The Tribunal concluded that in those circumstances, the option had been constructively exercised by the end of the basic charter period because the charterers had given no redelivery notices and had paid hire for the next hire period without any relevant deductions. In the Tribunal's view, in the current shipping environment, the fact that no deduction for bunkers on redelivery was made from that hire payment was held to be a clear indication to owners that charterers were intending to employ the vessel during the whole of the next hire period.

On any objective view, said the arbitrators, the owners could have been in little doubt by the end of the charter period that the charterers were intending to continue the charter, as the addition of off-hire was the only lawful basis on which they could do so. The owners were not entitled to assume that the charterers were in breach of their contractual obligations when they did not give their redelivery notices. The totality of the charterers' conduct indicated that they considered the charterparty was continuing.

Comment

This decision highlights the need for owners who require express notice to be given by the charterers before they exercise an option to extend the charter period to ensure that the charterparty says so expressly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.