Lay-Up – Time Charter Parties

Due to the recent downturn in the shipping markets, and in the offshore sector in particular, lay-up issues are once again high on the agenda. Recently Nordisk have assisted a number of members with lay-up related issues. Here are some points to bear in mind:

In long-term time charter parties, it is common to agree that the charterers will have the option to lay up the chartered vessel. By way of illustration, the well-known charter party form Supplytime 2005 (as well as the previous 1989 version) provides that the charterers shall be entitled to lay up the vessel. The rationale is that the charterers should have the opportunity to reduce costs in a situation where there is no employment for the vessel. Clauses granting the charterers an option to lay up the vessel fall into two main categories:

1) clauses providing that the charterers during the period of lay-up shall pay a specific lay-up rate. The lay-up rate is agreed at the time of concluding the charter party. Under this type of clause, any reduction in operating costs will be for the owners’ benefit, since the compensation during the lay-up period is pre-determined.

2) clauses providing that the charter hire rate during the period of lay-up shall be reduced either by the amount of savings actually made by the owners or by the amount of savings the owners reasonably ought to have made as a result of the vessel being laid up. In our experience, this type of lay-up clause is more likely to cause disagreement between the parties than the clauses described in 1) above..

An example of a lay-up clause falling into the second category is Clause 6(d) of Supplytime 2005:

“The Charterers shall have the option of laying up the Vessel at an agreed safe port or place for all or any portion of the Charter Period in which case the Hire hereunder shall continue to be paid but, if the period of such lay-up continues for more than 30 consecutive days, there shall be credited against such Hire the amount which the Owners shall reasonably have saved by way of reduction in expenses and overheads as a result of the lay-up of the Vessel.”

Prior to deciding to lay up the vessel, the charterers will often want to know how much the charter hire rate will be reduced and will ask the owners to advise as to what savings will be made. Whilst it would be advantageous for the parties to agree on the reduction (and thus the “lay-up rate”) in advance, thereby avoiding any subsequent discussions as to what savings the owners should reasonably make as a result of the lay-up, the parties are under no obligation to sort this out in advance. The system set forth in Supplytime 2005, Clause 6 (d) is the opposite, namely that the charter hire rate after the initial lay-up period of 30 days shall be reduced by the amount which the owners shall reasonably have saved as a result of the lay-up.

Once the charterers have made the decision to lay up the vessel, a typical problem is determining the meaning of “the amount which the Owners shall reasonably have saved by way of reduction in expenses and overheads”. Unsurprisingly, the parties often have differing opinions on this point. The extent of the owners’ obligation to save costs must be considered on a case-by-case basis, taking into account in particular the duration of the lay-up period and/or the remaining period of the charter party; the owners’ maintenance obligation, including the obligation to ensure that the vessel remains in class; and the costs involved in rendering the vessel in condition to resume operations upon redelivery.

In our experience, the more specific the clause is the better. In recent cases we have assisted in disputes relating to issues such as (i) whether redundancy costs should be included in the owners’ costs; (ii) whether the clause provides for cold or warm lay-up; (iii) the timeframe within which the owners are obliged to present the vessel ready for trading after the lay-up period; and (iv) the due date for costs relating to making the vessel ready to trade again.

Lay-up clauses come in many different varieties, and the above is intended simply as an introduction to this topic. Please do not hesitate to contact us for assistance in drafting a suitable clause or to benefit from our opinion on the construction of a specific clause.