Withdrawal Clause

What it does

A withdrawal clause entitles the owner to withdraw the vessel from the charterer's service if the charterer fails to pay hire when due, and sometimes for other specified breaches. Withdrawal ends the charterer's right to use the ship, allowing the owner to take her back and, in a rising market, to re-employ her at a higher rate, which is what makes the remedy so powerful.

In practice the bare right is almost always tempered by an anti-technicality clause requiring notice and a short cure period before withdrawal can be exercised, so the two clauses operate together. The withdrawal clause defines the default that triggers the right, the procedure for exercising it, and the consequences, including the treatment of cargo on board and hire already paid or accrued at the moment of withdrawal.

Commercial effect

Withdrawal is the owner's principal enforcement tool and the charterer's principal exposure under the hire regime. Its commercial weight depends heavily on the market: in a rising market the right to withdraw and re-fix is extremely valuable to the owner and correspondingly dangerous to the charterer, while in a falling market the owner may have little incentive to use it. The clause therefore carries asymmetric significance over the life of the charter.

Because the consequences are so severe, the precise conditions for withdrawal matter greatly, and they are read with the anti-technicality and payment clauses. Questions such as what counts as default, whether disputed deductions can trigger withdrawal, and what happens to cargo and sub-charters on withdrawal all have substantial commercial consequences, and they are frequently litigated when an owner seeks to withdraw in a strong market.

Owner's perspective

The owner wants a clear and effective right to withdraw for non-payment, since it is the sanction that makes the obligation to pay hire punctually meaningful. It wants the trigger and procedure unambiguous so that, when a charterer genuinely defaults, the owner can act decisively and lawfully, taking the ship back and re-employing her without being mired in argument about whether the right arose.

The owner accepts the anti-technicality overlay but wants withdrawal to remain a real remedy after a brief cure period. It is also concerned with the practical fallout, such as cargo on board and existing sub-charters, and wants the clause to address how those are handled so that exercising withdrawal does not entangle it in liabilities to third parties that undermine the value of the remedy.

Charterer's perspective

The charterer regards withdrawal as the gravest consequence in the charter and wants it confined to clear, genuine default and hedged by a proper anti-technicality notice and cure period. It is acutely aware that, in a rising market, an owner may be looking for an excuse to withdraw and re-fix, so it wants the conditions tightly defined to prevent withdrawal on thin or technical grounds.

The charterer also wants protection where it has made a bona fide deduction it believes it is entitled to, so that a good-faith dispute over the hire figure does not expose it to withdrawal. It manages its payment processes carefully to avoid giving any opening, and it relies on the interplay of the payment, anti-technicality, and withdrawal clauses to ensure the remedy is reserved for real failure to pay.

Negotiation points

• The defaults that trigger withdrawal — non-payment alone, or other breaches as well.
• Whether a bona fide disputed deduction can found a withdrawal.
• The procedure and timing for exercising withdrawal, read with the anti-technicality clause.
• The treatment of cargo on board, sub-charters, and accrued hire on withdrawal.

Common variations

• A clause allowing withdrawal for failure to pay hire punctually and regularly.
• A withdrawal right coupled with a mandatory anti-technicality notice and cure period.
• A clause extending withdrawal to other defined breaches beyond non-payment.
• A provision addressing cargo and sub-freights following a withdrawal.