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09 September 2015
Owners continue to face uncertainty when charterers fail to pay hire under a time charterparty, particularly in respect of when they can withdraw the vessel or terminate and claim damages for future loss of hire. Recent decisions on the issue are in conflict.
However, these uncertainties can be managed by including appropriate terms in the charterparty and by a careful and well-advised approach when charterers do fail to pay.
It is now almost two years since Justice Flaux decided in The Astra(1) that the payment obligation at Clause 5 of the New York Produce Exchange (NYPE) 1946 form is a "condition". Conditions are contractutal clauses in English law which are accorded special status; breaching a condition gives rise to an immediate right to terminate the contract. On this basis, any failure to pay hire as required by the charter would entitle the owner to terminate the charterparty and claim both the unpaid hire up to the date of withdrawal and also damages for any loss of future hire (in a falling market).
Previously, it was generally accepted that the payment obligation was not a condition. Accordingly, if a charterer failed to pay, the owner could withdraw the vessel immediately under the withdrawal clause (subject to any anti-technicality notices) and claim any unpaid hire. However, in order to claim damages for this, the owner also had to establish that the charterer had repudiated the charterparty. This meant that the owner had to show that the charterer had displayed a clear intention no longer to be bound by the charterparty.
In The Astra the charterer was found to be in repudiatory breach in any event where it clearly intended to pay only a significantly reduced rate of hire for over three years of the remaining charter period. Yet in practice, it is often hard to prove repudiatory breach, as the tests are quite general and it is not always clear how many missed hire payments or short payments are required or what sort of conduct is necessary. For example, the tribunal in The Fortune Plum(2) found that there was nothing seriously wrong with the fact that charterer had paid hire late for many months.
The judge focused on the need for certainty when reaching his decision in The Astra. However, as it diverged from previous case law, it created a dilemma for parties. Owners were in a stronger position, but were unsure how far to rely solely on this judgment and how far to look to previous law. Further, there was criticism that, if strictly followed, it could have led to liability being imposed on charterers for trivial breaches.
Recently, Justice Popplewell considered the obligation to pay hire punctually in time charters under the NYPE 1993 form and departed from the court's reasoning in The Astra. In Spar Shipping(3) the court returned to the previous prevailing approach – namely, that the obligation to pay hire is not a condition but a more general term (called an 'innominate' term) which would not give a right to terminate and claim damages for future loss unless breach amounted to a repudiation of the contract. On this analysis the language of the NYPE form – including the stipulations for time of payment – is neutral and does not support the view that any breach, even a trivial one (eg, late payment by a few minutes) should give rise to a right for owners to terminate.
Unlike the judge in The Astra, in Spar Shipping the judge did not think that his conclusion ran counter to the requirements of commercial certainty. Rather, he thought that making timely hire payment a condition could itself lead to uncommercial results. In a rising market, a trivial breach could mean that charterers would suffer in being unable to trade or sub-charter the vessel. In contrast, in a falling market owners would not be interested in trivial breaches, but rather successive failures to pay by charterers, but which would likely be repudiatory breach in any event.
This issue is likely to come before the Court of Appeal at some point. At present, there are two conflicting decisions of the same level: The Astra and Spar Shipping. Spar Shipping is more in line with the traditional thinking and had the benefit of fuller argument and case law citation than the earlier case. Thus, it seems likely that Spar Shipping will be preferred by the courts.
Although Spar Shipping's traditional approach gives no certainty to owners, it does give the parties the chance to rectify failures to pay hire on time and also the time and flexibility for commercial negotiations, which can lead to a mutually satisfactory resolution.
Apart from negotiation, when charterers are paying late, what can owners do to protect their position? Owners may seek to include a compensation clause in the charterparty providing expressly for the right to claim damages for future loss of hire in the event of a failure to pay by charterers. In The Astra the court ruled that there is nothing penal in such clauses.(4) A compensation clause may be harsh, but could be more acceptable to charterers if included with an anti-technicality clause allowing charterers time to rectify any mistake or failure to pay hire as required. This type of clause is commonly found in long-term bareboat charters, especially for transactions such as sale and leaseback. However, it could now be deployed in more short-term time charters.
An anti-technicality clause may, of itself, provide protection to owners. These are already commonplace and included as standard in the NYPE 1993 form. Although ostensibly for the benefit of charterers, in The Astra the court stated that the effect of an anti-technicality clause could be to make time for payment of hire by the end of the grace period of the essence, so that the clause would be a condition.(5) However, in Spar Shipping the court disagreed with this analysis, stating that a notice to make time of the essence did not convert an innominate term into a condition. Any anti-technicality clause should be carefully drafted(6) and owners must be aware that they may be unable to rely on the court's reasoning in The Astra.
Otherwise, in all circumstances, owners should proceed carefully when charterers fail to pay hire.
For further information on this topic please contact Chris Grieveson or Ben Williams at Wikborg Rein by telephone (+44 20 7367 0300) or email (email@example.com or firstname.lastname@example.org). The Wikborg Rein website can be accessed at www.wr.no.
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