Introduction Facts Decision Dilemma Comment
In Grand China Logistics (GCL) Holding (Group) Co Ltd v Spar Shipping AS(1) the Court of Appeal decided unequivocally that missing a single instalment of hire under a time charter is not a breach of condition.
In other words, there is no right to terminate for one missed instalment and claim damages for loss of bargain – usually the difference between the charter and market rate for the remainder of the charter period. The court also set out useful guidance on what constitutes 'renunciation' (anticipatory repudiatory breach) of a time charter (ie, when an owner can withdraw for anticipated non-payment of hire). This type of breach enables an owner to claim damages.
In 2010 Spar let three vessels on long-term time charters on amended New York Produce Exchange (NYPE) 1993 forms to the charterers, whose obligations were guaranteed by GCL. From April 2011 the charterers failed to pay hire on time and in full, and substantial arrears of hire accrued throughout the summer of 2011, with payments repeatedly missed or delayed.
Spar called on GCL to make payment under the guarantees, then withdrew the vessels and terminated the charters on September 23 and 30 2011. After the charterers went into liquidation, Spar commenced High Court proceedings against GCL under the guarantees, claiming $25 million for the balance of sums due and damages for loss of bargain – the difference between the charter and market rate for the remainder of the charter periods, which had 18 months to four years left to run.
Justice Popplewell held at first instance that the payment of hire was not a condition, but found that the charterers had renounced the charters and therefore awarded damages for loss of bargain.(2) The judge's findings on both points were appealed.
Condition issue On the issue of whether the payment of hire was a condition, the Court of Appeal found as follows:
- The crucial issue in analysing the nature of the payment obligation is the intention of the parties, which can be ascertained from the wording and construction of the contractual term;
- The payment obligation under Clause 11 of the NYPE 1993 (like the payment obligation under Clause 5 of the NYPE 1946) is not expressly stated to be a condition. Neither does it expressly make time of the essence or spell out the consequences of the breach. The express right of withdrawal and the anti-technicality clause did not indicate that the payment obligation was a condition;
- Classification of the payment obligation as a condition would achieve the greatest certainty for owners, but would also allow them to withdraw and claim damages for loss of bargain for even the most trivial breach (eg, one slightly late payment);
- A balance should be met between the need for certainty and the undesirability of trivial breaches carrying the consequences of a breach of condition. This is best achieved by treating the payment obligation as a contractual termination option; and
- The market view is that the payment obligation is not a condition and there is no apparent need for it to be a condition.
Accordingly, the payment obligation under Clause 11 of the NYPE 1993 (like the payment obligation under Clause 5 of the NYPE 1946) is not a condition, but an innominate or intermediate term. Hence, the question of whether the contract can be terminated (and whether owners can claim for loss of bargain) depends on the seriousness of the breach.
Renunciation issue The next issue was whether the charterers had renounced the charter, thereby allowing Spar to terminate and claim damages for loss of bargain (as well as the outstanding hire).
A 'repudiation' is a serious breach of contract (eg, under a time charter, the charterers not paying the owners' hire at all). A 'renunciation' is an anticipated repudiation (eg, the charterers making clear by their conduct that they will not pay hire going forward).
The court found that Spar was entitled to the regular payment of hire but, crucially, in advance. It concluded that, given the history of the charterers' late payments, the amounts and delays involved, and the absence of reassurance for the future, it was clear that the charterers did not intend to pay hire on time and had therefore renounced the charters.
"When charterers fail to pay hire: dilemma for owners" reported on Judge Flaux's controversial decision in The Astra(3) that the payment obligation was a condition, which was arguably against the previous case authority and market consensus. Popplewell disagreed with Flaux, but owners were still left with two conflicting first-instance decisions and a dilemma: rely on The Astra or proceed as though the prior law and Popplewell's decision applied.
The Court of Appeal has now finally decided the issue: the payment obligation is not a condition. The owners' dilemma is resolved, although not entirely in owners' favour. The decision will be welcomed by charterers and does not seem unfair. If parties want the payment obligation to be a condition, they can expressly agree on this and set it out in terms ? particularly considering the seriousness of the consequences for any trivial breach. The NYPE 2015 expressly provides that the payment obligation is a condition.
The payment obligation is therefore (unless otherwise stated) an innominate or intermediate term. This means that owners can still withdraw and claim damages for loss of bargain in the event of failures to pay hire or anticipated failures to pay hire, but only if such failures are serious enough to amount to repudiation or renunciation of the charter. Owners can withdraw in accordance with the withdrawal clause in the charterparty for missed payments, without establishing repudiation or renunciation.
Some uncertainty unfortunately remains for owners. The question of when repudiation or renunciation occurs will not always be clear and, as the court set out, will depend on the specific circumstances of the case. Precise rules would be helpful for owners deciding when repudiation or renunciation occurs. The court rejected GCL's argument that the test should be an arithmetic comparison of the arrears and the total sums payable. However, it is difficult to see on what basis a court could set out such precise rules.
Owners must be extremely careful when faced with a defaulting charterer, especially if the owners have a potential claim for loss of bargain, which will often exceed the value of the claim for unpaid hire.
Owners cannot withdraw and claim for loss of bargain for one failure to pay hire on time under a time charter, unless the payment obligation is expressly stated to be a condition. Owners must be patient and assess when the charterers' failure or conduct becomes repudiatory or renunciatory so that they can, if they wish, terminate and claim for damages for loss of bargain.
It should often be clear when repudiation or renunciation occurs, especially where:
- payments are missed in succession;
- significant delays occur;
- large amounts are outstanding; or
- the charterers make it clear that they simply cannot pay the hire on time.
The court clarified that an intention to pay hire in arrears is a renunciation.
In both The Astra and the present case, the charterers' conduct was found to constitute repudiation or renunciation of the respective charters, which entitled the owners to claim damages for loss of bargain.
Owners may protect themselves by insisting that the obligation to pay hire on time is expressly stated to be a condition, as per the NYPE 2015. This could be more acceptable to the charterers if included with an anti-technicality clause allowing them time to rectify any mistake or failure to pay hire as required, as standard in the NYPE 1993.
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 protected] or [email protected]). The Wikborg Rein website can be accessed at www.wr.no.
Endnotes
(2) [2015] EWHC 718 (Comm); [2015] 1 All ER (Comm) 879.
(3) Kuwait Rocks Co v AMN Bulkcarriers Inc (The Astra) [2013] EWHC 865 (Comm).
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