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Consequences of charterer's failure to pay hire under time charter

The Court of Appeal has upheld a decision of the Commercial Court that punctual payment of hire by the charterer was not a condition of the charters.

Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd (Court of Appeal) [2016] EWCA Civ 982

Executive summary

In a claim by a shipowner to enforce guarantees given in respect of three charter parties, the Court of Appeal has upheld a decision of the Commercial Court that punctual payment of hire by the charterer was not a condition of the charters, but, that as the charterer had renounced the charters, the owner’s claims for the balance of hire due at termination and also damages for loss of bargain for the unexpired term of the charters both succeeded in full.

Facts

The ship owner let three vessels on long term charters to a charterer each on the NYPE 1993 form. Each charter contained a payment and withdrawal clause, in materially the same terms as follows:

11. Hire Payment

(a) Payment

Payment of Hire shall be made so as to be received by the Owners or their designated payee … in United States currency, in funds available to the Owners on the due date, 15 days in advance …. Failing the punctual and regular payment of the hire … the Owners shall be at liberty to withdraw the Vessel from the service of the Charterers without prejudice to any claims they (the Owners) may otherwise have on the Charterers.

The charterer’s parent company provided guarantees in respect of each charter party. After a year, the charterer fell into arrears in payment of hire. The owner withdrew the vessels, terminated the charters and commenced arbitration proceedings against the charterer. The charterer went into liquidation and the arbitration proceedings were stayed. The owner then commenced court proceedings against the guarantor company claiming the balance due under the charters at the date of termination and damages for loss of bargain for the unexpired term of the charters. The owner’s claims together totalled over US$25 million plus interest and costs.

Amongst a variety of defences raised, the charterer claimed it was not liable for damages in respect of the unexpired periods of the charter as punctual payment of hire was not a condition, the charterer’s right of withdrawal was a contractual option and there had been no repudiatory breach or renunciation by the charterer of the charters.

Commercial Court decision ([2015] EWHC 718 (Comm))

Popplewell J held in favour of the owners, concluding that payment of hire was not a condition of the charters but that the charterer was in breach for renouncing the charters. The guarantor appealed to the Court of Appeal on the issue of whether the charterer had renounced the charters.

Court of Appeal decision

The Court of Appeal upheld the Commercial Court’s judgment.

Although no longer strictly live in the matter, because it was an issue of considerable market importance, the Court (with the parties’ consent) ruled on the question of whether payment of hire was a condition.

Earlier authorities were divided on whether the payment of time charter hire was a condition. The decision of Texas Steamship Co v Owners of the Motor Vessel Brimnes (The Brimnes) [1973] 1 W.L.R. 386 had held that payment of hire was not a condition. A more recent case of Kuwait Rocks Co v AMN Bulkcarriers Inc (The Astra) [2013] EWHC 865 had decided the contrary.

The Court of Appeal held that the first instance judge had correctly concluded that the obligation to make punctual payment of hire was not a condition of the charters. The inclusion of an express withdrawal clause in each charter was not on its own a strong or conclusive indication that clause 11 was a condition. As a matter of contractual construction, the charters did not make it clear that clause 11 was a condition. Breaches of the payment obligations in clause 11 could range from the trivial to the serious. Categorising clause 11 as a condition would achieve greater certainty but at a cost of allowing disproportionate consequences to flow from trivial breaches of the provision. The Astra had been wrongly decided on this issue.

On the renunciation issue, no criticism could be made of the judge’s analysis, findings and conclusions. Given the history of the charterer’s late payments, including the amounts and delays involved, and with no concrete assurances from either the charterer or the guarantor as to the future, the judge had been fully entitled to find that the charterer had renounced the charters at the time of their termination.

Comment

This decision has laid to rest the uncertainty that has existed since the judgment in The Astra as to whether payment of hire was a condition of time charter parties. The judgment makes it clear that, without additional express clear wording included in charters, the payment term on its own will not amount to a condition.

Following The Astra decision, the payment clause of the NYPE 2015 form of time charter was amended so as to give owners an express entitlement to loss of bargain damages for the remainder of the charter period should the vessel be withdrawn for breach of this term. It will be important for owners and charterers to carefully consider which form of the NYPE charter should be used for time charters and what amendments to the standard wording may be commercially possible between the parties.

The decision also provides useful guidance on the remedies available to a shipowner for non-payment of hire under time charters.

To discuss any of the issues in this update please contact Terry Donaghy, Consultant at terry.donaghy@weightmans.com or call 0151 242 6528.

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