When charterers fail to pay hire: owners’ dilemma finally resolved, but still be careful!

The Court of Appeal has handed down judgment in the case of Grand China Logistics Holding (Group) Co Ltd (“GCL”) v Spar Shipping AS (“Spar”) ( [2016] EWCA Civ 982), deciding 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 charter period. The Court also set out useful guidance on what constitutes renunciation (anticipatory repudiatory breach) of a time charter i.e when an owner can withdraw for anticipated non-payment of hire. It is this type of breach which will allow an owner to claim damages.

Dispute

Spar let three vessels on long-term time charters in 2010 on amended NYPE 1993 forms to the charterers, whose obligations were guaranteed by GCL. From April 2011 charterers paid hire late and not in full and there remained substantial arrears of hire throughout the summer of 2011 and a chronology of missed or delayed payments.

Missing a single instalment of hire under a time charter is not a breach of condition.

Spar called on GCL to make payment under the guarantees and then withdrew the vessels and terminated the charters on 23 and 30 September 2011. After charterers went into liquidation Spar commenced High Court proceedings against GCL under the guarantees claiming US$25 million for the balance of sums due and damages for loss of bargain, being the difference between the charter and market rate for the remainder of charter periods which had between 18 months to 4 years left to run.
Popplewell J held at first instance that the payment of hire was not a condition but found that charterers did renounce the charters and awarded damages for loss of bargain on this basis ([2015] EWHC 718 (Comm); [2015] 1 All ER (Comm) 879). The Judge’s findings on both of these points were appealed.

Condition issue

The Court of Appeal found:

  • 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 at clause 11 of the 1993 NYPE (like the payment obligation at clause 5 of the NYPE 1946) is not expressly stated to be a condition. Neither does it expressly make time of the essence nor spell out the consequences of the breach. The express right of withdrawal and the anti-technicality clause did not indicate the payment obligation was a condition. 
  • The classification of the obligation as a condition would achieve the greatest certainty for owners but it would allow owners to withdraw and claim damages for loss of bargain for even the most trivial breach, such as one slightly late payment.
  • There should be a balance 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.
  • The market view is that the obligation is not a condition and there is no apparent need in the market for it to be a condition.
Owners may of course protect themselves by insisting that the obligation to pay hire on time is expressly stated to be a condition.

Accordingly, the payment obligation at clause 11 of the 1993 NYPE (like the payment obligation at 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 owners claim for loss of bargain) depends on the seriousness of the breach. 

Renunciation issue

The next issue was whether there was a renunciation of the charter by charterers, which would allow Spar to terminate and claim damages for loss of bargain (as well as the outstanding hire).

A repudiation is a very serious breach of a contract e.g. under a time charter the charterers not paying the owners hire at all. A renunciation is an anticipated repudiation e.g. the charterers making clear by their conduct that they will not pay hire going forward.

The Court found that Spar were entitled to the regular payment of hire but also in advance, which was crucial. They concluded that given the history of charterers’ late payments, the amounts and delays involved, and that there was no reassurance as to the future, it was clear that charterers did not intend to pay hire on time going forward and had therefore renounced the charters.

Discussion

In a previous article, we considered Flaux J’s controversial decision in the “Astra” (Kuwait Rocks Co v AMN Bulkcarriers Inc (The “Astra”) [2013] EWHC 865 (Comm)) that the payment obligation was a condition, which was arguably against the previous case authority and market consensus. Popplewell J disagreed with Flaux J, but owners were still left with two conflicting first instance decisions and still with a dilemma: rely on the Astra or proceed as if the old law and Popplewell J’s decision applied.

The Court of Appeal has now finally decided the issue: the payment obligation is not a condition. Owners’ dilemma is now resolved, although not entirely in owners’ favour. The decision will welcomed by charterers, but also does not seem unfair. If the parties want the payment obligation to be a condition they can expressly agree on this and set it out in terms, particularly in view of the seriousness of the consequences for any trivial breach. The 2015 NYPE form 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 a repudiation or renunciation of the charter. Owners can of course always withdraw in accordance with the withdrawal clause in the charterparty for missed payments without establishing repudiation or renunciation.

Some uncertainty will unfortunately remain for owners. The question of when there is a repudiation or renunciation will not always be clear and, as the Court set out, will always be dependent upon the specific circumstances of the case. Precise rules would of course be very helpful for owners in deciding when there is repudiation or renunciation. The Court rejected the argument from GCL that the test should be an arithmetic comparison of the arrears and the total sums ­payable. It is difficult to see though on what basis a Court could set out such precise rules.

What to do

It is in all circumstances critical for owners to be extremely careful when faced with a defaulting charterer, especially if owners have a potential claim for loss of bargain which will often far outweigh the value of the claim for unpaid hire.

It is now clear that 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 charterers’ failure(s) or conduct becomes repudiatory or renunciatory so that they can, if they wish to do so, terminate and claim for damages for loss of bargain.

Often, it should become clear when there is a repudiation or renunciation, especially where there are a succession of missed payments, significant delays or large amounts outstanding or where charterers make it clear that they simply cannot pay the hire on time going forward. The Court did usefully clarify that an intention to pay hire in arrears will be a renunciation.

Indeed, in both the “Astra” and in the present case it was found that charterers’ conduct constituted a repudiation or renunciation of the respective charters, which in any event entitled owners to claim damages for loss of bargain.

Owners may of course protect themselves by insisting that the obligation to pay hire on time is expressly stated to be a condition, as per the NYPE 2015. As we mentioned in our previous article, this 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, as included as standard in the NYPE 1993 form.

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