Perils of the sea: Court of Appeal clarifies the remedies for termination for non-payment under a time charter

For some time there has been a lack of clarity as to the consequences of termination for a charterer’s failure to pay hire punctually under a time charterparty. However, the recent unanimous Court of Appeal decision in Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2016] EWCA Civ 982 has resolved this debate by deciding that compensation to the owner will not automatically be due as punctual payment of hire is generally not a condition of such contracts, unless expressly said to be so.

The Court of Appeal decision has significant consequences for the drafting of payment and termination clauses in charterparties and other contracts that allow termination for non-payment.

Background

The background to the Spar Shipping case was that in 2010 Spar Shipping hired three vessels to Grand China Shipping (Hong Kong) Co. Ltd under three long term NYPE 1993 time charters on essentially identical terms.

Each of the charterparties contained a withdrawal clause that provided insofar as material 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, or on any fundamental breach whatsoever of this Charter Party, 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.”

From April 2011 the charterer was in arrears for payment of hire under all the charterparties. Although the charterer promised to pay in due course, in late September 2011 Spar Shipping withdrew the vessels and issued termination notices. Spar Shipping initially commenced arbitration proceedings against the charterer, but shortly before the hearing the charterer went into liquidation. As a result Spar Shipping commenced an action the parent company guarantor in the English High Court for both the balance of historic hire due under the charterparties and for damages for loss of bargain in relation to the unexpired term of the charterparties.

High Court Decision

The judge at first instance, Popplewell J, held that clause 11 of the 1993 NYPE time charters was not a contractual condition. As a consequence, the operation of Clause 11(a) did not entitle the ship owner to payment of anything more than the outstanding historic hire. Popplewell J also held, however, that in this case the facts demonstrated that the charterer had renunciated the charterparties at termination (by in practice refusing to perform its obligations substantially in accordance with the express terms), meaning that the ship owner could additionally be compensated for loss of bargain, in total some US$25 million, plus interest and legal costs. This decision was then appealed.

Court of Appeal Decision

There were two key questions before the Court of Appeal: (i) is it a condition of contract that the charterer must pay hire punctually; and (ii) was the charterer’s proposal to pay the hire at some point in future but not in advance a renunciatory breach of contract?

Condition of contract

In relation to whether it was a condition of contract that the charterer must pay hire punctually, the Court of Appeal accepted that there were conflicting High Court decisions and academic commentary.

The Court of Appeal looked in some detail at the different types of terms in a contract; classifying them into the traditionally recognised categories of:

• Conditions – major terms, every breach of which would deprive the innocent party of substantially the whole benefit of the contract and entitle it to terminate and to claim damages;
• Warranties - simple minor terms, the breach of which will not deprive the innocent party of the benefit of the contract; and
• Innominate (or intermediate) terms – more complex obligations for which the remedy for any breach will depend on the nature, consequences and effect of that breach.

Gross LJ summarised “unless the contract made it clear that a particular stipulation was a condition or only a warranty, it was to be treated as an innominate term; the courts should not be too ready to interpret contractual clauses as conditions”.

The Court of Appeal concluded that, in the absence of express wording in the Spar Shipping time charters, the obligation to pay hire on time was not a condition of the contract, but only an innominate term. The Court of Appeal weighed up the competing case law and concluded that notwithstanding the importance of the timely payment of hire, it could not be said that any failure to pay hire punctually in advance, no matter how trivial, would derail Spar's performance under the charterparties. It was also telling that the NYPE standard form, or other industry standard forms, did not make it clear that payment of hire was a condition. The Court of Appeal’s decision meant that in relation to the first question whilst Spar Shipping could exercise an option to withdraw the vessel, it would only be entitled to claim hire up to termination and could not claim for the hire which should have become due for the remaining term of the three charterparties.

Renunciatory breach

However the Court of Appeal then went on to look at the second question. The Court of Appeal noted that there are a variety of different formulations of the test for renunciation given the need to apply the test in the widest range of factual circumstances. Gross LJ summarised:

“…it is important to keep in mind that a renunciation is not confined to an evinced unwillingness to perform the contract at all; an evinced unwillingness to perform the contract according to its terms (whether through inability or otherwise) may likewise amount to a renunciation if the performance proffered is substantially inconsistent with that party’s obligations thereunder… Further, renunciation may be inferred where it is apparent that the defaulting party is doing no more than procrastinating in the hope that something may turn up…”

The Court of Appeal highlighted three key questions to be answered when considering whether renunciation had occurred: (i) what was the benefit the innocent party was intended to obtain from the contract; (ii) was the prospective non-performance foreshadowed by the words and conduct of the breaching party; and (iii) was the prospective non-performance such as to go to the root of the contract?

The Court of Appeal found in this case there was no room for doubt; Spar Shipping could have “no realistic expectation” that the charterer would in future pay hire punctually in advance and the judge at first instance could conclude that the charterer had renounced the charterparties at the dates of the termination notices. This meant, although the Court of Appeal decided that there had not been a breach of an express contractual condition, Spar Shipping was entitled to compensation for its loss of bargain as a result of the charterer’s common law renunciation of the contract.

Comment

It remains the approach of English law that termination for breach of a condition under the express termination terms of a contract will be treated the same as termination at common law. It follows that termination for breach of a condition will attract common law damages, unless the contract stipulates otherwise.

The Court of Appeal’s judgment has a number of important consequences for drafters of charterparties and similar contracts:

1. Although this decision brings some clarity to the historic conflicting judicial statements on the consequences of withdrawal of a vessel upon failure to pay hire punctually, ship owners entering into charters providing for withdrawal of a vessel on non-payment of hire may now be less able to recover losses unless there is specific contractual provision allowing such claims.
2. The NYPE standard form has been amended in the 2015 version to improve the position on recovery, but other standard forms (such as BIMCO) have not yet followed suit.
3. It may be sensible, therefore, for ship owners to take the opportunity now to review their charters to ensure, where relevant, these provide expressly that:

• Punctual payment of hire is a condition of the contract;
• Time is of the essence for payments due under the contract; and/or
• If they elect to withdraw the vessel because of failure to make punctual payment of hire, they shall also be entitled to damages for the loss of hire rates for the remainder of the contract.

The effectiveness of such drafting additions is still likely in practice to depend on the facts and circumstances of each case.

Finally, it is of some interest that the High Court and Court of Appeal decided that the charterers’ repeated failure to pay amounted to a renunciation of the charterparty. Whilst such findings are fact specific and therefore might not be of general application, the decision seems to be based on the proposition that it is a fundamental aspect of a charterparty that the hire is paid in advance. Where a charterer makes it clear it cannot pay in advance, or it is obvious from the factual records that it cannot do so, it effectively renounces its ability to perform the contract in substantially the same manner as agreed. This might occur by words or conduct in many circumstances where the charterer has solvency issues. It means that charterers should be extremely careful in how they conduct their communications with owners in the event of financial difficulties. It may also make it difficult for financially distressed charterers unable to make repeated payments to avoid a claim for renunciation upon a withdrawal of the vessel for non-payment.