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By Paige Young 
Given the depressed economic climate and persistent stagnation in the shipping industry as a whole, the Aquafaith decision addressed a highly relevant question for shipowners – are they entitled to refuse early redelivery of a vessel under a time charter or, if they are obliged to take re-delivery of the vessel, do they have to mitigate their loss in the spot market and ultimately pursue a claim for damages?
This question relates directly to a long-established rule in contract law stemming from White and Carter (Councils) Limited v McGregor [1962] AC 413 and its progeny. The basic principle of White and Carter is that where one party repudiates a contract “the innocent party has the option of either accepting that repudiation and suing for damages… or refusing to accept the repudiation and affirming the continuation of the contract.” This is conditioned by the caveat that if the innocent party chooses to continue the contract he must be able to do so himself, “without the need for any action on the part of the contract breaker, [and then] he will be in a position to sue for the agreed price” (hire in our context).
In Isabella Shipowner SA v Shagang Shipping Co Ltd. (“The Aquafaith”) [2012] EWHC 1077 (Comm), the charterers chartered The Aquafaith on an amended NYPE form for approximately five years beginning in September 2006. The charterparty specifically included an express warranty prohibiting redelivery of the vessel before 59 months had passed, with the earliest possible redelivery date being 10 November 2011. Toward the end of the hire period the charterers no longer needed the vessel and announced their intention to anticipatorily breach the charter on 6 July 2011. The owners refused to accept this and commenced arbitration on 25 July 2011.
In the arbitration award, the tribunal (Mr. William Robertson) considered White and Carter and agreed with the charterers that there were no means by which the owners could complete the contract without any action on the part of the charterers and therefore White and Carter did not apply. The tribunal also asked whether the owners had a “legitimate interest” in continuing the contract rather than seeking damages, in an attempt to determine whether the case fell within the exception to White and Carter. The tribunal’s choice of the “legitimate interest” test derives from a remark made by Lord Reid in White and Carter that is highlighted as part of a general exception to the principle in the standard treatise, Time Charters, 6th Edition, 2008. The tribunal ultimately found that the owners had no legitimate interest in forcing the charterers to perform the contract rather than claiming damages. Consequently, the charterers prevailed.
On appeal, the High Court took a different view and found that the tribunal had come to the wrong conclusion factually in determining that White and Carter did not apply and had also applied the wrong test when it was considering the applicability of the exception.
In regard to the facts, the court found that no participation was required by the charterers to maintain the charterparty because the vessel could simply sit and earn hire without their involvement. Thus, the court found the case to be within the scope of the White and Carter principle.
As to the exception to White and Carter, the court determined that the arbitrator had applied the wrong test and that a “reasonableness” principle should temper, if not supersede, the “legitimate interest” analysis upon which the arbitrator had relied. The test as it was articulated by the court ultimately favoured owners in that it asked if the owners’ conduct was “so reprehensible that damages would be an adequate remedy” (as opposed to keeping the contract alive), making it applicable only in extreme circumstances. The court took into account the fact that the charterers were facing financial difficulty and the significant burden of claiming damages from a potentially insolvent charterer. The court also noted that being forced to mitigate one’s damages by trading on the spot market is not easy in difficult market conditions and that with approximately three months left on the five-year charter, finding a new time charter for that period would be nearly impossible. Thus, reversing the arbitration award, the court found that the owner’s desire to affirm the contract was not “wholly unreasonable” and that the exception did not apply.
Practically speaking, this provides some clarity in the law and potentially strengthens the position of owners with vessels on time charter facing an early redelivery. It is also edifying to see the Aquafaith confirm the position that Nordisk has always maintained in their legal advice to their members, who can now rely on this advice with a clear commercial court decision as support.
