CONTENTS
Introduction
Since the crash in the market in 2008, an owner frequently has to assess his options in the face of a failure by a charterer to pay hire in accordance with the charterparty requirements. All the standard charterparty forms include clauses setting out the requirements as regards payment of hire and the owner’s option of withdrawing the vessel in the event of non-payment. However, given the potentially draconian consequences for an owner of “getting it wrong”, it is important that the owner’s legal position under the clause is understood and that there is proper application of the principles to the facts.
There are two recent English High Court cases (Kuwait Rocks Co v AMN Bulk Carriers Inc [2013] EWCH 865 (Comm) (the “Astra”) and White Rosebay Shipping SA v Hong Kong Glory Shipping Limited [2013 EWCH 1355 (Comm) (the “Fortune Plum”)) which provide some guidance on this area of the law.
This article will provide a short reminder of the principles dealing with the obligation to pay hire, withdrawal and termination and then will look at the two cases and provide a short comment on how and to what extent these provide helpful guidance to an owner and/or clarify the position.
Reminder of the principles
The obligation upon a charterer to pay hire on or before the due date is an ‘absolute’ one. In other words, the charterer is in default if he fails to make the payment for whatever reason. There is no requirement that the non-payment be deliberate or due to negligence in performance of the charterparty. The general rule is that a charterer must pay each instalment of hire in full. However, a charterer does have the right to make deductions from hire in three circumstances: (a) where the charterer has an express right of deduction under the charterparty, (b) where the charterer is entitled to an adjustment of hire following a period of off-hire, and (c) where a charterer has a claim for damages which he is permitted to set off against hire (this applies principally where the owner’s breach of the charterparty has deprived the charterer of the use of the ship or prejudiced the charterer in his use of the ship). In the event of non-payment or reduced payment, the burden is on the charterer to bring himself within one of the above three categories.
Failure to pay the full amount of hire without justification will, in most standard form charterparties, give rise to drastic consequences, namely the owner’s right to withdraw the vessel, thereby bringing the charterparty to an end. It may also (depending on the wording of the charterparty) give the owner the right to suspend services whilst the payment remains outstanding. Further, non-payment may give rise to a right for the owner to terminate the charterparty and to claim damages for loss of bargain.
The difference between withdrawal of the vessel, thereby bringing the charterparty to an end, and termination of the charterparty is as follows: withdrawal of the vessel is a contractual right given to the owner in the event of any single non-payment of hire by the charterer in accordance with the terms of the charterparty. As set out above, there is no requirement of fault on the part of the charterer. If the owner exercises his right of withdrawal, then he is entitled to recover the hire both earned and payable as at the date of withdrawal. However, in the absence of a separate and concurrent right to terminate, the owner will not be entitled to claim damages in addition. The right to terminate for non-payment of hire will arise if either (i) the obligation to pay hire is a condition of the charterparty, or (ii) where the obligation is not a condition, the charterer’s failure to pay hire amounts to a repudiation of the charterparty. In other words, the owner will have to show that the charterer’s failure to pay is either a sufficiently serious breach of a term of the charterparty or an unambiguous representation that the charterer will not or cannot perform his obligations under the charterparty (i.e., a renunciation). It is the assessment of what amounts to a renunciation which usually gives rise to concern from an owner’s point of view. Where the right to terminate arises, the owner may terminate the charterparty (rather than simply withdraw under the charterparty clause) and claim damages for loss of bargain. Where the right to withdraw the vessel or to terminate for non-payment of hire arises, the owner will have a reasonable time in which to give notice of the exercise of the right to withdrawal or termination (as applicable). However, if the owner delays unreasonably then he may be held to have waived his right and to have “affirmed” the contract. Although what amounts to a “reasonable time” depends on the circumstances in each case, the owner will usually be required to react quickly. The Fortune Plum, considered further below, touches upon some of the issues faced by an owner in respect of timing of notices.
Payment of hire as a condition – The Astra
In light of the above, an owner will often want to be able to terminate the charterparty for non-payment, as opposed to simply withdrawing the vessel, as he will then be able to claim damages for any loss suffered (principally this will be where the termination occurs in a falling market). Up until the decision in The Astra, it was widely accepted that a single non-payment of hire did not in itself provide grounds for termination (as opposed to withdrawal). However, earlier this year Mr Justice Flaux at first instance in The Astra made a long obiter statement to the effect that the payment of hire under a time charter was a condition and not an intermediate term. In other words, in his view, a single default in payment would entitle a shipowner to terminate the charterparty and claim damages for any loss suffered as a result.
His conclusion was reached following a review of previous obiter statements from judges in the Court of Appeal and the House of Lords from which he found support for his views. Whilst he was considering the hire payment clause in the NYPE form, his view was expressed to apply to all similarly worded payment provisions (i.e., those where there is a right to withdraw for non-payment). He put forward three reasons in support of his conclusion. First, the fact that there was an express right to withdraw within the payment clause, irrespective of whether the non-payment was repudiatory or not, showed that the parties considered the clause to be an essential stipulation. Any breach of such a stipulation went to the root of the contract, which is a traditional criterion for labelling a term a “condition”. Second, the fact that in mercantile cases there was a general rule that where there was a time limit for doing something under the contract, then time was of the essence. This was another key criterion for labelling a term a “condition”. His final reason in support was that considering the payment of hire (with or without an anti-technicality clause/grace period) as a condition provided certainty to both an owner and a charterer, such certainty being of key importance to businessmen in commercial transactions.
The charterparty under consideration in The Astra contained an anti-technicality clause, as is the position under most charterparties these days. In the judge’s opinion, however, the obligation to pay hire timely would also be a condition if there was no such anti-technicality clause (although he accepted there was House of Lords authority to the contrary).
Whilst the judge in The Astra undoubtedly sought to clarify the position and provide some certainty when interpreting such clauses, this was unfortunately not proved to be the case. First, the comments of the judge were obiter as the case was decided on different grounds (the charterers were found to be in repudiatory breach of the charterparty). As such, the judge’s decision on this issue does not set out a new legal principle. Second, this is only a first instance decision and is therefore, in any event, not binding on any court at the same level or a higher court considering the same issue. As such, and until the issue has been considered and affirmed by a higher court, the conclusion of the judge is to be viewed with caution.
The risks for an owner when considering termination – The Fortune Plum
The second recent case on the topic highlights the difficulties for an owner when assessing whether a series of under- or non-payments by a charterer is sufficient evidence that the charterer has effectively declared an intention not to perform the contract and, if so, what steps the owner can take in the face of this breach to ensure he is not seen as having affirmed the charterparty before he seeks to terminate it.
The parties entered into a charterparty on an amended NYPE form with hire payable on a monthly basis. At first the charterers paid the hire but late, then they paid less than the full amount and in instalments. Finally they began not to pay the instalments at all. The owners exercised a lien over sub-freights and sub-hires and also issued a statutory demand on the charterers claiming over USD 1 million in overdue hire (which if not paid within the timeframe allowed, allowed the owners to apply to the court to put the charterers into bankruptcy). On 7 November 2011, following the expiration of the statutory demand without any payment from the charterers, the owners considered the charterers to have renounced the charterparty on the basis that the non-payment against the demand clearly showed an intention on the part of the charterers not to perform their obligations under the contract. On 9 November, the vessel arrived at the discharge port and began discharging. By 11 November, the owners had decided to terminate the charterparty and on 12 November told the master that this was the case and that upon completion of discharge he was to sail to anchorage and wait further orders. On 14 November, upon completion of discharge, the owners purported to terminate the charterparty for charterers’ non-payment. Charterers responded that the withdrawal was wrongful and that the owners were themselves in serious breach of the charterparty by withdrawing without justification.
The tribunal held that the period between 7 and 11 November was a reasonable period to which the owners were entitled in order to consider their options. However, once they had made up their mind on 11 November to terminate the charterparty, their decision to complete the cargo operations before informing charterers of the termination was an affirmation of the charterparty by conduct. Whilst the tribunal could understand the owners’ commercial reasons for wanting to wait until discharge was complete, applying the legal principles to the owners’ conduct led the tribunal to one conclusion only: the owners had chosen to forego their rights. This was even the position where the conduct of the owners at the relevant time had been under a strict reservation of rights. In this respect the tribunal held that a reservation of rights could not protect the owners in circumstances where they had acted (by the continued discharge) in a manner wholly inconsistent with their accrued right to terminate. As such, the tribunal held that the owners had affirmed the contract on 11 November and that their subsequent termination of the charterparty on 14 November was a serious (i.e, repudiatory) breach entitling charterers to terminate the charterparty and claim damages.
The court upheld the tribunal’s decision and held that there had been no error in law in the tribunal’s approach in its finding that there had been an affirmation by owners. The court did state that, while a different tribunal might have found differently on the basis of the same facts, this particular tribunal had not erred in applying the law, and had not reached a conclusion that no reasonable tribunal could have reached. Accordingly, the court held that there was no basis to allow the appeal on the issue of affirmation.
The court did however allow the owners’ appeal on the issue of continuing renunciation. The owners argued that the tribunal had failed to consider the principle that where, following affirmation by the innocent party (the owners), the repudiating party (the charterers) continues to declare (by words or by conduct) an intention not to perform the contract (i.e., continuing renunciatory behaviour), then the innocent party may later treat the contract as at an end. The court agreed. It held that, on the basis that the tribunal had found that the owners committed a repudiatory breach on 14 November (when they terminated the charterparty) due to their affirmation by conduct on 11 November, the tribunal had failed to consider whether the charterers’ behaviour in the period between 11 and 14 November was a continuing renunciation allowing the owners to terminate the charterparty when they did so on 14 November. The court set aside the award and it has been remitted to the tribunal.
This case highlights the potential pitfalls for an owner in such a situation. An owner must not only first assess whether a charterer’s repeated non-payment is renunciatory behaviour, he must then take a decision on whether to terminate or not within a reasonable time (during which time he may continue to perform his obligations under the charterparty). However, if he decides to terminate, he must be careful not to act in any way inconsistent with that decision prior to effecting termination, even if there are clear commercial and/or practical reasons for doing so. The risk is that the owner will be taken to have affirmed the charterparty and any termination thereafter will be a repudiatory breach on his part. Furthermore it is clear that taking any inconsistent action even under a strict reservation of rights is unlikely to save the owner.
The court’s findings in relation to the continued renunciation point are potentially good news for an owner who has inadvertently affirmed a charterparty. If he can show that post the affirmation and before the termination the charterers continued to declare (by words or by conduct) an intention not to pay the charterparty, the owner’s later termination may still be held lawful, thus entitling him to recover damages for loss of bargain.
The recent cases demonstrate that there are a number of challenges facing an owner in the face of single and multiple non-payments of hire and that, until there is further clarification, an owner should seek prompt legal advice when such a situation arises.
