Payment of hire is not a condition

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

Since judgment was handed down in Kuwait Rocks Co v AMN Bulk Carriers Inc [2013] EWCH 865 (Comm) (the “Astra”) (see the article in Nordisk Medlemsblad no.576 for further details), there has been much discussion of the question of whether an owner is entitled to terminate a time charter for a single default in payment of hire and claim damages for any losses suffered as a result.

Whilst the position adopted by Flaux J in that judgment was favourable to owners, it was somewhat controversial given the existing case law and represented a departure from what the market had previously understood the position to be.

Popplewell J then took the opposite view at first instance in Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2015] EWHC 718, which did little to resolve the uncertainty as to the effect of withdrawal clauses.

The Court of Appeal has now clarified the position in their judgment handed down on 7 October 2016 in Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS [2016] EWCA Civ 982.

The brief facts of the dispute are that owners and charterers entered into three long-term charterparties on the NYPE 1993 form (with amendments). Performance of charterers’ obligations under those charterparties was guaranteed by Grand China Logistics Holding (Group) Co Ltd. Charterers were in default of their payment of obligations from April 2011 by reason of multiple missed and delayed payments. In September 2011 owners withdrew the vessels, terminated the charterparties and pursued initially charterers and subsequently the guarantor for the unpaid hire and losses suffered in respect of the unexpired period of the contracts.

At first instance, Popplewell J reviewed the existing case law and concluded that (counter to Flaux J’s reasoning in the Astra) there was no basis on which to construe a right to terminate for non-payment of hire as elevating the obligation to pay hire to the status of a condition and that nothing else in the contract lead to the conclusion that payment of hire was a condition.

Owners were nevertheless successful in arguing that charterers were in renunciatory breach of the contracts by reason of charterers’ repeated defaults and stated inability to pay. Owners were awarded damages for their loss of bargain over the remaining period of the contracts. Charterers appealed.

Court of Appeal
The matter then came before the Court of Appeal who concluded that whilst timely payment of hire is of great importance to an owner under a time charter, it was not a condition of the contract. Neither the inclusion of a withdrawal clause nor an anti-technicality clause renders payment of hire a condition. They simply provide a mechanism by which an owner can bring the contract to an end. Clear words would be needed to turn the payment obligation into a condition and parties are free to agree such a provision should they so wish.

The Court of Appeal nonetheless held that charterers had renunciated the charterparties by reason of their repeated defaults and stated inability to pay and that owners were entitled to damages accordingly.

In reviewing the arguments on renunciation the Court of Appeal confirmed that the obligation to pay hire promptly lies at the heart of a time charterparty and that an owner who has contracted to receive hire in advance is not obliged to accept a charterer’s unilateral decision to pay in arrears and require performance of services by the owner on credit. If the owner can show that the charterer has evinced an intention not to perform (i.e. an intention not to or an inability to pay punctually in the future) such conduct goes to the root of the contract and gives owners a right to terminate and claim damages for loss of bargain.

Implications of the judgment
Prior to the decision of the Court of Appeal, there were conflicting first instance decisions on the status of the obligation to pay hire. This latest judgment has now resolved that uncertainty in charterers’ favour.

The question of whether a particular charterer’s failure or repeated failure to pay hire in a timely manner (or apparent inability to do so) gives rise to a right to terminate and claim damages remains one that must be considered on the facts and in the context of performance of the contract in question.

Nevertheless, the discussion in the above judgment as regards renunciation of time charters may offer some assistance to an owner considering termination as a result of a defaulting charterer promising delayed and uncertain performance.