UK: Commercial Court Upholds Anti-Technicality Clause

Last Updated: 12 November 2010
Article by Max Cross and Reema Shour

Owneast Shipping Ltd v Qatar Navigation QSC (Qatar Star) [2010] EWHC 1663 (Comm)

An anti-technicality clause is commonly found in time charters where the intention is to avoid a situation where owners may withdraw the vessel due to a late payment of hire that may be minimal or inconsequential. Mr Justice Mance in The North Sea [1997] 2 Lloyd's Rep 328 observed that since a withdrawal or cancellation clause is a forfeiture clause, the effect of which may be draconian, caution must always be exercised in any attempt to extend its application. The approach of giving effect to anti-technicality provisions as a means of providing time charterers with a measure of relief from what could be unjust forfeiture of a ship is reflected in the Commercial Court judgment in this case.

Background facts

The Qatar Star was chartered on an amended NYPE form with additional clauses dated 7 February 2005 for 48 months +/-2 months at charterers' option. The charter contained inter alia the following provisions:

"5. Payment of said hire to be made to Owners designated bank account in cash in United States Currency, 15 days in advance . . . otherwise failing the punctual and regular payment of the hire, or bank guarantee or deposit, or on any fundamental breach of this Charter Party, the Owners shall be at liberty to withdraw the vessel from the service of the Charterers, without prejudice to any claim they may have against the Charterers. . . ."

"15. That in the event of the loss of time from deficiency and/or default and/or strike of men or deficiency of stores, fire, breakdown or damages to hull, machinery or equipment, grounding, detention by average accidents to ship or cargo, drydocking for the purposes of examination or painting bottom, or by any other cause preventing the full working of the vessel, the payment of hire shall cease for the time thereby lost and all extra directly related expenses may be deducted from hire;..."

"62. Punctual Payment

Referring to lines 60 and 61, where there is any failure to make "punctual and regular payment" due to errors or omission of Charterers' employees, bankers or Agents or otherwise for any reason where there is absence of intention to fail to make payment as set out, Charterers shall be given by owners 3 banking days notice to rectify the failure and where so rectified the payment shall stand as punctual and regular payment."

The charterers were not punctual in their semi-monthly hire payments, many of which were paid up to four or five days late. At one stage, the charterers had sought (pursuant to clause 15 of the charter) to make deductions from hire as a result of crane breakdown but paid immediately upon receiving the owners' anti-technicality notice under clause 62.

In respect of the 34th semi-monthly payment which was due on 24 August 2006, hire had not been paid by the due time and so, at 10.11 on 25 August 2006, the vessel was withdrawn. The owners' notice of withdrawal stated as follows:

"It is clear to us that your persistent failure to pay hire timeously as required by the Charterparty is deliberate and/or that you no longer intend to be bound by the terms of the Charterparty. We therefore hereby give you notice that we are exercising our right under clause 5 of the Charterparty and withdrawing "QATAR STAR" from your service with immediate effect, alternatively we hereby accept your conduct as amounting to a repudiatory breach of the Charterparty and are terminating the Charterparty with immediate effect."

The owners did not give the charterers three banking days grace (per clause 62) before withdrawing the vessel. Thereafter, the charterers made no further hire payments. However, they brought a claim in arbitration against the owners for wrongful withdrawal of the vessel. The tribunal had to consider whether, in the circumstances, a withdrawal notice that complied with the requirements of clause 62 had been necessary.

Tribunal's decision

The Tribunal commented that clause 62 was poorly drafted and impractical because its application depended on facts of which the owners might have no knowledge, namely the reason for non-payment of an instalment or charterers' intentions as to payment. The majority of the Tribunal considered that the words in clause 62 "where there is absence of intention" to make punctual and regular payment should be construed as meaning what a commercial man would understand them to mean and concluded that a commercial man would interpret them as meaning deliberate or wilful failure to make regular and punctual payment, but not recklessness as to the consequences of their conduct. By a majority, they found on the facts that the dominant cause of the charterers' failure to pay was seriously incompetent management on the part of their general manager but not intentional non-payment. Consequently, the majority view was that owners' notice of withdrawal should have complied with the requirements of clause 62. The owners appealed on two points of law.

Commercial Court

Will recklessness suffice to exclude clause 62?

The first question of law for Mr Justice Christopher Clarke was whether clause 62 applied where the failure to pay any hire by the due date was the result of recklessness on the part of the charterers. The judge agreed with the Tribunal's view that a commercial man in the position of the parties to this charter would not regard the word "intention" as extending to include recklessness. He also dismissed owners' submission that intention must encompass awareness that late payment will be the virtually inevitable consequence of a deliberate course of action. The fact that the court's strict interpretation of clause 62 meant that owners would probably have to serve a clause 62 notice in every case except the most obvious was not, in the judge's opinion, a compelling consideration for interpreting it differently. Quite apart from the fact that he considered the clause substantially unworkable in any event, he added that the parties could have expressly provided in the charter that absence of recklessness was necessary if a notice was to be given.

Was charterers' intended deduction from hire reasonable / bona fide?

The second issue the judge had to consider was whether the fact that the charterers had (as demonstrated by the evidence) intended to make the payment but with a substantial deduction meant, as owners argued, that they intended to make a payment of hire which was not "regular" in accordance with clause 62 and therefore a clause 62 notice was not required.

Mr Justice Christopher Clarke relied on The Nanfri [1978] QB 927, where it was held that an owner may not withdraw a vessel for non-payment of hire inter alia if the charterer's deduction from hire is bona fide, even though the amount which he deducts turns out to have been too much. The judge also cited The Libyaville [1975] 1 Lloyd's Rep 537, where the charterparty contained a clause in terms very similar to clause 62. In that case, Mocatta J found on the evidence that the charterers did not intend to fail to make punctual and regular payment, but had at all times intended to comply with their obligations under the charter even though they deliberately paid a lower rate of hire which in the event turned out to be the incorrect rate.

Mr Justice Christopher Clarke said that if the failure to make punctual and regular payments arose from any of the specified causes in clause 62, a notice would be required unless the charterers' intention was to make a payment which involved a calculation of a deduction that was made in bad faith. There was no evidence of bad faith in this case. The appeal was therefore dismissed.

Comment

As Mr Justice Christopher Clarke put it, "the dividing line between serious incompetence and deliberate delay amounting to an intention not to make punctual payment is sometimes thin". Faced with "a deeply unsatisfactory provision", the majority of the arbitral tribunal and the Commercial Court judge gave the charterers the benefit of the doubt.

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