UK: Commercial Court Confirms Principle In White And Carter Applies To A Time Charterparty

Last Updated: 17 May 2012
Article by Paul Herring, Reema Shour and Livvi Zen-McDonald

Isabella Shipowner SA v. Shagang Shipping Co Ltd (Aquafaith) [2012] EWHC 1077 (Comm)

In a judgment handed down on 27 April 2012, Mr Justice Cooke has held that, in circumstances where the time charterers were in repudiatory breach of charterparty in purporting to redeliver the vessel early, the owners were entitled to refuse early redelivery, affirm the charterparty and hold the charterers liable for hire for the balance of the minimum period of the charterparty. The judge rejected the argument that the owners were bound to accept early redelivery and sue instead for damages.

The background facts

The vessel was chartered by the owners to the charterers on an amended NYPE form for a duration of 59 to 61 months. The charterparty contained an express warranty that the vessel would not be redelivered before the minimum period of 59 months. Nonetheless, the charterers sought to redeliver the vessel just over three months before the earliest permissible date for redelivery. There was no dispute that this constituted a repudiatory breach of the charterparty. The parties disagreed, however, as to what the owners were required by law to do as a result and whether they could elect to keep the charterparty alive even where the charterers had indicated that they were no longer prepared to perform.

The matter went to arbitration and the sole arbitrator held that the owners were required to take redelivery of the vessel, trade the vessel on the spot market by way of mitigation and claim damages in respect of their loss. The owners appealed to the court under section 69 of the Arbitration Act 1996. Mr Justice Cooke allowed the appeal and varied the arbitration award accordingly. He has also refused the charterers leave to appeal so the matter can go no further on appeal.

The Commercial Court decision

The relevant issue of law turned on the following principle as enunciated in the House of Lords decision in White and Carter (Councils) Limited v. McGregor [1962] AC 413, namely: if one party to a contract repudiates it, the innocent party has the option of either accepting that repudiation and suing for damages for breach of contract, or refusing to accept the repudiation and affirming the continuation of the contract. If the innocent party can then complete the contract himself, without the need for any action on the part of the contract breaker, he will be in a position to sue for the agreed price. In that case, Lord Reid stated that where it could be shown that the innocent party had no legitimate interest, whether financial or otherwise, in performing the contract rather than claiming damages, it might well be that he should not be allowed to enforce the contract. In other words, an absence of legitimate interest could, in appropriate circumstances, operate as an exception to the general rule. Lord Reid also stated that there was no requirement on an innocent party to exercise his rights reasonably, so that the conduct of the innocent party would have to amount to something more than unreasonable.

White and Carter did not involve a time charterparty and the arbitrator in The Aquafaith held in essence that time charters fell outside the scope of the rule in White and Carter in that a time charter was not a contract that could be performed without the charterers needing to do anything i.e. the owners required the charterers' co-operation to perform the charter and further, he decided that the owners had no legitimate interest in performing the contract rather than claiming damages.

Mr Justice Cooke, having reviewed both the decision in White and Carter and subsequent case-law disagreed.

In the judge's view, whilst a time charterparty might be a contract for services, the earning of hire by the owners after the purported redelivery was not dependent on any performance by the charterers of their obligations. In other words, the owners did not need the charterers to do anything in order for them to earn the hire in question. The judge distinguished the Court of Appeal decision in The Puerto Buitrago [1976] 1 LLR 250 on the basis that a time charter differs from a demise charter; the essence of a demise charter is that the demise charterer takes possession of the vessel and, as soon as the owner retakes possession, he can no longer be entitled to hire. Unlike a time charterparty situation, therefore, owners could not fulfil a demise charter without the co-operation of demise charterers. Mr Justice Cooke also made reference to the judgment of Mr Justice Kerr in The Odenfeld [1978] 2 LLR 357, who found in that case that the owners were entitled to hold the ship at the charterers' disposal and claim hire for a certain period though he indicated that this right could be lost by the passage of time thereafter, depending on events. In coming to that conclusion, Mr Justice Kerr dismissed the idea that a time charterparty is a type of contract involving a high degree of co-operation between the parties such that the owners could not choose to maintain the contract in the face of the charterers' repudiation.

Mr Justice Cooke found that the arbitrator had applied the wrong test when considering whether the owners had a legitimate interest in maintaining the charterparty for the balance of 94 days and claiming hire, as opposed to accepting the charterers' repudiatory breach as bringing the charterparty to an end, trading on the spot market to mitigate their loss and claiming damages for the difference. Citing with approval the judgment of Mr Justice Simon in The Dynamic [2003] 2 LLR 693, the judge stated that the exception to the general rule in White and Carter applies only in extreme cases where damages would be an adequate remedy and where an election to keep the contract alive would be unreasonable. As per Mr Justice Simon, the burden of proof is on the contract breaker to show that the innocent party had no legitimate interest in performing the contract rather than claiming damages and this burden would not be discharged merely by showing that the benefit to the innocent party is small in comparison to the loss to the contract breaker.

The judge also referred to The Alaskan Trader [1984] 1 All ER 129, involving early redelivery by eight months under a two-year time charterparty. Mr Justice Lloyd in that case considered that, whilst there comes a point at which it would be inequitable for the court to allow an innocent party to enforce his contract according to its strict legal terms, defining that point involves drawing a line between conduct which is "merely unreasonable" and conduct which is "wholly unreasonable".

In the present case, Mr Justice Cooke concluded that the effect of the authorities was that an innocent party would have no legitimate interest in maintaining the contract if damages were an adequate remedy and his insistence on maintaining the contract could be described as "wholly unreasonable", "extremely unreasonable" or even, in Mr Justice Cooke's words, "perverse".

Applying these principles to the facts of this case, the judge noted the owners' submissions that damages would be an inadequate remedy because the charterers were in financial difficulty and the owners were, therefore, at risk of the charterers directing their limited funds to meet obligations to other parties, whilst delaying payment of any sums owing to the owners until the end of the charterparty and the assessment of what was due in damages. Alternatively, the charterers might become insolvent. The judge also drew attention to the fact that the charterers were seeking to shift the burden onto the owners of trading in a difficult spot market, where a substitute time charter was impossible, in circumstances where the charterers had the ability to sub-let the charter themselves. In his view, the charterers had the same opportunities to use the vessel as the owners, but were instead seeking to be shot of the difficulties in trading the vessel by imposing that burden on the owners, as well as depriving the owners of the assured income of advance hire.

Consequently, the judge concluded that it would be impossible to characterise the owners' stance in wishing to maintain the charterparty and a right to hire as unreasonable, let alone wholly unreasonable or perverse. This was not an extreme case to which the exception to the rule in White and Carter should apply.

Comment

This judgment is a welcome clarification from the Commercial Court that the rule in White and Carter applies to time charterparties, and that the exception to that rule will only operate in extreme cases. It is welcome news for owners faced with early redelivery in an adverse market.

Paul Herring and Livvi Zen-McDonald of Ince & Co LLP represented the successful owners in this case. In case of any query, please contact Paul Herring.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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