UK: New Decision: Is Failure To Pay Hire A Breach Of Condition?

On 18 April 2013, Mr Justice Flaux handed down judgment in Kuwait Rocks Co v AMN Bulkcarriers Inc (The "ASTRA") [2013]. The case considers whether a charterers' failure to pay hire is a breach of a condition which entitles owners to cancel the charter, and claim damages for the unperformed part. The Judge's detailed decision is likely to have significant practical consequences for those within the industry, and in particular those with extant early redelivery disputes.

The Facts

Charterers hired the vessel on an NYPE 1946 Form for five years from 6 October 2008. The charter contained the standard clause 5 wording:

"Payment of said hire to be ... 30 days in advance ... failing the punctual and regular payment of the hire ... the Owners shall be at liberty to withdraw the vessel from the service of the Charterers, without prejudice to any claim they (the Owners) may otherwise have on the Charterers".

Following the significant drop in freight rates at the time, charterers were unable to sub-charter the vessel at a profit so owners agreed a hire reduction for a defined period. When that period expired, the charterers requested a further period at a reduced rate, this time threatening that if agreement could not be reached they would declare bankruptcy. Owners agreed, and an addendum to the charter was issued that reduced the daily hire rate for a fixed period, following which the full charter rate would be payable once again.

After expiry of the fixed period, charterers continued to pay the reduced sum, and not the full charter rate as agreed. Owners held charterers in breach, gave them two days to remedy the breach (pursuant to the "anti-technicality clause"), and when charterers failed to do so, owners withdrew the vessel.

Owners commenced arbitration, claiming USD13 million, being the difference between the market and the full hire rate for the two years and three months remaining on the charter.

The Arbitration

The Tribunal considered:-

1. Was charterers' conduct tantamount to a "renunciation" or "repudiation" of the charterparty (the "Repudiatory Breach")? And

2. Were charterers in breach of condition in not paying hire punctually (the "Breach of Condition")?

For Repudiatory Breach, owners had to show that, by their words or conduct, the charterers evinced an intention not to perform the contract, which a reasonable person would regard as clear and absolute. It would be sufficient if, taking into account the history of the contractual relationship, owners could show that charterers only intended to perform the charter in a way that was substantially inconsistent with their contractual obligations.

The Tribunal did not consider that late payment was itself sufficient, but when considered objectively, charterers' repeated threats that they would declare bankruptcy unless the hire rate was reduced, and their refusal to pay the full charter rate after the end of the fixed period were tantamount to Repudiatory Breach.

Accordingly, the Tribunal ruled in owners' favour and awarded damages of around USD12.5 million.

In relation to the alleged Breach of Condition, the Tribunal said that, whilst their instinct was to treat the obligation to pay hire as a condition, they were not persuaded that was the current state of English law. The Tribunal therefore adopted the "orthodox" view under English law that the punctual payment of hire is not a condition, and dismissed owners' claim. This was the position held in The "BRIMNES" [1973], and affirmed by the Court of Appeal. There is however some contrary "obiter dicta" (i.e. additional, non-binding judicial comments) in later decisions.

The Commercial Court's decision

The Judge considered that the Tribunal had applied the correct legal test for Repudiatory Breach, and that it had reached the correct conclusion. Accordingly, the Judge dismissed charterers' appeal.

This is the rationale of the Court's decision and, therefore, as a general principle, it is only this part of the decision that should be binding on arbitration tribunals, and subsequent Court judges (unless there is a cogent and convincing reason to do otherwise).

However, the Judge proceeded to deliver his judgment in relation to the Breach of Condition.

The Judge considered all the authorities on Breach of Condition, and formed the view that the obligation to make punctual payment of hire is a condition.

The Judge's view was:

1. The fact that clause 5 gives a right to withdraw the vessel is a strong indication that it was intended that a failure to pay hire promptly would go to the root of the contract

2. As time is made of the essence, it is consistent with the requirement being a condition

3. The "BRIMNES" can be distinguished as it is a decision where there was no anti-technicality clause making time of the essence – however, the Judge stated that he would still have refused to follow the decision due to obiter dicta in subsequent decisions, and the fact that one of the authorities relied upon in The "BRIMNES" has now been overruled; and, perhaps most importantly

4. The importance to businessmen of certainty in commercial transactions – an owner needs to know whether he can withdraw the vessel and claim damages or whether he should persevere with his inconsistently performing charterers

What does this mean?

This decision is slightly problematic as the question as to what an owner should now do when presented with a defaulting charterer is perhaps less clear than before.

The reason for this is that the decision is, strictly speaking, obiter, as it was not the rationale for dismissing charterers' appeal, and it does not therefore have to be followed by subsequent courts. It may well be that if the issue comes before a different Commercial Court judge (perhaps on appeal from an arbitral tribunal), the Court may elect to follow the orthodox view.

However, LMAA (London Maritime Arbitrators Association) Tribunals may be bound, and are likely to consider themselves obliged to follow the decision in the first instance.

Irrespective of whether the decision is binding, it is definitely contrary to the position that has been adopted in the industry to date – that a failure to pay hire punctually is not a breach of condition, and that more is needed to show a Repudiatory Breach.

This may have considerable implications as whilst the case is in relation to the NYPE Form, the Judge's reasoning goes wider, and will impact the proper interpretation of most commonly used time charterparties. The Judge's comments may even apply where there is no anti-technicality clause.

The decision is slightly surprising as the Judge relied upon obiter comments in non-time charterparty cases (such as the shipbuilding disputes, Stocznia Gdanksa SA v Latvian Shipping Co [2002] and Stocznia Gdanska v Gearbulk Holdings Ltd [2009]), whilst rejecting reliance on the obiter statement of Lord Sumption in the Supreme Court's decision in The "KOS" [2012], which was a time charter case, on the basis that the relevant issue was not in dispute. In The "KOS", Lord Sumption stated:

"The second consequence is that any failure on the part of the charterers to pay hire when it falls due will not of itself entitle the owners to damages representing the loss of the bargain or the expenses of termination simply because the owners respond by withdrawing the vessel. This is because the non-payment does not itself destroy the bargain or occasion the expenses, unless in the circumstances it is a repudiation which owners have accepted as such"

Whilst obiter, this appears to be an indication of the Supreme Court's view on the question of whether a failure to pay hire punctually is a condition.On a final point, whilst the decision raises more questions for owners faced with non-paying charterers, it may assist decision-making owners in one situation. In The "AQUAFAITH" [2012], the Court held that when charterers repudiate the contract, for example by seeking to redeliver early, owners can decide whether to accept the repudiation, and claim damages, or affirm the contract, and continue to claim payment of hire at the full charter rate. This still presents owners with a difficulty: if they affirm charterers' repudiation (for example because they consider that charterers are good for the money or they are looking for alternative employment for the vessel), then they could lose their right to terminate at a later date if charterers remain silent and simply refuse to pay hire. However, for the time being at least, if owners are evaluating whether to accept a charterers' repudiation or affirm the charter whilst looking for alternative employment, they may take some comfort in knowing that they may still be able to argue, later, that the next failure to pay an instalment of hire by charterers could be a breach of condition entitling them to exercise their right of withdrawal and to claim damages.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Leon Alexander
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.