UK: Putting You On Notice: Penalties May Not Be Enforceable

Last Updated: 30 June 2009
Article by Richard Mabane

Lloyd's List, 20 May 2009

In a case involving late redelivery of a bulker, the tribunal took the view that the amount payable under a penalty was "unconscionable" writes Richard Mabane.

When is a penalty not a penalty? When it is a genuine pre-estimate of the loss recoverable in law, confirmed the English Court in an interesting recent late redelivery case (Lansat Shipping Co v Glencore Grain BV 2009 EWCH 551 Comm).

The vessel, a handysize bulker, had been chartered for three to five months at $29,500 daily. Additional clause 101 stated: "The charterers hereby undertake the obligation/responsibility to make thorough investigations and every arrangement in order to ensure that the last voyage of this charter will in no way exceed the maximum period under this charter party. If, however, the charterers fail to comply with this obligation and the last voyage will exceed the maximum period, should the market rise above the charter party rate in the meantime, it is hereby agreed that the charter hire will be adjusted to reflect the prevailing market level from the 30th day prior to the maximum period date until actual redelivery of the vessel to the owners."

Following redelivery 6.166 days late, the shipowner claimed $471,603.32, based on a market rate of $46,083.82 and applying that rate, not just to the period of 'overrun', but also to the previous 30 days.

English law has long distinguished between 'liquidated damages', which are recoverable because a genuine pre-estimate of the innocent party's potential losses, and a 'penalty', which is unenforceable because it is intended more as a deterrent and not a genuine pre-estimate of those losses.

The courts are not too stringent, and try to uphold the intended bargain, but if it is not a genuine pre-estimate of loss, the clause should not be upheld.

The case here involved late redelivery, where it is also settled law that, if an order is followed for an 'illegitimate' last voyage (i.e. one which cannot be expected to complete within the charter period), hire is payable at the charter rate up to the end of the maximum charter period and at the prevailing market rate only thereafter.

The owners conceded that a requirement for 30 days of extra hire for late redelivery alone would be a penalty, but argued that the clause here provided compensation for the owners' compliance with an illegitimate last voyage order, rather than lateness as such, and was therefore not a penalty.

On that basis, they argued:

1. The loss to be considered involved comparing the owners' position if the order had not been given, which meant assuming redelivery of the vessel at the time of the order; and,

2. Viewed that way, 30 days was a genuine pre-estimate of loss, and indeed, since 60 days was a typical voyage length for a vessel of this kind, represented a sensible mid-position in the range of losses that the owners might suffer.

The charterers argued that the extra hire was simply compensation for late redelivery, but that, even if the owners' interpretation was accepted, the position was no different: an illegitimate last order, if followed, gave rise to the same claimable loss as with late redelivery generally, namely the charter rate up to the maximum date and the market rate thereafter. The charterers further suggested that the clause could also apply to the consequences of legitimate last voyage orders, on the basis that the standard applicable ("thorough investigations", "every arrangement") meant that the charterers' reasonable expectations may not suffice, and the main obligation — to ensure that redelivery was not late — was one which could be breached regardless of whether the order had been legitimate.

The court rejected the owners' characterisation of the clause, pointing to the fact that loss only flowed from an illegitimate last order if the order was followed; and that, if the order was persisted in and the owners brought the contract to an end, they would suffer no loss at all by re-chartering at current market rates.

Like the arbitrators, the court also felt that the primary purpose of the clause was to deter charterers from redelivering late, rather than to compensate owners as such, approving the tribunal's view that the amount payable was "unconscionable" (unreasonably excessive), and citing the tribunal's example that the owners could have claimed $471,602.32 here even if redelivery had been only one hour late.

The decision demonstrates the risks of falling foul of the law in this area, even where good commercial reasons exist for the intended bargain.

On one view here, the clause could be seen as intending to compensate the owners for erring on the cautious side in following what turned out to be illegitimate final orders, in the absence of special knowledge (which charterers might have) of likely waiting, loading and discharging times which might otherwise enable them to reject the orders. Seen in that light, the provision might be considered a reasonable commercial carve-out, compensating the owners for allowing the charterers the benefit of the doubt and the much-improved market but, if the voyage did over-run, putting the owners nearer the financial position they could have been in if they had been able fully to assess the orders and (assuming no alternative orders) legitimately terminated the charter.

That said, even if a clause seems commercially reasonable, the guiding principles must not be forgotten. In particular, as this case makes clear, attention should be paid to amounts recoverable in law. Whilst English law recognises the concept of restitutionary damages (i.e. damages intended to reflect the benefit of non-performance to the party in breach), damages are generally based on the loss suffered by the innocent party and, in the area of late redelivery of ships, involve payment at the charter rate up to the end of the maximum period. The cases in this area, which could have developed differently, have referred in that regard to the owners' "expectation interest", i.e. anticipation that they would only receive the charter rate up to the last permissible date. What is ultimately recoverable in law may also involve subtle issues of interpretation and causation: here, the fact that illegitimate orders would not necessarily result in loss, depending how the owners and the charterers then behaved, made the owners' attempt to distinguish the clause as compensating for the owners' compliance with an illegitimate order (rather than the resulting lateness) more difficult to make good.

In assessing whether clauses are likely to be be upheld, rather than void as penalties, attention should also be paid to how the clause works in various permutations. In theory, a clause can validly provide for payment of an amount that reflects the upper end of the scale of possible losses. However, while the harshness of that result on the party in breach is not strictly speaking a determinative factor, potentially disproportionate effects will not assist a clause in being upheld. The example here of a one hour over-run is a case in point. A more flexible formula, possibly involving a sliding scale, might have avoided anomalies of this kind.

Last but not least, the precise wording can be important, even as a matter of appearance. Here, the arbitrators found the clause to be a deterrent partly because of its emphasis on the charterers' obligations ("thorough investigations..to ensure ..the last voyage.. in no way exceed the maximum period..."), but might have found differently had the wording been less forceful.

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
 
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.