UK: Charterer's Failure To Pay

Last Updated: 25 November 2016
Article by Arthur James and Marko Kershoff

Introduction

Does a charterer's failure to pay an instalment of hire punctually under a standard form time charterparty constitute a breach of condition allowing the shipowner to withdraw the vessel and claim damages for breach of contract, or does such a failure merely entitle the shipowner to withdraw the vessel from service in accordance with the express provisions of the charterparty? This was the dominant question before the England and Wales Court of Appeal in Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS [2016] EWCA Civ 982.

The case was on appeal from the Commercial Court, a sub-division of the Queen's Bench Division of the High Court of Justice. In the lower court, Popplewell J decided not to follow the decision of Flaux J in Kuwait Rocks Co v AMN Bulkcarriers Inc ("The Astra") [2013] EWHC 865 (Comm), wherein it was held that payment of hire by charterers was not a condition of the charterparty. The Court of Appeal, in essence therefore, had to decide whether Popplewell J was correct to reverse established precedent.

Facts

The respondent, Spar Shipping AS (hereafter "Spar"), was the registered owner of three Supramax bulk carriers, Spar Capella, Spar Vega and Spar Draco (hereafter referred to collectively as "the vessels").

By way of three charterparties (hereafter referred to collectively as "the charterparties") dated 5 March 2010, on amended NYPE 1993 forms, Spar agreed to let and Grand China Shipping (Hong Kong) Co Ltd (hereafter "GCS"), as charterers, agreed to hire, the vessels on the terms set out therein.

The appellant, Grand China Logistics Holding (Group) Co Ltd (hereafter "GCLH"), the parent company of GCS were required to, and later issued, three letters of guarantee on behalf of GCS (hereafter "the guarantees").

The charterparties were on identical terms, save as to the rate of hire, period, delivery, laycan and vessel details.

The withdrawal clause, including an "anti-technicality clause" (see 11(b) "Grace Period" below), was in the same terms in each of the charterparties and provided as follows:

"11. Hire Payment

(a) Payment

Payment of Hire shall be made so as to be received by the Owners or their designated payee...in United States currency, in funds available to the Owners on the due date, 15 days in advance...Failing the punctual and regular payment of the hire, or on any fundamental breach whatsoever of this Charter Party, the Owners shall be at liberty to withdraw the Vessel from the service of the Charterers without prejudice to any claims they (the Owners) may otherwise have on the Charterers.

At any time after the expiry of the grace period provided in Sub-clause 11(b) hereunder and while the hire is outstanding, the Owners shall, without prejudice to the liberty to withdraw, be entitled to withhold the performance of any and all of their obligations hereunder and shall have no responsibility whatsoever for any consequences thereof, in respect of which the Charterers hereby indemnify the Owners, and hire shall continue to accrue and any extra expenses resulting from such withholding shall be for the Charterers' account.

(b) Grace Period

Where there is failure to make punctual and regular payment of hire due to oversight, negligence, errors or omissions on the part of the Charterers or their bankers, the Charterers shall be given by the Owners 3 clear banking days...written notice to rectify the failure, and when so rectified within those 3 days following the Owners' notice, the payment shall stand as regular and punctual.

Failure by the Charterers to pay the hire within 3 days of their receiving the Owners' notice as provided herein, shall entitle the Owners to withdraw as set forth in Sub-Clause 11(a) above..." (emphasis added).

GCS fell in arrears with payment of hire. Spar recouped some of the arrears by exercising its lien on sub freights but there remained substantial arrears of hire on all three vessels. Spar called on GCLH for payment under the guarantees on 16 September 2011. On 23 September 2011 Spar withdrew the Spar Capella and terminated the relevant charterparty. On 30 September 2011 Spar withdrew the Spar Vega and Spar Draco and terminated those charterparties.

Spar sought to claim the balance of hire due under the charterparties as well as damages for loss of bargain in respect of the unexpired term of the charterparties from GCS, and, to this end, commenced arbitration proceedings against GCS. However, prior to the hearing of the arbitration, GCS went into liquidation in Hong Kong and the proceedings were stayed. To circumvent this issue, Spar commenced court proceedings against GCLH under the guarantees.

Decision

Speaking on behalf of the Court of Appeal, Lord Justice Gross confirmed that, in terms of English law, "a condition is a major term of the contract any breach of which entitles the innocent party to terminate the contract". A warranty, in contrast, is "a minor term of the contract such that no breach will entitle the innocent party to terminate the contract". An innominate term (sometimes referred to as an "intermediate term") is "neither a condition nor a warranty". Also, said Lord Justice Gross, "where a term is innominate, the question as to whether the contract can be terminated turns on the seriousness of the consequences of the breach...judged at the time of the termination taking into account what has happened and is likely to happen", as opposed to the importance of the term. The classification of a term turns on the intention of the parties. A breach of a condition in the contract, inter alia, entitles the innocent party to treat the contract as at an end.

With regard to whether the obligation to pay hire is a condition or not, which was the main issue before the Court of Appeal, the Court of Appeal noted as follows:

  • There is no doubting the importance of the punctual payment of hire in advance under a time charterparty. Hire is payable in advance in order to provide a fund from which shipowners can meet their expenses, including mortgage and finance commitments, as well as binders to future (ie next in line) charterers. A withdrawal clause furnishes shipowners with an express contractual option to terminate the charterparty on the occurrence of the events specified therein. However, it is a leap too far to argue that from the mere presence of an express withdrawal clause, the punctual payment of hire is a condition;
  • Whether a term in a contract is to be classified as a condition or not, the following general principles must be kept in mind. First, the intention of the parties ought to be ascertained. In other words, the first question is always whether, upon a true construction of the contract, the clause in question is a condition, an innominate term or a warranty. Secondly, if, on a true construction of the contract, the parties did not elevate a particular term to that of a condition, and if the breach of such term may result in only trivial or minor consequences, then the term is innominate. Thirdly, unless the contract made it clear that a particular term was a condition, it should not be interpreted as such by a court of law. The present clause (clause 11, as quoted above) is a payment term, and compliance by GCS therewith was not a condition precedent to the performance by Spar of its obligations. From a consideration of the clause, it could not be said that any failure to pay hire punctually in advance, no matter how trivial, would derail Spar's performance under the charterparties. The wording of the charterparties does not lend support to the argument that clause 11 is a condition: it does not expressly make time of the essence, nor does it spell out the consequences of breach with any degree of specificity;
  • A general presumption that time is of the essence in commercial contracts is not of significance in the present instance;
  • The anti-technicality clause (see clause 11(b), as quoted above) does no more and no less than that which is expressed, ie where the failure to make punctual and regular payment of hire is due to one or more of the specified causes, namely oversight, negligence, error or omission on the part of the charterers or their bankers, then the charterers enjoy a "grace period" of 3 days to remedy such failure.

For the reasons set out above, the Court of Appeal concluded that the obligation to pay hire punctually and in advance under the time charterparties does not constitute a condition. The court denied the appeal, thereby upholding the decision by Popplewell J, who gave judgment in the court a quo in favour of Spar under the guarantees for (i) the balance due under the charterparties prior to termination; and (ii) damages for loss of bargain in respect of the unexpired term of the charterparties (GCS was held to have renounced the charterparties when notices of termination were received), totalling US$25 308 320 (plus interest).

Conclusion

The decision is important in that it overturns that of Flaux J in The Astra, wherein it was held that payment of hire is a condition of the contract and therefore that the failure to pay a single hire payment entitled the owners to withdraw the vessel and claim damages (including loss of profit for the remaining charter period) for breach of contract.

When met with a charterer's failure to pay an instalment of hire punctually under a standard form time charterparty, shipowners still have the right to withdraw the vessel from the charterers' service and also remain entitled to claim unpaid hire that has already fallen due to them. However, as the decision by the Court of Appeal in Grand China Logistics Holding (Group) Co Ltd now makes clear, damages for loss of bargain for the unexpired charter period does not follow automatically as a breach of condition of contract. Shipowners are likely to have to prove either repudiation or renunciation by charterers if they wish to claim damages for loss of profit (as was done in the present case). A simple failure on behalf of charterers to pay, and consequential exercise by shipowners of a right to withdraw, is unlikely to be sufficient.

Charterer's Failure to Pay

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