In Shipping Law News 19/05/2015
Defaulting charterers and late payment of hire would normally cause ship owners to consider terminating the charterparty and pursue a claim for damages, which, if successful, would, in general, be assessed by reference to the difference between the market and charterparty rate of hire for the unexpired term of the charterparty. However, the requirements for the award of such damages are currently the subject of conflicting Commercial Court judgments.
Despite some inconsistency in the relevant legal authorities, the common understanding in the shipping community seemed to have been for a long time that the general rule is that the payment of hire is not a condition of the contract (but rather an innominate term), i.e. that damages would be awarded by the Courts only where the breach of the charterparty would be repudiatory or a renunciation, “going to the root of the contract or depriving the innocent party of substantially the whole benefit of the contract”. Hence the surprise with which the judgment on The Astra case was received in April 2013, where it was held that the payment of hire clause was actually a condition of the charterparty. This would mean that any kind of breach, even the slightest delay in the payment of hire or even the accidental non-payment, would trigger the ship owner’s right to terminate the charterparty and to claim damages. The position would therefore be quite clear for ship owners, although possibly stringent for defaulting charterers.
The Astra had not been considered ever since until very recently, when Popplewell J delivered earlier this year his judgment on Spar Shipping [Spar Shipping AS v Grand China Logistics Holding (Group) Co., Ltd [2015] EWHC 718 (Comm)]. After a considerable legal analysis of the issues involved and the relevant authorities, he decided not to follow The Astra (but rather the older The Brimnes), concluding, among others, that the payment of hire is generally an innominate term and not a condition of the contract. Therefore, in the absence of clear language in the charterparty to the contrary, it is only a sufficiently serious breach (i.e. a repudiatory breach) or a breach which reveals an intention of the charterer not to honour (or to honour in a substantially different way) his future contractual obligations (i.e. a renunciation of the contract) that would bring about termination and confer a right to damages. Popplewell J further concluded that, contrary to The Astra, this position would not change by the inclusion in the charterparties of what is known as anti-technicality clause, since these are designed to protect the charterers from the strict consequences they would face in case of good-faith mistakes in the payment of hire or failures in the banking system. Although this would seem fairer for the charterers, it is certainly not straightforward for the ship owners.
Having to deal with two conflicting judgments, the uncertainty in the shipping market is far from being settled. The issue becomes even more critical in a falling market, as the current one, since a termination of the charterparty would most probably result to the ship owner hiring the withdrawn vessel at lower rates, while the award of damages remains an unclear issue.
It is to be seen whether a Court of Appeal judgment will shed some light on the issue, but until then ship owners have to consider the possible implications of Spar Shipping before terminating a charterparty. A carefully drafted termination clause as well as an evaluation of the breach of the defaulting charterer would bring some certainty to the parties’ relationship and keep ship owners on the safe side.
