Hire – Not a Condition of the Contract

October 2016

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17 Spar Shipping Appeal 121016 sm web

In April 2013 Flaux J gave judgment in Kuwait Rocks Co v AMB Bulkcarriers Inc (The Astra). He decided the obligation to make punctual payment of hire was a condition of the contract and, therefore, a breach of this condition entitled the vessel Owners to both withdraw the vessel and claim damages for loss of profit for the remainder of the charter period.

That decision caused some consternation in shipping circles.

In March 2015 Popplewell J gave judgment in Spar Shipping AS v Grand China Logistics Holding (Group) Co., Ltd. He disagreed with Flaux J’s decision in The Astra; finding that the payment of hire was not a condition of the contract.

Not surprisingly given the importance of the question – whether the punctual payment of hire under a charter is a condition of the contract - both decisions have attracted considerable discussion. The decision in Spar Shipping was appealed by both parties. The Court of Appeal decision was published on the 7 October 2016. The decision is of great interest on two fronts.

First whether the obligation to pay hire on time is a condition of the contract. The second being a detailed consideration of when charterers are in renunciatory breach thus entitling Owners both to terminate the Charterparty and to damages for the unexpired charter period.

Is Payment a Condition?

The Court of Appeal has firmly rejected The Astra. In a nutshell, the Court decided unanimously that the payment of hire on time is not a condition of the Contract. In the words of Hamblen LJ:

“… we should hold that The Astra was wrongly decided. I would add that in circumstances where, as here, the law had apparently been settled by an existing decision for some 40 years, without any indication of market disquiet, I consider that a court should be very cautious before departing from such a decision so as to disturb the predictability of the law and detract from its certainty.”

Gross LJ in delivering the leading judgment reviewed and addressed in detail the following

i. The express option to terminate;

ii. Ascertaining whether a clause is a condition;

iii. General presumptions as to time being of the essence;

iv. The anti-technicality clause;

v. Certainty; and

vi. Market reaction;

and came to the clear conclusion that: “…, I was not persuaded that the inclusion of the express withdrawal clause provided a strong or any indication that cl. 11 of the charterparties was a condition. As a matter of contractual construction, the Charterparties did not make it clear that cl. 11 was to be categorised as a condition.Considerations of certainty, most important though they are, did not sway me from this conclusion, in particular given the significant certainty achieved by cl. 11 as a contractual termination option, simpliciter and the fact that breaches of cl. 11 could range from the trivial to the grave; greater certainty would be achieved by categorising cl. 11 as a condition but at a cost of disproportionate consequences flowing from trivial breaches – in my view, an unsatisfactory balance. I sense that market reaction is generally supportive of the decision of the Judge in this case and view it as reassuring. I do not regard as significant the arguments advanced on the basis of a general presumption as to time being of the essence in mercantile contracts or those which relied on the anti-technicality clause…and I would respectfully hold that The Astra was wrongly decided on this issue.”

[clause 11 is headed “HIRE PAYMENT”]

Renunciatory Breach?

However of more interest is the second limb of the appeal before the higher court, namely whether the Charterers had renounced the Charterparty thereby allowing Owners to claim damages for the unexpired period.

Renunciatory breach is not an easy concept. Conduct is repudiatory if it deprives the innocent party of substantially the whole benefit of the contract.

But when is conduct renunciatory? This is if a party evinces an intention to commit a repudiatory breach – in other words if a reasonable person would conclude that one party does not intend to perform his future obligations and the failure to perform such obligations would be repudiatory.

Furthermore, evincing an intention to perform but in a manner which is inconsistent with the contractual terms is still evidencing an intention not to perform and such conduct can be renunciatory if the future intended performance is so inconsistent as to be repudiatory.

And whilst an intention to perform indicates a willingness to perform, willingness does not mean a desire to perform despite an inability to do so – as per Devlin J in Universal Cargo Carriers Corp v Citati [1957] 2 QB 401 at 437, “I would like to but I cannot’ negatives intent just as much as ‘I will not’.”

Before the Court of Appeal neither party disputed that Popplewell J had correctly summarised the test for when a breach was renunciatory; rather Charterers claimed the Judge had wrongly applied the test to the facts of the matter, being, it was said, “too cynical” and “not sympathetic enough”.

So whilst bearing in mind that every case will be decided on its facts, the facts of Spar Shipping are worth reviewing as they give an indication of what a Court may look to when assessing when conduct is renunciatory in the future cases.

Owners had three vessels on charter to the same Charterer. There had been regular failures to pay hire on time during a period of five months. Almost all hire payments on the three vessels were unpaid when they fell due. Some were not paid at all, others only months after they fell due. In those months, only once were instalments paid on time. The arrears fluctuated between about US$1.5 million and US$2.5 million, and would have been up to US$1 million more but for the exercise by Owners of liens on sub-hire/sub-freights.

Charterers had made clear that non-payment was due to cash flow difficulties caused by the fall in the market. They had said they expected a cash injection from their parent company which would allow for payment of hires going forward and the arrears. They twice promised to pay off half the arrears but failed to do so. By the end of the five month period, Charterers simply repeated that they had cash flow difficulties, provided no certain proposals, and simply said they would pass on sub-hires.

When Owners called on the parent company under a guarantee given pursuant to the three Charterparties, the response was that the parent company was prioritising payment of bank interest over operational payments and referred to the overdue hire as a ‘relatively small sum’.

On the basis of these facts, Popplewell J found at first instance that an objective person would conclude that the Charterers were unwilling, because they were unable to pay hire punctually for the balance of the Charters or to pay off the arrears unless the market improved, and the defaults would likely be substantial - weeks or months and arrears of US$2 million or more. In the arbitration, the Charterers had stated that they were willing to pay hire at the agreed rate but could not, due to cash flow problems.

Popplewell J found that the Charterers were evincing an intention not to perform in a manner that deprived Owners of substantially the whole benefit of the Charterparties. He had rejected an argument that, comparing the total sums payable under the Charterparties with “arrears by a few instalments constituting a small proportion of the total” could not be said to be depriving Owners substantially of the whole benefit of the Charterparties.

In the Court of Appeal, Gross LJ confirmed that it must be borne in mind that renunciation can be evinced by substantially inconsistent performance and may be inferred where it is apparent that the defaulting party is doing no more than procrastinating in the hope that something may turn up - as per Lord Shaw of Dunfermline in Forslind v Bechely-Crundall [1922] SC (HL) 173.

Further, as renunciation looks to the future, renunciation may be inferred from both the nature and causes of past breaches (even if by themselves insufficient or irrelevant for repudiation) and the evinced unwillingness to perform in the future. So Gross LJ then applied the facts to the test:

  1. what was the contractual benefit Owners intended to obtain from the Charterparties?
  2. what was the prospective non-performance? and
  3. was the prospective non-performance such as to go to the root of the contract?

As to the first, the bargain under a time Charterparty is that an Owner is entitled to regular payment of hire in advance, so long as the Charterparty continues. Hire is payable in advance to provide a fund from which Owners can meet the expenses of their own performance under the Charterparty; and Owners are not obliged to perform the services on credit. The financial strength of an Owner has no bearing whatsoever. The fact that an Owner may be better placed to absorb a Charterers prospective inability to perform does not mean that the Owner was obliged to accept payment of hire in arrears when it had contracted for payment in advance.

As to the second question, on the facts as found by Popplewell J, a reasonable Owner could have no certainly no realistic, expectation that hire would be paid punctually in advance for the remainder of the period. On its own case, Charterers were in difficulty due to market conditions. The best that could be hoped for was that they were willing to pay hire–but in arrears.

And to the final, third, question - whether the prospective non-performance was such as to go to the root of the Charterparties – Gross LJ had no doubt that it was. To quote: “The prospective non-performance would unilaterally convert a contract for payment in advance into a transaction for unsecured credit and without any provision for the payment of interest. The importance of the advance payment of hire in time Charterparties has already been emphasised and need not be repeated. That any failure to pay a single instalment of hire punctually does not amount to a breach of condition… is one thing; an evinced intention not to pay hire punctually in the future is very different… and, in my judgment, goes to the root of the Charterparties. Taken to their logical conclusion, Mr Coburn’s submissions [for Charterers] would mean that Charterers could hold Owners to the contracts by stating that all payments of hire would be made but late and in arrears – leaving Owners obliged to accept this limping performance and attendant uncertainty. In my view, that is not the law, at least in this context. For the avoidance of doubt, whichever test is adopted the answer would be the same; thus I am satisfied that GCS’s [Charterers] evinced intention would deprive Spar of “substantially the whole benefit” of the Charterparties.“

The judgment is clear, concise and welcome guidance of an Owners’ position in what continues to be a very difficult market for all.

 

Article by Sian Morris,

Syndicate Manager
European Syndicate.