Isabella Shipowner SA v Shagang Shipping Co Ltd (The “Aquafaith”) [2012] EWHC 1077
Introduction
Cooke J’s recent decision in Isabella Shipowner SA v Shagang Shipping Co Ltd (The “Aquafaith”) [2012] EWHC 1077 (Comm) tests the limits of the rule that an innocent party to a repudiatory breach is entitled to keep the contract alive. Because of this, the principles that emerge from The “Aquafaith” are likely to have significant implications for contract law in general. In the shipping market, the case will be welcome news for shipowners. Charterers are unlikely to be similarly enthused.
Legal Background
The dispute concerned the scope of the principle enunciated in White and Carter (Councils) Limited v McGregor [1962] AC 413 that an innocent party faced with a repudiatory breach can insist on keeping the contract alive. Lord Reid set out two exceptions where the claimant will be limited to a remedy in damages: firstly, where the defendant’s co-operation is required before the claimant can complete performance, and secondly, where the claimant has no legitimate interest, financial or otherwise, in performing the contract rather than claiming damages.
There have been a number of charterparty disputes involving the White and Carter principle. In The “Puerto Buitrago” [1976] 1 Lloyds Rep 250, White and Carter was considered on an obiter basis in a case where the charterers redelivered a vessel in a state of disrepair. It was estimated that repairing the vessel would cost US$2 million, but that her value after repairs would be US$1 million. Lord Denning stated that the White and Carter principle had no application in a case where the plaintiff ought
“in all reason, to accept the repudiation and sue for damages provided that damages would provide an adequate remedy for any loss suffered by him.”
In The “Odenfeld” [1978] 2 Lloyd’s Rep 357, the charterers repudiated a time charter with 6 ½ years to run. Kerr J regarded The “Puerto Buitrago” as a case arising out of “facts which were extreme in their nature”. He rejected the charterers’ contention that the owners were not entitled to affirm the charter, holding that
“any fetter on the innocent party’s right of election whether or not to accept a repudiation will only be applied in extreme cases, viz. where damages would be an adequate remedy and where an election to keep the contract alive would be wholly unreasonable.”
Among the factors which compelled Kerr J to find in the owners’ favour was the charterers’ liberty to sub-let the vessel and the difficulty the owners would face in establishing damages. Kerr J rejected the charterers’ proposition that the degree of co-operation between owners and charterers required by a time or demise charter rendered the White and Carter principle inapplicable.
In The “Alaskan Trader” (No.2) [1984] 1 All ER 129, a vessel subject to a 24 month time charter suffered a major engine breakdown. Despite having been told by the charterers that they had no further use for the vessel, the owners repaired the vessel and sought to hold the charterers liable for hire for the remaining 7 months of the charterparty. Lloyd J upheld the arbitrator’s finding that the owners were not entitled to sue for hire as they did not have any legitimate interest in performing the contract, having acknowledged at p.137 that:
“this Court is bound to hold that there is some fetter, if only in extreme cases, and for want of a better way of describing that fetter, it is safest for this Court to use the language of Lord Reid, which, as I have already said, was adopted by a majority of the Court of Appeal in The Puerto Buitrago.”
Lloyd J also considered whether the time charter required co-operation between the parties so as to take it outside the White and Carter principle. He was initially attracted to the charterers’ argument that a time charter was a contract for services under which the owners were only able to earn remuneration by performing the services required, but did not decide the point since Kerr J had found the same argument unimpressive in The “Odenfeld”.
Simon J agreed in The “Dynamic” [2003] 2 Lloyd’s Rep 693 that the fetter on the principle of election only applied in extreme cases, viz. where damages would be an adequate remedy and where an election to keep the contract alive would be unreasonable. He did not think that the qualifying word “wholly” in Kerr J’s expression “wholly unreasonable” added anything to the test.
There is a noticeable lack of judicial consensus as to the exact formulation for determining whether the innocent party is entitled to keep the contract in being. As will be seen, The “Aquafaith” appears to introduce yet another variant of the test.
The Facts
The vessel was chartered for a minimum period of 59 months on an amended NYPE form dated 19 September 2006. On 6 July 2011, the charterers announced that they would redeliver the vessel after completing her then current voyage. Redelivery would occur with 94 days left to run under the time charter. Though this put them in anticipatory breach, the charterers had no further use for the vessel, and no desire to continue paying hire. The owners commenced arbitration, seeking a declaration that they were entitled to refuse re-delivery, which they had done, and that the charter continued in force, with the charterers liable for hire for the remaining period.
Though the charterers were in admitted repudiation of the charter, the arbitrator concluded that the case fell outside the White and Carter principle because the time charter required co-operation between the owners and charterers. He was persuaded by the charterers’ argument that they were required to provide fuel for the vessel to enable it to operate.
The arbitrator further found that the owners had no legitimate interest in holding the charterers to the charter. The owners would not be left worse off by mitigating and claiming damages, while the fact that the charterers had the right to sub-let the vessel was irrelevant because the charterers had been emphatic in maintaining their repudiation. He described Kerr J in The “Odenfeld” as putting a gloss on Lord Reid’s legitimate interest dictum when he stated that this limitation would only be applied in extreme cases where damages would be an inadequate remedy and where an election to keep the contract alive would be wholly unreasonable.
Cooke J’s Judgment
Cooke J allowed the owners’ appeal. First of all, he held that the arbitrator erred in law in finding that the White and Carter principle did not apply due to the co-operative nature of the charter. On the contrary, the owners could earn hire under the time charter without the need for the charterers to do anything. If the charterers failed to give orders, the vessel could remain idle. If bunkers ran out while awaiting orders, the owners could stem the vessel. There were no unperformed obligations of the charterers upon which the owners’ ability to earn hire depended. By contrast, under a demise charter, possession of the vessel is given to the demise charterer as a condition of hire. Immediately upon the owner retaking possession, the entitlement to hire ceases.
Cooke J also ruled that the arbitrator had applied the wrong test when deciding whether or not the owners had a legitimate interest in maintaining the charter and claiming hire. At paragraph 44, he stated:
“The effect of the authorities is that an innocent party will have no legitimate interest in maintaining the contract if damages are an adequate remedy and his insistence on maintaining the contract can be described as “wholly unreasonable”, “extremely unreasonable” or, perhaps, in my words, “perverse”.
To illustrate the kind of perversity which would be required to disentitle the owners from maintaining the charter, Cooke J referred to The “Puerto Buitrago” where “the cost of repair was double the value of the ship when repaired and four times as much as its scrap value. To refuse to accept a premature re-delivery of the vessel in order for such repairs to be done would therefore be truly perverse. Repair in such circumstances would be an exercise in futility.”
In Cooke J’s judgment, this was a very different case. The owners had argued that the charterers were in financial difficulty, which made damages an inadequate remedy. The parties’ experts disagreed about the state of the market, thus opening up the prospect of a significant dispute as to mitigation of loss. The charterers were seeking to divest themselves of having to trade the vessel in a difficult spot market. These were points the arbitrator had failed to grapple with. What is more, he had incorrectly deemed irrelevant the charterers’ ability to sub-let the vessel, when this meant it was equally open to the owners or the charterers to employ the vessel on the market. To compound matters, the arbitrator thought there was nothing exceptional, extreme or unusual about this case, but failed to recognize this militated in favour of, and not against, the owners. Finally, the arbitrator committed a further error of law by taking into account the tenacity with which the charterers maintained their repudiatory stance.
At paragraph 50, Cooke J summarised:
“The arbitrator should have been asking himself whether or not this was an extreme case of the kind where damages were an adequate remedy and the owners’ conduct was so beyond the pale that they should not be allowed to keep the contract alive. That he did not do.”
Case Comment
Cooke J’s formulation of the test for determining whether the innocent party is entitled to hold the contract breaker to the contract, though avowedly based on the authorities, in fact arguably involves a degree of reinterpretation. By stating that the decision of the owner might need to be “perverse” (paragraph 44), even “beyond the pale” (paragraph 50), before he can be said to have no legitimate interest in maintaining the contract, Cooke J implicitly eschewed Lloyd J’s reliance on Lord Reid’s language in The “Alaskan Trader” (No.2) and Simon J’s more moderately worded test in The “Dynamic”.
By so doing, Cooke J couched the test in terms which could conceivably increase the burden on the contract breaker seeking to extricate himself from a contract. This will have ramifications for shipping law, and for contract law more generally. If Cooke J’s test gains precedence over its predecessors, it is possible that the scope of the White and Carter principle will be widened.
Secondly, Cooke J was right to reject the notion that the vehemence with which the charterers persisted in their repudiation had any bearing on whether the owners were entitled to keep the charterparty alive. It would be bizarre if the innocent party’s right of election was undercut by the obstinacy with which the contract breaker maintained his position. This would be the very definition of a perverse incentive and reward especially determined contract breakers. Yet, that is precisely the suggestion made in all five previous editions of “Time Charters” published between 1978 to 2003, which stated that:
“once it becomes clear that there is no room for a change of mind by the charterers, the courts are likely to insist that the owners accept the re-delivery and sue for damages – assuming that damages will be an adequate remedy”.
The current edition of Time Charters, on the other hand, states that the owner will be disallowed from insisting on keeping the charterparty alive only in very clear cases.
Thirdly, Cooke J drew a firm distinction between time charters and demise charters. Time charters do not require co-operation so as to fall outside the ambit of the White and Carter principle, as the owners’ entitlement to hire is not predicated on performance by the charterers. Demise charters differ because the owner’s entitlement to hire is contingent on the charterers’ possession of the vessel, provision of crew and payment for outgoings.
Timothy Hill QC and James Shirley of Stone Chambers acted on behalf of the claimant owners in this important Commercial Court decision.
With thanks to Andrew Leung of Stone Chambers for preparing this article.
