Time Charter – Condition on Delivery an Innominate Term – No Right to Repudiate for Misrepresentation as to Condition on Delivery

August 2000

(Sea Venture Volume 19)

It is not uncommon that on delivery or arrival at the first loadport a vessel is not yet ready in her holds to receive the intended cargo, but instead requires cleaning. This is likely to amount to a breach of charterparty by the owners. When this happens, the charterers may want to take advantage of such a breach to put an end to the charterparty, on the basis that the owner's breach in this respect amounts to a repudiation. A recent London Arbitration has emphasised that charterers' ability to do so depends on the seriousness of the breach and that they would be well advised to exercise caution.

In London arbitration 16/99¹, the vessel was chartered on the NYPE form as amended for a trip via the Baltic to the Far East or in charterers' option via the ES Gulf with bulk urea. She was delivered on 27 January 1996. On 5 February 1996 the charterers purported to terminate the fixture on account of the ship's condition, given the presence of rust scale and previous cargo residues. On 8 February the shipowner treated the charterers themselves as having repudiated the charter.

The charterers said that they were entitled to terminate on the basis of alleged(unexplained) misrepresentations. Alternatively they said that the owners were in breach of their obligations as to the ship's delivery condition under the charter (lines 21-23 and Clause 41) and/or that the ship was never ready for the charter service at any time.

Lines 21-23 of the charterparty provided that the ship was to be:

''…On her delivery ready to receive cargo with clean swept holds and tight staunch and strong and in every way fitted for the service, and for intended cargo of bulk urea, in all respects free from rust scales and previous cargo…''

Clause 41 provided:

''Vessel on arrival at loading port in all respects ready to load intended cargo of fertilisers, in all respects free from rust scale and previous cargo residues to the satisfaction of local relevant surveyors. Should the vessel not be approved by such relevant surveyor the vessel to be placed off-hire from rejection until she is fully accepted. Any expense/time incurred thereby to be for owners' account.''

Repudiatory breach and right to termination

The tribunal held:

1. The charterers' case based on alleged misrepresentation would be rejected.

2. As to charterers' argument based on the contractual provisions, the tribunal analysed as follows:

On arrival at the loading port, and as the owners had accepted, holds 1 and 2 were not clean and there was thus a breach of charterparty in that respect. However, the owners' failure to have the ship entirely ready for loading was not a repudiatory breach either under lines 21-23 or clause 41. As the owners had argued, the provisions in question could at most be innominate terms or intermediate terms. Whether a breach of such a term does or does not entitle the innocent party to treat the contract as discharged depends on the nature and consequences of the particular breach that has occurred. It was therefore necessary to consider the circumstances and, in particular, the severity of the breach.

On 3 February the charterers' own surveyor had advised them that the ship would require between four and seven days of further work to be ready. On the evidence, the ship was in fact fit to load her cargo by the afternoon of 7 February, a date which tallied with the estimate given by the charterers' surveyor. Thus the delay was relatively minor and was certainly so in the context of the likely duration of the charter as a whole. The delay could in no way be considered repudiatory. Clause 56 of the charter which provided for off-hire in the event of seizure or detention of the ship gave some indication of what the parties thought might be a period justifying termination. It gave charterers the option to cancel the balance of the charter if the ship was off-hire for 30 consecutive days by reason of seizure or detention. Accordingly, the tribunal found that although the owners were in breach as regards the delivery or arrival condition of the vessel at the loading port, that breach was not repudiatory, and it did not justify the charterers in terminating the charter. Owners were therefore entitled to damages.

The proper measure of damages

To secure their claim, the charterers had arrested the ship. The owners therefore claimed the arrest was wrongful and sought to be compensated for the loss arising out of the wrongful arrest of ship by the charterers between 7 and 13 March.

The tribunal held that owners' losses for the period of the wrongful arrest were not caused by the charterers' wrongful repudiation of the charter. The losses were caused by charterers' decision to arrest the ship, which decision was based on their assertion that it was the owners who had repudiated the charter. The owners were not entitled to damages simply because the arresting party's claim turned out to be unjustified. There had to be bad faithor crassa negligentia. The fact that the tribunal had ultimately found the charterers' case to be unjustified did not mean that their arguments were not put forward, and their arrest of the ship had not been made, in good faith.

The owners were however entitled to damages representing the difference between what the ship would have earned if the charterparty had been performed, with what she did, in fact, earn during the period that performance of the charterparty would have taken, so far as that could be known or estimated. In total the owners were awarded over US$200,000 damages, plus interest.

This case serves to illustrate, once again, that the consequences of terminating a charterparty wrongfully can be severe. Members, whether charterers or owners, should contact the Club when deciding whether and, if so, when to put an end to a charterparty.

¹ LMLN 519