Is Payment of Time Charter Hire a Condition? The Astra Reconsidered

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In Kuwait Rocks Co v AMB Bulkcarriers Inc (The Astra), Flaux J determined that the obligation to make punctual payment of hire under an amended NYPE time charter, whether on its own or in conjunction with an anti-technicality clause, was a condition of the contract. The 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 (click here to read Reed Smith's article discussing The Astra).

On 18 March 2015, judgment was handed down in Spar Shipping AS v Grand China Logistics Holding (Group) Co., Ltd. Popplewell J disagreed with Flaux J’s analysis in The Astra, finding that payment of hire was not a condition of the contract.

The facts of Spar Shipping AS v Grand China Logistics Holding (Group) Co., Ltd 

The Claimant Owners had let three vessels to Grand China Shipping (Hong Kong) Co Ltd on amended NYPE 1993 forms. The charters were on materially identical terms. They included provisions allowing Owners to withdraw the vessel “failing the punctual and regular payment of the hire, or on any fundamental breach whatsoever” of the charter, and an anti-technicality provision requiring Charterers to be given a three banking day grace period where there was “a failure to make punctual and regular payment of hire due to oversight, negligence, errors or omissions on the part of Charterers or their bankers”.

The Defendant Guarantor provided guarantees in respect of Charterers’ performance under all three charters. Substantial arrears accrued, causing Owners to withdraw the vessels and terminate the charters. Owners claimed against the Guarantor under the guarantees for (i) the balance due under each charter prior to termination; (ii) damages for loss of bargain in respect of the unexpired term of the charters; and (iii) their costs of arbitration proceedings against Charterers.

The court was required to determine various issues, including whether the Guarantor was bound by the guarantees and the correct method of calculating any damages due for the unexpired charter periods. However, it was the question of whether Owners were entitled to those damages which was the focus of the majority of Popplewell J’s detailed judgment.

The Guarantor’s position was that although Owners had a contractual option to withdraw the vessels, in order to claim damages for loss of bargain there had to have been a breach that gave right to damages for repudiation or renunciation. There had been no such breach. Owners contended that payment of hire was a condition of the charters, such that breach entitled them to damages for loss of bargain. Alternatively, if payment of hire was an innominate term, Charterers’ conduct was repudiatory and/or evinced an intention not to pay hire on time, which constituted a renunciation of the charters.

The question of whether the obligation to pay hire punctually and regularly in advance was a condition of the contract was precisely the one which Flaux J had considered (albeit obiter) in The Astra.

Flaux J’s findings in The Astra 

The charterparty in The Astra was also on an amended NYPE form. The provisions regarding payment of hire were on materially identical terms to those in the instant case. Flaux J determined that the obligation to make punctual payments of hire, whether on its own or in conjunction with the anti-technicality provision, was a condition of the contract. Breach therefore entitled the Owners to withdraw the vessel and claim damages for loss of bargain. His main reasons for reaching this conclusion were:

1. Failure to punctually pay hire was sufficiently serious to allow the Owners to terminate, indicating that such failure went to the root of the contract. On that basis, the provision was a condition.  
2. In commercial contracts, where time is of the essence (i.e. where something must be done, or payment be made, by a specified time), such a provision is a condition of the contract.  
3. Certainty is essential in commercial transactions, and there would be no certainty if the Owners could only claim damages after withdrawal where the charterers’ conduct was repudiatory. Proving charterers’ repudiation would not always be straightforward. The charterers also required certainty, in that they should know they would be liable for damages for loss of bargain if the Owners withdrew the vessel after their failure to pay hire promptly.

Popplewell J’s findings in Spar Shipping AS v Grand China Logistics Holding (Group) Co., Ltd 

Like Flaux J, Popplewell J conducted a thorough review of the authorities on all relevant issues, in particular the classification of contractual terms as conditions and the question and effect of time being of the essence. He concluded that the obligation to pay hire was not a condition of the contract, and so breach alone did not entitle Owners to damages for loss of bargain for the unexpired charter periods.

Popplewell J disagreed with Flaux J on each of the three points set out above.

1. The provision of a right to terminate on breach of a particular term is not indicative that the term in question is a condition. To have such effect, any agreement between the parties must entitle the defaulting party to treat the contract as repudiated, not simply to terminate. A contractual right to terminate may constitute such an agreement, or it may simply be an option to cancel. On this basis, the fact that the option to cancel is triggered by a breach says nothing about whether the term breached is to be characterised as a condition.  
2. The presumption in commercial contracts is that stipulations as to time of payment are not of the essence, unless there is a clear indication to the contrary. The cases which comment on the Owners’ commercial interest in punctual advance payment provide a basis for a stringent approach to a contractual option to terminate. However, they provide no additional reason to treat such a term as a condition conferring a right to terminate, which would have very different financial consequences. If Owners invoke an option to cancel, they are no longer obliged to fund the operation of the vessel and their interest in punctual payment disappears.  
3. It is correct that Owners may face uncertainty in having to continue with a charter until such time as they can say that charterers are in repudiatory breach. However, this is no more than any commercial party faces as a result of English law’s requirement that only repudiatory breaches of innominate terms allow a party to put an end to contractual obligations. The principal function of conditions and termination provisions is to ensure certainty so far as the right to terminate is concerned. This can be achieved by an option to cancel without conferring an unmerited right to damages.

Unless and until the question comes before a higher court, it is likely that Popplewell J’s decision will be followed in subsequent cases. He referred in his judgment to a general principle that where there are conflicting decisions of courts of co-ordinate jurisdiction, the later decision is to be preferred, if it has been reached after full consideration of the earlier decision.

Payment of hire: where are we now? 

The issue of whether Owners can claim damages is often crucial to their decision as to whether to withdraw a vessel or to continue with a charter. After The Astra, Owners were arguably in a stronger position to give a legal basis to a decision to withdraw their vessel from charterers’ service and claim damages for loss of profit after only a few missed or part hire payments, or even a single such payment.

Owners’ position was also strengthened where charterers sought to make deductions from hire, on the basis that the threat of withdrawal and a damages claim could encourage charterers to pay and claim back alleged deductions, rather than deduct them from an initial hire payment. Although the decision in The Astra was not universally welcomed, it was generally seen as providing some long overdue certainty to a controversial area of debate.

The decision in the present case essentially takes matters back to the position before The Astra. Owners are likely to have to prove a repudiation or renunciation by charterers if they wish to claim damages for loss of profit. A mere failure by charterers to pay, and consequential exercise by Owners of a right to withdraw, is unlikely to be sufficient. Owners will need to show that charterers have either evinced an intention not to be bound by the charter terms, or have expressly declared that they are or will be unable to perform their obligations in some essential respect. This raises difficult questions such as the number of missed or short hire payments that amount to an “intention no longer to be bound”, and places a higher evidential burden on Owners.

The decision in this case does not affect Owners’ right to withdraw the vessel from charterers’ service, if the charter gives them that right, nor does it affect their entitlement to claim unpaid hire that has already fallen due. What it will affect is owners’ entitlement to damages for loss of bargain for the unexpired charter period. The temporary strengthening of owners’ position arguably provided by The Astra may now have come to an end.

We are grateful to Andrew Taylor (Partner) and Alexandra Allan (Associate) of Reed Smith for this article which has also been published as a client alert by Reed Smith.