Terminating a Time Charter - Do Landlord and Tenant Principles Apply?

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The English High Court recently heard an interesting appeal brought by the bareboat charterer of the vessel “Mahakam”[1] against a London Arbitration award of US$ 27 million for wrongful repudiation of a bareboat charter. Rather unusually for a shipping claim, the charterers claimed that they were entitled to rely on a binding principle from English landlord and tenant law as a defence to the owners’ claims.

The charterers claimed, amongst other arguments, that the following “binding principle” applied: where a landlord (or in this case, the vessel owner) is aware of a default in the payment of rent (hire payments) and the right to terminate the agreement, and a further unequivocal demand for rent (hire) is made, then the landlord/owner had thereby waived his rights to terminate for non-payment of rent (hire). The charterers’ argument was that the subsequent demands for hire under the bareboat charter constituted an automatic waiver at law of any accrued rights to terminate.

Therefore the issues were whether the owners had lawfully terminated the charter, or whether the charterers could claim that any right to terminate the charter for the failure to make payments as set out in the termination notices had been waived by each successive demand for hire.

The charterparty stated that hire was to be paid to the owners twice per month. The charterparty also contained an anti-technicality provision which provided for a three day “grace” period in which charterers could rectify any defaults in payment, provided that such payment was received by the owners within three days of receipt of written notice from the owners. If charterers did not rectify (make payment) within three days, then the owners would be entitled  to terminate the charter and withdraw the vessel.

During the charterparty the charterers failed to pay a series of hire instalments. There were three missed instalments for which the owners  provided the charterers with default notices. However, despite the charterers still not  paying the outstanding hire, the owners did not  terminate the charterparty. Instead, they continued to discuss with the charterers whether the parties could reach a commercial agreement. Further hire payments were missed and the owners served a further two notices. Later the same month, the owners served another three day notice which referred to the previous four unpaid instalments but did not refer to the most recent (ie the fifth) unpaid instalment. No payment was received and the owners terminated the charterparty.

Arbitrators found in favour of the owners. The charterers appealed claiming amongst other things that, on the basis of settled landlord and tenant case law[2],  the owners had waived their right to withdraw because  knowing that the charterers had defaulted they had not terminated the charter but had, instead, made an unequivocal demand for future hire. In legal terms, charterers claimed that owners’ actions had waived the right to terminate for an earlier breach.

On appeal the High Court was asked to consider whether: (i) a demand for future rent can waive the right to terminate the contract and, if so, (ii) this principle is correct and binding in a commercial shipping case or (iii) this principle should be limited to issues of contractual construction for property leases. However, the Judge held: (i) there was no principle binding upon him from the law of landlord and tenant that required him to find that a demand for future rent waived the right to terminate the contract, and (ii) even if there were such a right, the court was not bound to follow it in shipping cases and (iii) even if such a principle did exist, that demand for rent had been made at a time when there was no entitlement to terminate and, therefore, no entitlement that could be waived.

The court also affirmed that even if there had been no contractual right to repudiate under the contract, the conduct of the charterers over the duration of the charterparty and the failure to pay the final hire instalment was sufficient for the owners to claim wrongful repudiation of the contract at common law. Of particular significance was that clause 38.3 of the charter provided that “time shall be of the essence” in respect of hire payments which made the obligation to pay hire a condition of the contract, subject to the period of grace. As such there was, in effect, a specific breach of a condition (ie actual repudiation) of the charter in failing to pay the instalment covered by the fifth hire invoice.

This case clearly shows the importance for both charterers and owners to ensure that their rights are exercised in good time and to ensure that their conduct remains consistent and compliant with the charterparty terms to ensure that contractual, as well as common law rights are protected.

Article by Diana Sailor

[1] Parabulk II SA v Heritage Maritime Ltd SA  [2011] EWHC 2917 (Comm))

[2] Greenwood Reversions v Word Environment Foundation Ltd [2008] EWCA Civ 47