The Effect Of Non-Payment Of Charter Hire

 

E‐ Bulletin –October 2016

1 Re: The Court of Appeal offers welcome clarification on the consequences of nonpayment of charter hire

By Carlos Vazquez, Service and Business Development Manager

Background

Last week the English Court of Appeal handed down an important decision on the effect of charterers failing to pay full and punctual hire to owners. Earlier decisions by the Commercial Court had reached conflicting conclusions as to whether the obligation to pay charter hire amounts to a breach of condition allowing owners to terminate the charter and claim damages for loss of bargain in relation to the unexpired period of the charter. Whereas in the ASTRA1 case the judge ruled that payment of hire was a condition, a subsequent judgment in the case Spar Shipping v Grand China Logistics2 held that a failure to pay hire does not automatically give owners the right to claim damages (see Club’s e‐bulletin of 21 April 2015 with our commentary on these decisions). The Court of Appeal judgement reached on the latter case3 has delivered much desired guidance and clarification of the law on these issues.

The facts

The background facts have already been summarised in the bulletin referred to above. In short, charterers chartered three vessels from owners pursuant to an amended NYPE 1993 form. Financial difficulties subsequently encountered by charterers resulted in late payments of hire until owners finally withdrew the vessels from service. In addition to the balance of hire due (which was not in dispute), owners sought to recover damages resulting for loss of bargain for the considerable balance period of the charters which they could only advance by establishing a breach of condition. The Court of Appeal was asked to determine whether payment of hire is a condition and, if not, whether charterers had renounced the charters as a result of their failure to make punctual payments.

The Court of Appeal decision

On 7 October 2016 the Court of Appeal ruled that failure by charterers to make punctual payment of hire would only allow owners to withdraw the vessel from service, that is, 1 [2013] EWHC 865 (Comm) 2 Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd. [2015] EWHC 718 (Comm) 3 Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS [2016] EWCA Civ 982 2 the obligation to pay hire under a time charter constitutes an innominate term and does not therefore amount to a breach of condition. The Court of Appeal however held in favour of owners on the basis that charterers, by their repeated failure to make punctual payment of hire, had shown an intention not to perform the charterparties in a manner that deprived the owners of substantially the whole benefit of the contract, thus entitling the owners to claim loss of bargain. The Court of Appeal reflected that a key obligation in a time charter such as payment of full and punctual hire lies at the heart of a contract of this nature meaning that if there is evidence of intent not to make such payments, charterers’ conduct will be construed as going to the root of the contract amounting to a renunciatory breach of contract thereby allowing owners to terminate and claim damages.

Conclusion

Pending further appeal on these issues, the Court of Appeal’s decision confirms the generally accepted position that there is no automatic right to damages for loss of bargain in the event that charterers fail to pay full hire on time thus resolving the uncertainty and resulting market unease the two earlier conflicting Commercial Court decisions had brought to the industry. Assureds chartering tonnage on the new NYPE 2015 time charterparty form should be aware that the revised Clause 11 dealing with payment of hire varies the common law position as, in addition enabling owners to withdraw the vessel and terminate the charter, it contains express wording that allows owners to claim damages from charterers to cover the remaining period of the charter if owners are able to establish a loss as a result of the early termination of the charterparty (such as future lost earnings due to falling market rates)4. Accordingly, Assureds would be advised to reject or amend this wording where commercially possible to ensure a failure to pay hire on time is not treated as a breach of condition. Assureds are nonetheless warned that late and/or non‐payment of hire may still amount to a repudiatory breach of charter if owners are able to show evidence of renunciation, that is, proof that charterers had no intention to perform the charter in the future. Assureds are invited to contact the claims department in London or Shanghai if they have any queries concerning this Bulletin.

4 See our Circular 004/2015 of 15 December 2015