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You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Spar Shipping AS v Grand China Logistics Holding (Group) Co, Ltd [2015] EWHC 718 (Comm) (18 March 2015) URL: https://www.bailii.org/ew/cases/EWHC/Comm/2015/718.html Cite as: [2015] EWHC 718 (Comm), [2015] 2 Lloyd's LR 407, [2015] 2 Lloyd's Rep 407 |
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QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Combined Court Centre
The Law Courts
Winchester
Hants SO 23 9EL
B e f o r e :
____________________
SPAR SHIPPING AS |
Claimant |
|
- and - |
||
GRAND CHINA LOGISTICS HOLDING (GROUP) CO., LTD |
Defendant |
____________________
Michael Coburn QC (instructed by Holman Fenwick Willan LLP) for the Defendant
Hearing dates: 29, 30 January, 2, 4 February 2015
____________________
Crown Copyright ©
The Hon. Mr Justice Popplewell :
Introduction
(1) The balance due under the charters prior to termination, quantified after credit for bunkers remaining on board and other cross claims at US$217,238.95 for the SPAR CAPELLA and US$344,431.14 for the SPAR VEGA (there was a small balance in favour of GCS on the balance of accounts for the SPAR DRACO).
(2) Damages for loss of bargain in respect of the unexpired term of the charters. In respect of the SPAR DRACO it was common ground that there was at the date of termination an available market for a substitute time charter for the unexpired term of the charter of about 18 months at US$13,000 per day, on the basis of which damages were quantified at US$2,739,029. In respect of the SPAR CAPELLA and SPAR VEGA it was common ground that at the date of termination there was no market for a substitute time charter for the unexpired term of the charters of about four years. Spar has quantified the damages as the difference between what it would have earned under the charters and the actual earnings from employment of the vessels to date and estimated future earnings of US$9,600 per day until expiry of the charter periods in December 2015. The calculations performed by Spar in respect of actual earnings did not in fact cover the entire period up to the hearing date but only up to 31 December 2014 with the period thereafter being treated as future earnings. The amounts claimed were:
(a) SPAR CAPELLA: US$7,967,879.16 to 31.12.14 and US$2,308,658.23 for future earnings to expiry, making a total of US$10,276,537.39;
(b) SPAR VEGA: US$8,012,272.22 to 31.12.14 and US$2,349,899.27 for future earnings to expiry, making a total of US$10,362,171.49;
(3) Spar's costs of the arbitration proceedings against GCS in the sum of £319,868.19.
(1) Is GCL bound by the Guarantees? In particular:
(a) Did Mr Jia have actual authority?
(b) Did Mr Jia have ostensible authority?
(c) Did GCL ratify the Guarantees?
(d) Is non registration with SAFE relevant, and if so does it render the Guarantees unenforceable?
(2) Is payment of hire a condition of the charterparties?
(3) If not, was GCS's conduct in relation to payment of hire a repudiation or renunciation?
(4) What is the correct principle for assessment of damages for a charterer's repudiation of a time charter where there is no market for a replacement time charter of the duration of the unexpired term of the charter?
(5) What alternative time charter employment was available for the SPAR CAPELLA and SPAR VEGA?
(6) What other adjustments fall to be made, if any, to the quantum of Spar's claim?
(7) Do the arbitration costs fall within the scope of liability under the Guarantees?
Narrative
Name: XXX XXX
Title: Board Chairman
For and on behalf of [blank]
"11. Hire Payment"
(a) Payment
Payment of Hire shall be made so as to be received by the Owners or their designated payee as per Clause 50 [which identified the owners' account at a bank in Norway and provided for the first payment to be made within 3 banking days of delivery] in United States Currency, in funds available to the Owners on the due date, 15 days in advance Failing the punctual and regular payment of the hire, or on any fundamental breach whatsoever of this Charter Party, the Owners shall be at liberty to withdraw the Vessel from the service of the Charterers without prejudice to any claims they (the Owners) may otherwise have on the Charterers.
At any time after the expiry of the grace period provided in Sub-Clause 11 (b) hereunder and while the hire is outstanding, the Owners shall, without prejudice to the liberty to withdraw, be entitled to withhold the performance of any and all of their obligations hereunder and shall have no responsibility whatsoever for any consequences thereof, in respect of which the Charterers hereby indemnify the Owners, and hire shall continue to accrue and any extra expenses resulting from such withholding shall be for the Charterers' account.
(b) Grace Period
Where there is a failure to make punctual and regular payment of hire due to oversight, negligence, errors or omissions on the part of the Charterers or their bankers, the Charterers shall be given by the Owners 3 clear banking days written notice to rectify the failure, and when so rectified within those 3 days following the Owners' notice the payment shall stand as regular and punctual.
Failure by the Charterers to pay the hire within 3 days of their receiving the Owners' notice as provided herein, shall entitle the Owners to withdraw as set forth in Sub-clause 11(a) above."
"Name: MR JIA Hongxiang
Title: Board Chairman"
" ..
"1) We hereby unconditionally and irrevocably guarantee as primary obligor the full and timely performance by the Charterers of each and every obligation of the Charter Party, and in the event of any one or more defaults in performance by the Charterers, we undertake on your first written demand to promptly rectify each and every default and hereby accept the responsibility for any liability, losses or damages that you suffer as a result or arising out of any such default.
2) We hereby waive due diligence, notice by defaults, and other notice or demand of any kind, and consent to any and all extensions of time, indulgence or waiver of rights under the Charter Party and to any modifications, variation or amendment of the said Charter Party. We shall not be released or discharged from our liability hereunder by any of the above or any change in the shareholding relationship between us and the Charterers.
3) This guarantee shall be governed by and construed in accordance with English law
Name: MR JIA Hongxiang [beside which Mr Jia's signature appeared]
Title: Board Chairman
For and on behalf of [GCL]"
(1) On 24 September 2011 Spar entered into a substitute fixture with the existing subcharterers, Flame SA, for a short period, to enable discharge of the cargo then loaded on board, at a daily rate of US$14,275.
(2) On 29 September 2011, Spar fixed a time charter with Swiss Marine Asia for a term of 12 months on a floating rate of 103.75% of the daily Baltic Supramax Index. The Vessel was delivered into the charter on 8 October 2011, after completion of the discharge of cargo in South China and re-delivery of the vessel from Flame SA. The Vessel was redelivered on 16 September 2012.
(3) From 16 September 2012, Spar entered the Vessel in the Navig8 Pool, for a minimum period of 12 months. Mr Ellefsen gave evidence that the SPAR CAPELLA was still in the Navig8 pool at the time of the hearing, but that Spar had recently given notice to withdraw it.
(1) On 29 September 2011 Spar entered into a 12 month substitute fixture with Swiss Marine Asia, for the same duration and on similar terms as those agreed in respect of the SPAR CAPELLA. The vessel was re-delivered in mid-October 2012.
(2) The vessel was placed in the Navig8 Pool from 16 October 2012 and remained in the pool until November 2014.
(3) On 18 November 2014 Spar entered into a charterparty with Centurion Bulk Pte Ltd for a minimum period of 40 days at a rate of $10,000 per day. Mr Ellefsen gave evidence that the vessel was re-delivered at the beginning of January 2015 and had subsequently been employed in a new charter going into the Persian Gulf at a daily rate of $6,000.
(1) On 5 October 2011 Spar entered into a substitute short-term fixture with JSW Ispat Steel Ltd for a term of 10 - 15 days at a daily rate of US$14,100.
(2) Following re-delivery of the vessel, Spar entered into a new fixture with Allied Maritime Inc for 4 - 6 months at a rate of US$14,250 per day.
(3) On 23 February 2012 Spar entered into a new 4 - 6 month fixture with D'Amico Dry Ltd at $11,500 per day. The vessel was delivered on 16 March 2012 and re-delivered to Spar on 6 June 2012.
(4) On 4 September 2012 Spar entered into an agreement for the SPAR DRACO to be placed into the Navig8 Pool for a minimum period of 12 months.
Issue 1: Is GCL bound by the Guarantees?
Actual authority: Chinese law
"Article 24
The Board of Directors shall be the decision-making organ of the Company as well as the standing organ of powers of the Board of Shareholders. The Board of Directors shall be accountable to the Board of Shareholders.
Article 25
The Board of Directors of the Company shall comprise of 5 directors, among whom there shall be one Board Chairman, one Executive Board Chairman and three Vice Board Chairmen. The term of office shall be 3 years. A director may serve consecutive terms upon expiration if re-elected.
Article 26
The directors shall be elected by the Board of Shareholders. The Board Chairman, the Executive Board Chairman and the Vice Board Chairmen shall be elected by the Board of Directors. The Board Chairman is the legal representative of the Company. The term of office of the Board Chairman, the Executive Board Chairman and the Vice Board Chairman shall be 3 years and may serve consecutive terms upon expiration if re-elected.
Article 30
The Board of Directors shall exercise the following functions and powers:
(1) Convene shareholders' meetings
(2) Execute resolutions passed in shareholder's meetings;
(3) Review and determine the Company's development plans, annual production and operation plans, financial budget and accounting proposals, profit distribution proposals and proposals for making up losses;
(4) Put forward proposals for the increase or reduction of the Company's registered capital, issuance of bonds, and for mergers, divisions, dissolution and liquidation of the Company;
(5) Appoint General Manager and, upon the General Manager's nomination, appoint the senior managerial personnel including the Vice General Manager and financial officers of the Company;
(6) Ascertain the operational and managerial system of the Company, including the labour and wages system, personnel management system and financial affairs management system;
(7) Examine and approve proposals regarding structural establishment and manning quotas proposed by the General Manager;
(8) Examine and approve important operational decisions of the Company;
(9) Other functions and powers authorised in the shareholders' meeting.
Article 31
The Board Chairman is the legal representative of the Company and shall exercise the following functions and powers:
(1) Convene and preside over meetings of the Board;
(2) Monitor the execution of the resolutions passed at the Board meetings;
(3) Sign the Capital Contribution Certificates, important contracts and other important documents of the Company;
(4) Give guidance and instructions regarding important business activities of the Company in the intercession of the Board of Directors;
The Executive Board Chairman and Vice Board Chairmen shall assist the Board Chairman in his or her work. If the Board Chairman is unable to perform his or her duties, he or she can authorise the Executive Board Chairman or the Vice Board Chairmen to carry out part or all of the Board Chairman's duties."
(1) Article 13 of the Company Law provides for a company to have a Legal Representative who is registered in a publicly available register. The Legal Representative is to be the Board Chairman, the Executive Board Chairman or the Manager, in accordance with the company's articles of association. Articles 26 and 31 of GCL's articles of association provided for the Chairman to be the Legal Representative. Mr Li Qing was the Chairman of GCL March 2010 and therefore the Legal Representative pursuant to its articles of association at the time the Guarantees were executed.
(2) Under Article 38 of the General Principles of Civil Law PRC (1987) ("GPCL"), a company is bound by the acts of its Legal Representative exercising his powers in accordance with the articles of association. Mr Li therefore would have had authority to enter into the Guarantees if in so doing he was exercising powers he had under the articles.
(3) Acts of a person other than the Legal Representative will also be binding if the company has authorised that other person to perform the acts. This is the effect of Article 63(1)(2) of the GPCL which provides:
" legal persons may perform civil juristic acts through agents. An agent shall perform civil juristic acts in the principal's name within the scope of the power of agency. The principal shall bear civil liability for the agent's acts of agency."
(4) Accordingly if Mr Li as Legal Representative had authority to enter into the Guarantees exercising powers he had under the articles, and authorised Mr Jia to execute the Guarantees, GCL would be bound by them. The possibility of such delegated authority is expressly recognised in article 31 of GCL's articles of association.
(5) Acts of a person other than the Legal Representative will also be binding if the person performs an act in the name of the company, with the knowledge of the company, and the company makes no objection. This is the effect of Article 66 of GPCL which provides:
"The principal shall bear civil liability for an act performed by an actor with no power of agency, beyond the scope of his power of agency or after his power of agency has expired, only if he recognizes the act retroactively. If the act is not so recognized, the performer shall bear civil liability for it. If a principal is aware that a civil act is being executed in his name but fails to repudiate it, his consent shall be deemed to have been given."
(6) Contracts will bind a company if signed or sealed by the relevant person. It is not necessary that they should be both signed and sealed. Whereas it was common in the past for the company seal or "chop" to be attached to documents, the practice was not universal and has become less frequent in more recent years in relation to international contracts.
Article 43 GPCL
"An enterprise as legal person shall bear civil liability for the business activities of its legal representatives and other personnel."
Article 58 of the SPC Opinions
"The legal representative of an enterprise legal person and other personnel who engage in business activities in the name of the legal person and cause economic damages to others, the enterprise legal person shall undertake civil legal liabilities."
(1) Mr Li expressly authorised Mr Jia to sign them; or
(2) Mr Li knew that Mr Jia was signing them and purporting to bind GCL when they were executed, but did nothing to repudiate Mr Jia's authority to do so; or
(3) Irrespective of any authorisation or knowledge on the part of Mr Li, Mr Jia was performing a duty related activity in signing the Guarantees.
Actual authority: the facts
(1) On 4 March 2010 GCS imposed a "subject BOD" approval and subsequently confirmed on 5 March 2010 that it had been lifted. I have already expressed my conclusion that the obvious inference from this exchange, and from the further exchange on 8 March 2010, is that a board resolution of GCS had taken place on 5 March 2010 following conclusion of the fixture negotiations, in order to give or withhold approval of GCS entering into the charters. Mr Coburn submitted that the fact that the subject was lifted did not necessarily mean that a board meeting had taken place. But there would have been little purpose in imposing the subject in the first place unless board approval was regarded as required. The significance of this is that Mr Li was not only Chairman of GCL, but was also at the time a director of GCS, who would have attended such a board meeting in that capacity and participated in giving approval on behalf of GCS. The fixture terms made very clear that GCS's obligations were to be guaranteed by GCL and Mr Li could not have been unaware of this as a member of GCS's board considering approval of the charters. He must have known that Guarantees were required to be, and would be, given on behalf of GCL.
(2) On 5 March 2010 Mr Kong of GCS said that the Guarantees were "on formalities for approving", and "now in the process of internal procedure" which suggests that GCL's internal procedures were being engaged. If these required authorisation from Mr Li, the natural inference is that the procedures were followed and such authorisation was sought and granted before any Guarantees were provided. Mr Kong confirmed on 25 March 2010 that the formalities had been completed. The natural inference is that whatever authority was required by internal procedures for the execution of the Guarantees by whoever was to sign them had been obtained.
(3) Mr Jia signed the Guarantees. Mr Yang's unchallenged evidence was that Mr Li's background was in aviation, whereas Mr Jia's was in shipping. It would therefore have been natural for Mr Jia to be in charge of executing Guarantees for long term time charters. There is no evidence which suggests that Mr Jia was the kind of man who would execute guarantees without being authorised, or of any reason why he would have done so in this instance. The fact that he did so over the title of Chairman is consistent with his not noticing or being bothered about that inaccuracy given that the draft was prepared by Spar and would have been presented to him in that form. Mr Coburn referred me to some internet material which raised the suggestion that Mr Jia had subsequently been accused of bribery in relation to a different charter, but Mr Coburn made clear that he did not accuse Spar of involvement in any bribery, and GCL could have been expected to adduce evidence if there were any grounds for even suspicion of bribery in relation to these charters or Guarantees.
(4) Mr Jia had executed guarantees on behalf of GCL which guaranteed GCS's charter obligations on at least six other occasions whilst he was Executive Board Chairman in 2010:
(a) On 28 January 2010 Mr Jia signed a guarantee on behalf of GCL guaranteeing the obligations of GCS as charterers of the m/v Minerva under a charterparty dated 26 January 2010. The guarantee also bore the company seal.
(b) Mr Jia signed an undated guarantee on behalf of GCL guaranteeing the obligations of GCS as charterers of the m/v Monemvasia under a time trip charterparty dated 1 March 2010. This guarantee did not bear the company seal.
(c) On 21 April 2010 Mr Jia signed a guarantee on behalf of GCL guaranteeing the obligations of GCS or a nominee under a bareboat charter dated 12 April 2010. The guarantee also bore the company seal.
(d) Mr Jia signed an undated guarantee on behalf of GCL guaranteeing the obligations of GCS as charterers under a charterparty with Danish owners dated 30 August 2010. The guarantee also bore the company seal.
(e) The Monemvasia charter was extended by amendment to become a two year time charter, performance of which was further guaranteed by GCL by an agreement dated 10 October 2010. Mr Jia signed the guarantee agreement on behalf of GCL, this time with the company seal. The obligations under this agreement were further guaranteed by HNA.
(f) On 22 October 2010 Mr Jia signed a guarantee on behalf of GCL guaranteeing the obligations of GCS as time charterers of the m/v Bulk Singapore under a charterparty dated 1 June 2010. The guarantee also bore the company seal.
(5) Five of these six guarantees bore the company seal. Either it was applied by Mr Jia, which suggests that he had access to the seal and therefore that he was on occasion given authority to sign guarantees on behalf of GCL; or the seal was applied by Mr Li with signature by Mr Jia either before or afterwards, which again would be indicative of Mr Jia having authority to sign such guarantees.
(6) GCL did not disclose copies of any of these six guarantees signed by Mr Jia. Spar obtained them from public files in litigation in the USA. In fact GCL did not disclose any documents evidencing internal communications in respect of the conclusion of the Spar charters or the Guarantees, notwithstanding that Mr Li described a formal internal procedure requiring consideration by the compliance department, the financial department and the board of directors. GCL served a witness statement from the General Manager of its HR department explaining that its practice was such that it was left to retiring employees to select documents from their personal hard drives to pass on to those taking over, and the remainder would be deleted. Whilst not accepting Mr Phillips' submission that such a document retention policy was incredible, nevertheless I find it hard to believe that no documentation survives from the formal compliance and authorisation procedures for those guarantees executed by Mr Jia in other cases, or that copies of those guarantees themselves, which would be important documents, were not preserved in copy. I am forced to the conclusion that such material has not been provided because those within GCL who are responsible for doing so did not wish the court to see it because it did not assist GCL's case.
(7) The report of what Mr Adam Tan of HNA/GCL said at the meeting in early July 2011 suggests that GCL were then treating the Guarantees as validly given on its behalf. If there had been any doubt over Mr Jia's authority to execute them the previous year, Mr Tan could have been expected to raise it then.
(8) When Spar sent letters to GCL on 16 September 2011 claiming on the Guarantees, GCL could have been expected to deny that the Guarantees were binding if that was thought to be the case. There was no such response. I reject GCL's suggestion that the letters were not received, in the light of the fact that they were sent to what was still GCL's current fax number; and in the light of the subsequent discussion between Mr Shao of RS Platou and Mr Luo Zhipeng, the general manager of GCL's compliance department, on 22 September, followed by an email referring to the claim on the Guarantees and Mr Luo's response.
(9) Again, Mr Luo's failure to suggest at this point that there was any doubt that GCL was bound by the Guarantees is telling. He was not some junior functionary but head of the compliance compartment and could be expected to have investigated whether the Guarantees had indeed been validly given on behalf of GCL before corresponding on the basis that they had.
(10) Although Mr Jia has left GCL, GCL provided no information, still less evidence, to the effect that he would not assist by giving evidence, and if so explaining why not. His departure from GCL is not of itself an explanation, as is apparent from Mr Li's willingness to provide a statement despite having left the company. Applying the principles identified in Wisniewsky v Central Manchester Healthy Authority [1998] PIQR 324, 340, it is legitimate to draw the inference, that GCL has not called him because it did not think that his evidence would assist its case.
(11) GCL has disclosed no documents or other evidence identifying when it discovered the existence of the allegedly unauthorised Guarantees, of which it was aware no later than 16 September 2011, nor any documents containing or evidencing any adverse reaction, either internally or externally. Had Mr Jia been unauthorised, one would have expected disclosure of such documents and some witness evidence explaining GCL's reaction upon its discovery and its investigation into what had happened.
(1) Mr Li was not called to give evidence and his evidence has not been tested.
(2) Spar had given advance notice that it would ask the court to draw adverse inferences from the failure of Mr Li to give evidence. Although he has left GCL, it had access to him as a cooperative and potentially available witness who agreed to provide a statement. In advance of the trial GCL adduced no evidence as to why Mr Li was not to be called as a witness. The Court will only take into account evidence, not submission, which is tendered as an explanation for failure to call a witness if advance notice has been given that the court will be invited to draw an adverse inference: see Imam-Sadeque v Bluebay Asset Management [2012] EWHC 3511 (QB) at paragraph [10]. In his opening, Mr Coburn submitted on instructions (from what GCL had told his instructing solicitors, not as a result of any direct contact between the solicitors and Mr Li) that Mr Li was unwilling to attend. Mr Phillips said that he was prepared to treat this as being evidence. I therefore proceed on the basis that the explanation for his absence is not incapacity or unavailability but simply an unwillingness to give his evidence on oath and face cross examination. There was no information from GCL, still less evidence, as to why Mr Li was unwilling to give evidence. Mr Coburn speculated that it might have been the result of a reluctance to travel a long distance to be subjected to an ordeal in a hostile foreign environment. This is illegitimate speculation, but in any event would not explain an unwillingness to give evidence by video link. In the absence of further explanation, it is permissible to draw the conclusion that he was unwilling to give his evidence on oath and have the evidence tested by questioning because he did not think it would stand scrutiny.
(3) This is an inference which gains strength from other aspects of his statement which are inconsistent with evidence in the case in important respects:
(a) Mr Li suggested that guarantees of the type in issue in this action would only be signed by him. This is inconsistent with the signature by Mr Jia of such guarantees on at least six separate occasions in 2010. This is not explained by Mr Li who makes no reference to the other guarantees signed by Mr Jia in his statement.
(b) Mr Li asserted that only he, as the Legal Representative, could collect the company seal from the administration department of GCL, where it was kept, and apply it to contracts. This is inconsistent with the five guarantees executed by Mr Jia which bear the chop.
(c) Mr Li provides no explanation for being ignorant of the Guarantees in the face of the apparent approval of the charters by the board of GCS, of which he was a member, in circumstances where the charters expressly referred to the fact that they were to be guaranteed by GCL.
(4) Mr Li's statement leaves many questions unanswered. If the internal procedures required submission to the compliance department, the financial department, the board and then him, why did none of these take place? Or if authorisation was declined somewhere in the chain, when, and by whom, and why? And if so why were Spar not so informed? Or if the authorisation process was never initiated, how is that to be reconciled with the correspondence suggesting that it was, and the express requirement in the fixture that there should be guarantees? And again, if so, why was Spar not informed? What explanation could there be for Mr Jia executing the Guarantees when he knew he was not authorised to do so? He could hardly have expected the fact that he had done so to be secret from others. GCL's case involves the improbable assumption that Mr Jia was on an unexplained frolic of his own in signing these Guarantees, of which no one else within GCL or HNA was aware for several years.
Ostensible authority
Ratification
"102. The principles governing ratification by a purported principal of an act done in his name were considered by Waller J in Suncorp Insurance and Finance v Milano Assicurazioni SPA [1995] 2 Lloyd's Rep 225 especially at page 234 and by Moore-Bick J in Yona International Limited v La Reunion Francaise SA [1996] 2 Lloyd's Rep 84 especially at pages 103 and 106. Ratification may be implied as well as express, and there is no requirement that it be communicated to either the agent or the person with whom the agent entered into the contract: it operates as a unilateral manifestation of will. Mere acquiescence or inactivity may be sufficient to constitute ratification. However, it involves a conscious decision to adopt an unauthorised act, and in order for there to be ratification:
(i) The act of ratification must be that of the principal or of someone competent at the time of ratification to make the contract in question or to do the relevant act for the principal.
(ii) The person ratifying the agent's conduct must know of all the material circumstances, unless he evinces an intention to ratify the contractual or other act regardless of them.
(iii) In a case of ratification through silence and inactivity, it must be such as to manifest unequivocally an intention to adopt the act in question.
103. In the Yona International case, Moore-Bick J said this (at page 106), which to my mind has some application to this case:
'The essence of ratification is a decision by the principal to adopt the unauthorized act as his own. It does not therefore depend on communication with or representation to the third party and is thus in principle distinct from estoppel, but since the intention to ratify must be manifested in some way it will in practice often be communicated to and relied upon by the other party to the transaction. Ratification can no doubt be inferred without difficulty from silence or inactivity in cases where the principal, by failing to disown the transaction, allows a state of affairs to come about which is inconsistent with treating the transaction as unauthorized. That is probably no more than a form of ratification by conduct. Where there is nothing of that kind, however, the position is more difficult since silence or inaction may simply reflect an unwillingness or inability on the part of the principal to commit himself. For that reason it will not usually be sufficient to evidence ratification, nor will it amount to an unequivocal representation sufficient to give rise to an estoppel.'"
SAFE
Issue 2: Is payment of hire a condition of the charterparties?
The doctrine of precedent
"That unqualified statement of a general rule comes from a source to which the greatest possible respect is due. It is fortuitous that my own instinct should have coincided with it. However diffident I might have been in relying on instinct alone, the coincidence encourages me to suggest a reason for the rule. It is that it is desirable that the law, at whatever level it is declared, should generally be certain. If a decision of this court, reached after full consideration of an earlier one which went the other way, is normally to be open to review on a third occasion when the same point arises for decision at the same level, there will be no end of it. Why not in a fourth, fifth or sixth case as well? Mr. Barnes had to face that prospect with equanimity or, perhaps to be fairer to him, with resignation. I decline to join him, especially in times when the cost of litigation and the pressure of work on the courts are so great. There must come a time when a point is normally to be treated as having been settled at first instance. I think that that should be when the earlier decision has been fully considered, but not followed, in a later one. Consistently with the modern approach of the judges of this court to an earlier decision of one of their number (see, e.g., Police Authority for Huddersfield v. Watson [1947] K.B. 842, 848, per Lord Goddard C.J.), I would make an exception only in the case, which must be rare, where the third judge is convinced that the second was wrong in not following the first. An obvious example is where some binding or persuasive authority has not been cited in either of the first two cases. If that is the rule then, unless the party interested seriously intends to submit that it falls within the exception, the hearing at first instance in the third case will, so far as the point in question is concerned, be a formality, with any argument upon it reserved to the Court of Appeal."
Terminology
(1) There are essentially three categories of conduct by one party to a contract which may entitle the innocent party to treat the contract as at an end, namely (a) a total or partial failure to perform obligations which have fallen due, (b) conduct which evinces an intention not to perform future obligations when they fall due, and (c) impossibility to perform future obligations when they fall due created by the defaulting party's own act. The first is actual breach. The second and third, commonly termed renunciation and self induced impossibility respectively, are the two forms of anticipatory breach.
(2) In the absence of any relevant contractual or statutory provision, the innocent party's right to treat the contract as terminated will depend upon whether the term breached is to be categorised as a condition, a warranty or an innominate term. Any breach of a condition will entitle the innocent party to terminate the contract. Only a sufficiently serious breach of an innominate term will do so, often expressed as one which goes to the root of the contract or one which deprives the innocent party of substantially the whole benefit of the contract. The expression repudiatory breach is sometimes used to cover only a breach of an innominate term, in distinction to a breach of condition; sometimes it is used to cover both. I shall use it to cover both. It is also commonly used to describe the form of anticipatory breach directed to performance of future obligations, which I prefer to call renunciation. Elision between use of the terms repudiation and renunciation is common in the cases, not least because an actual breach may itself evince an intention not to perform in the future and therefore be renunciatory. But use of the word repudiatory to refer to conduct which is relevant not as actual breach in the past but only insofar as it casts light on future performance may lead to confusion of thought, and I prefer to use it only to describe a category of actual breach.
(3) Where there is a repudiatory breach or renunciation, the innocent party is entitled to elect to terminate the contract. If he does so, the consequence is that (a) each party is relieved from its obligations to render any further performance under the contract; and (b) the innocent party is entitled to damages for loss caused by the breach, which includes loss flowing from the termination. For the purpose of assessing damages, it is the defaulting party's repudiatory breach or renunciation which is regarded as the cause of the termination, not the innocent party's election to terminate.
(4) Other language has been used to describe a "condition", used in this sense as a term any breach of which is sufficient to give rise to a right to terminate. Where the obligation in question falls to be performed by a certain time, the question has often been formulated as "whether time is of the essence". Other formulations include whether the term is an essential term or a fundamental term, although Lord Diplock who has played a large part in the development of the jurisprudence in this area, uses the expression fundamental breach to connote a repudiatory breach of an innominate term in contradistinction to a breach of condition.
(5) It is possible by express provision in the contract to make a term a condition, even if it would not be so in the absence of such a provision. So a stipulation that time is of the essence, in relation to a particular contractual term, denotes that timely performance is a condition of the contract. The consequence is that delay in performance is treated as repudiatory, without regard to the gravity of the breach, such that the injured party may elect to terminate and recover damages in respect of the defaulting party's outstanding obligations.
"It seems to me that when an agreement of hiring is terminated by virtue of a power contained in it, and the owner retakes the vehicle, he can recover damages for any breach up to the date of termination but not for any breach thereafter, for the simple reason that there are no breaches thereafter. I see no difference in this respect between the letting of a vehicle on hire and the letting of land on a lease. If a lessor, under a proviso for re-entry, re-enters on the ground of non-payment of rent or of disrepair, he gets the arrears of rent up to the date of re-entry and damages for want of repair at that date, but he does not get damages for loss of rent or for breaches of repair thereafter."
"Once the hirer repudiated his liability for future rentals, the owners were entitled to treat the repudiation as itself a breach going to the root of the contract: and, on accepting it as such, they were entitled to regard the hiring as at an end and retake the vehicle. The repudiation being itself a breach which took place before the termination, it is within the class of breaches for which the owners can recover damages according to the principle I have already stated. But if there is no repudiation, and simply, as here, a failure to pay one or two instalments (the failure not going to the root of the contract and only giving a right to terminate by virtue of an express stipulation in the contract), the owners can only recover the instalments in arrear, with interest, and nothing else; for there was no other breach in existence at the termination of the hiring."
" .. in the absence of express provision to the contrary, the non-payment of two instalments would not be an event which relieved the owners from their undertaking to do what they had agreed to do but had not yet done.
As I ventured to point out in Hongkong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd, parties to a contract may incorporate in it provisions which expressly define the events, whether or not they amount to breaches of contract, which are to have this result. But such a provision of itself may do no more than define an event which of itself, or at the option of one or other of the parties, brings the contract to an end and thus relieves both parties from their undertakings further to perform their obligations thereunder. Whether or not it does more than this and confers any other rights or remedies on either party on termination of the contract, depends on the true construction of the relevant provision."
" where one party has done something which the law regards as a wrongful repudiation of the contract and the other party has thereupon determined the contract, whether under an express power contained in the contract or in the exercise of his right to do so under the common law, he is entitled to damages for non-performance of the contract during the period that it has still to run; but if that party has not done something which the law regards as a wrongful repudiation of the contract, the other party, although he may be entitled under an express power to determine the contract, is not entitled to damages for non-performance of the contract during the period for which it would have continued to run but for such determination."
The time charter withdrawal authorities.
"Then it was said that the owner, if not entitled to freight under that clause, is entitled to damages to an equal amount for the charterers' breach of contract, the breach being the failure of the charterers to pay punctually the hire due on January 10, that this breach occurred while the ship was beyond the reach of the owner so that he could not resume effective control of her, and that therefore he is entitled as damages to an amount equal to hire for the period from January 11 to January 23 when he got possession of his ship at Barry. That argument is fallacious. The non-payment of the hire was not the cause of loss, if any, incurred by the owner through not getting possession of his ship till January 23. The real cause was his own act in withdrawing his ship of his own volition on January 11 when he was well able to make an advantageous choice between leaving control to the charterers and assuming it himself. Having done that act, presumably with a just view of his own interest, he cannot rely upon it as giving him a right to damages."
"On the whole my view is that the damages arise as the natural and probable consequence of the defendant's breach of contract in failing to pay the two instalments of hire which were due at the time of the withdrawal."
"Default in payment, that is, on the due date is not in my opinion excused by accident or inadvertence. The duty to pay is unqualified so far as the express terms of the charterparty go. I think this is the true construction of the terms of the contract, and it is confirmed by the cases cited in argument. A dictum or decision of Bigham J. in Nova Scotia Steel Co., Ld. v. Sutherland Steam Shipping Co., Ld. (1899) 5 Com. Cas. 106, has been relied upon as an authority that a certain latitude was permissible so that payment made two days after the due date did not constitute a default in payment. But I cannot agree that so drastic a departure from the specific words of the charter can be supported. In that case the clause provided for regular and punctual payment: these adjectives however add nothing to the stringency of the simple and unqualified language in the charter before this House. I think that so much of Bigham J's judgment as conceded a latitude as to the date of payment is erroneous in law and should be overruled. The importance of this advance payment to be made by the charterers, is that it is the substance of the consideration given to the shipowner for the use and service of the ship and crew which the shipowner agrees to give. He is entitled to have the periodical payment as stipulated in advance of his performance so long as the charterparty continues. Hence the stringency of his right to cancel."
"The significance of that passage, as I see it, is that although it does not state in terms that the provision for payment of hire is a condition, Lord Wright's reasoning is clearly predicated upon it being an essential term of the contract, which, as other cases demonstrate, is synonymous with the provision being a condition."
"It is important to remember that in relation to the payment of hire under a time charterparty, time is of the essence of the contract only in the sense that there is a breach of contract if payment is a moment late. It is not of the essence of the contract in the sense that late payment goes to the root of the contract and is a repudiating breach giving rise to a common law right in the owners to treat the contract as at an end. The right to withdraw the vessel and thus bring the charterparty to an end is contractual and the situations in which this right is exercisable depend upon the true construction of the contract. In the present case the words are 'In default of payment'. Does this mean 'If there has been default in payment' or does it mean 'Whilst there is default in payment'? If it means the former, a shipowner can take his time considering whether or not to withdraw the vessel and there is no action which the charterer can take to retrieve the position, although a stage will eventually be reached when, in the absence of a withdrawal of the vessel, it can be said that the owner has waived his rights. If it means the latter, the owner can still withdraw the vessel if he acts promptly, but the charterer can retrieve the situation if he pays or tenders the hire before the owner acts.
"Both the wording of the clause and the drastic nature of the right conferred on the owners lead me to the conclusion that the right of withdrawal is intended as a spur to timeous payment, which subsists only so long as there is an absence of payment rather than a punishment for late payment. Once payment has been made, whether late or in time, there is no further need for such encouragement. The words are 'In default of' which I construe as 'in the absence of'."
"The effect of a stipulation as to time always depends on the true construction of the contract. A default in payment does not automatically give the other a right to determine it. Usually it does not do so. It only does so if there is an express provision giving the right to determine, or if the non-payment is such as to amount to a repudiation of the contract. That is shown by Martindale v. Smith, (1841) 1 Q.B. 389; and by the well-known judgment of Lord Blackburn in Mersey Steel and Iron Company (Ltd.) v. Naylor, Benzon & Co., (1884) 9 App. Cas. 434, at p. 444. In the present case the non-payment was clearly not such as to amount to repudiation. It was obviously a mistake. The charterers thought that as the banks were closed on Saturday and Sunday, Monday would do. They were wrong in so thinking. But they were not repudiating the contract. Then does the clause itself give the shipowners the right to withdraw? I think it does, as the Tankexpress case shows, provided always that they exercise the right before payment is made or tendered. I think in this clause the words "in default of payment" mean "in default of payment and so long as default continues". It means that the owners have the option so long as the charterers are in default to withdraw the vessel. But, once the charterers remedy their default, by paying the instalment or tendering it, the owners have no right to withdraw."
"It was argued by Mr Evans that there were two features of clause 5 of the charterparty in this case, not present in clause 6 of the charterparty in [The Georgios C. ie the Baltime form] which showed that the parties intended the obligation to pay hire by a certain date to be of the essence of the contract. These were, first, the use in relation to the word 'payment' of the epithets 'punctual' and 'regular', and, secondly, the presence of the words 'or any breach of this charterparty'. As regards the epithets 'punctual' and 'regular' he said that these emphasised the importance of the obligation, and he relied, in support of this proposition, on Maclaine v Gatty [1921] 1 AC 376 and particularly on the observations of Viscount Finlay, at p 389. As regards the words 'or any breach of this charterparty' he said that it was necessary to imply the words 'in the event of' between the words 'or' and 'any', and that what was then meant was that, in the event of a breach of any essential term of the charterparty, other than failure to pay hire punctually, the owners should have the right to withdraw the ship. It followed that failure to pay hire punctually was being treated as being in the same category as breach of any other essential term. Against that Mr Goff contended that the use of the epithets 'punctual' and 'regular' added nothing or little to the word 'payment' standing alone; and that reservation of an express right of withdrawal for failure to pay hire tended to show that the obligation was not otherwise of such a character as to be an essential term.
I have considered these arguments carefully and I have reached the conclusion that there is nothing in clause 5 which shows clearly that the parties intended the obligation to pay hire punctually to be an essential term of the contract, as distinct from being a term for breach of which an express right to withdraw was given. It follows that I decide the first point of construction in favour of the charterers."
"6. Repudiation
It remains to deal with the owners' cross-notice. This relates to Brandon J.'s rejection of the plea contained in paragraph 13 of the defence that the charterers' failure to pay the April hire punctually, following as it did on persistent late payments and notwithstanding the owners' protests in January and February 1970,. . . "constituted a breach of condition and/or a repudiation and/or fundamental breach of the charterparty . . ." which entitled the owners to rescind by withdrawing the ship. Mr. Anthony Evans evinced no enthusiasm in supporting this plea, and that, I think, was wholly understandable. Brandon J. said [1973] 1 W.L.R. 386, 409:
"In order to justify a decision that the charterers' conduct was repudiatory it would be necessary to find that they evinced clearly by it an intention not to be bound by the terms of the contract."
He declined to hold that they had, and, on the whole of the evidence, I agree with him."
"The repudiation question
The owners contend that the history of belated hire payments by the charterers is such that the owners were entitled to treat the charterparty contract as at an end, apart altogether from the "failing punctual payment" clause. Once again, because of the assignment, there might be difficulties for the owners in relying on late payments, the right to receive which they had transferred to another person. In any event, however, with all respect, the argument on behalf of the owners wholly failed to convince me that there was any possible basis for disagreeing with the view held and expressed by Brandon J, who rejected this submission on his review of the relevant facts."
"Although when Lord Tenterden first wrote his famous text-book on Shipping it was not the practice to provide for hire to be paid in advance and for time charterers to grant an express right of withdrawal on non-payment of such advance payments, these provisions have been common form in time charters in this country and the United States for generations. I think there is much weight in Mr. Pollock's argument that if the word "withdrawal" bore the construction sought to be placed upon it by Mr. Hallgarten so as to include temporary withdrawal or suspension, this would inevitably have come up for decision in the Courts before now. The Courts seem to have treated the word "withdrawal" as equivalent to "cancellation", an interpretation which, if I may say so with respect, seems to me the natural one."
"Apart from these authorities and the remarkable absence of any authority the other way, I thought there was force and relevance in Mr. Pollock's submission that payment of hire is not a condition precedent in the contract to immediate further performance by the shipowner. Thus in The Brimnes both Mr. Justice Brandon, [1972] 2 Lloyd's Rep. 465 and 483, and the Court of Appeal [1974] 2 Lloyd's Rep. 241 at pp. 252, 256 and 262, held that late payment of hire was not of itself repudiatory entitling the owners, in the absence of a withdrawal provision, to terminate the charter. In this connection his citation of Leslie Shipping Co. v. Welstead, (1921) 7 Ll.L.Rep. 251; [1921] 3 K.B. 420, was interesting. There Mr. Justice Greer (as he then was) said at pp. 253 and 426 that the withdrawal clause was inserted in the charter for the benefit of the shipowners giving them an express right to withdraw the vessel and making it impossible that there should be any discussion about the matter. If timely payment of hire was a condition precedent, there would have been no relevance in this comment. .
If hire still remains payable should the services of the ship be withdrawn for a period without this amounting to a repudiation which is accepted, then I do not think there is that close concurrent mutuality for which Mr. Hallgarten argued."
"As has often been pointed out the description of a time charter as a hire or demise of a ship is very misleading: all that the owner does, in fact, is to agree to provide services, those of the master and the crew (whose wages the owner has - punctually - to pay) in sailing the ship for the charterers' purposes, and all that the withdrawal clause does is to entitle the owner to cease providing these services (for example see Lord Porter in the Tankexpress [1949] A.C. 76, 90). It must be obvious that this is a very different type of creature from a lease of land. I would certainly go so far as to agree that the owner has to show that the conditions necessary to entitle him to withdraw have been strictly complied with: but equally I would not overlook the fact that there are very good reasons why the charterer should punctiliously comply with the provisions as to the payment of hire in which the owner has an interest very different from that of a landlord whose essential interest is to receive the rent."
"A time charter is a contract for the provision of services. Much of its language has historical origins and is not appropriate to modern times: see Sea and Land Securities Ltd. v. William Dickinson and Co. Ltd. [1942] 2 K.B. 65, 69. During the provision of the services the shipowner bears the cost of running the vessel from day to day. For this he is to get the hire in advance because the owner puts the profit earning capacity of the ship at the disposal of the charterer. The freights are collected by the charterer; the shipowner never sees these profits. The shipowner is not obliged to perform the services on credit; he does so only against advance payment. He stipulates for and is entitled to advance payment monthly or fortnightly. He is not obliged to provide the services here for a given fortnight until he has had payment in full in respect of it: see Tankexpress A/S v. Compagnie Financiθre Belge des Petroles S.A. (The Petrofina)[1949] A.C. 76, 81, 89-90, 91, 93, 94, 97, 99-100, 102, 105. The withdrawal clause allows the shipowner to put an end to the contract."
"My Lords, it would seem that there are some members of the Court of Appeal who do not approve of the Baltime form of charter and other forms of charter such as the New York Produce Exchange and the Shelltime forms which closely resemble it. These forms of charter are undoubtedly very strict in relation to the due payment of hire: their meaning, however, is perfectly clear and it is not permissible to put a construction upon them which would depart from that meaning. Unless the full amount of hire is paid by its due date the owners have the undoubted right to withdraw their vessel providing they do so within a reasonable time of the charterers' default. The only exception is when the parties by their course of conduct (a) have as in the present case accepted that disbursements made by the charterers in respect of the owners' liabilities may be deducted from the hire subject to vouchers being produced, or e.g., (b) have accepted as in Tankexpress A/S v. Compagnie Financiθre Belge des Petroles S.A. [1949] A.C. 76 that the amount of hire posted two days before it falls due shall be deemed to have been paid in time. Otherwise, unless the full hire is paid by the time it falls due the charterers are in default and the vessel may be withdrawn. On the appeal to your Lordships' House in The Laconia [1977] A.C. 850 I ventured to point out that the law relating to the owners' rights under a Baltime form of charter to withdraw their vessel should the charterers fail to pay the hire in time had been clearly stated by your Lordships' House in the Tankexpress case; but that a great deal of doubt on the subject had since been generated by the Court of Appeal in The Georgios C [1971] 1 Q.B. 488 and had troubled the waters ever since. I expressed the hope that those doubts might finally be dispelled by your Lordships' reversal of the Court of Appeal's decision in The Laconia and overruling its decision in The Georgios C. These doubts were, however, temporarily revivified by the decision of the Court of Appeal in the present case but will now, I think, permanently be laid to rest by your Lordships' decision allowing this appeal; Certainty of meaning is of primary importance in all commercial transactions. Commercial contracts all over the world, having nothing to do with the United Kingdom, have for generations provided that any dispute arising under the contract shall be decided in the English commercial court or by arbitration in London according to English law. This is because of the confidence which exists throughout the commercial world in the administration of English justice. I fear that this confidence will hardly be strengthened should there be any further decisions in the Court of Appeal similar to those in The Georgios C, The Laconia and the instant case."
"The Baltime form of charter and others which closely resemble it may be hard on charterers, especially when the market for hiring vessels rises sharply during the span of the charter. Certainly there are other forms of charter which are not so strict. It must, however, be remembered that charterers and shipowners are usually hard-headed and experienced businessmen who freely agree upon which form of charter they will adopt."
"Nevertheless the doctrine of anticipatory breach by conduct which disables a party to a contract from performing one of his primary obligations under the contract has in my view no application to a breach of such a clause.
The relevant portions of cl. 5 have been set out by the Lord Chancellor. The first part of the clause imposes upon the respondents as charterers a primary obligation to pay the "said hire" (which by cl. 4 had been fixed at a monthly rate and pro-rata for any part of a month) punctually and regularly in advance by semi-monthly instalments in the manner specified, which would involve the payment of a minimum of 42 and a maximum of 54 instalments, during the period of the charter. Failure to comply with this primary obligation by delay in payment of one instalment is incapable in law of amounting to a "fundamental breach" of contract by the charterers in the sense to which I suggested in Photo Production Ltd. v. Securicor Transport Ltd., [1980] 1 Lloyd's Rep. 545; [1980] AC 827 at pp. 553 and 849, this expression, if used as a term of legal art, ought to be confined. The reason is that such delay in payment of one half-monthly instalment would not have the effect of depriving the owners of substantially the whole benefit which it was the intention of the parties that the owners should obtain from the unexpired period of the time charter extending over a period of between 21 and 27 months.
The second part of cl. 5, however, starting with the word "otherwise" goes on to provide expressly what the rights of the owners are to be in the event of any such breach by the charterers of their primary obligation to make punctual payment of an instalment. The owners are to be at liberty to withdraw the vessel from the service of the charterers; in other words they are entitled to treat the breach when it occurs as a breach of condition and so giving them the right to elect to treat it as putting an end to all their own primary obligations under the charter-party then remaining unperformed. But although failure by the charterers in punctual payment of any instalment, however brief the delay involved may be, is made a breach of condition it is not also thereby converted into a fundamental breach; and it is to fundamental breaches alone that the doctrine of anticipatory breach is applicable."
"Moreover, in the case of a time charter it is not possible to state that the object of the insertion of a withdrawal clause, let alone the transaction itself, is essentially to secure the payment of money. Hire is payable in advance in order to provide a fund from which the shipowner can meet those expenses of rendering the promised services to the charterer that he has undertaken to bear himself under the charterparty; in particular the wages and victualling of master and crew, the insurance of the vessel and her maintenance in such a state as will enable her to continue to comply with the warranty of performance."
He went on at p. 703A
"All the analogies that ingenuity has suggested may be discovered between a withdrawal clause in a time charter and other classes of contractual provisions in which courts have relieved parties from the rigour of contractual terms into which they have entered can in my view be shown upon juristic analysis to be false. Prima facie parties to a commercial contract bargaining on equal terms can make "time to be of the essence" of the performance of any primary obligation under the contract that they please, whether the obligation be to pay a sum of money or to do something else. When time is made of the essence of a primary obligation, failure to perform it punctually is a breach of a condition of the contract which entitles the party not in breach to elect to treat the breach as putting an end to all primary obligations under the contract that have not already been performed. In Tankexpress A/S v. Compagnie Financiθre Belge des Petroles S.A. [1949] A.C. 76 this House held that time was of the essence of the very clause with which your Lordships are now concerned where it appeared in what was the then current predecessor of the Shelltime 3 charter. As is well-known, there are available on the market a number of so-(mis)called "anti-technicality clauses," such as that considered in The Afovos, which require the shipowner to give a specified period of notice to the charterer in order to make time of the essence of payment of advance hire; but at the expiry of such notice, provided it is validly given, time does become of the essence of the payment."
"The arbitrators decided this issue against the shipowners. The 78 pages in which they expressed their reasons for doing so contained an interesting, learned and detailed dissertation on the law, so lengthy as to be, in my view, inappropriate for inclusion in the reasons given by arbitrators for an award. Their reasons can be adequately summarised as being (1) that "any other breach of this charter party" in the withdrawal clause means a repudiatory breach - that is to say: a fundamental breach of an innominate term or breach of a term expressly stated to be a condition, such as would entitle the shipowners to elect to treat the contract as wrongfully repudiated by the charterers, a category into which in the arbitrators' opinion the breaches complained of did not fall, and (2) that even if that were wrong, the word "on" immediately preceding "any other breach" meant "within a reasonable time of" their first knowledge of the breach; and the shipowners, in the arbitrators' opinion, had not given notice of withdrawal until after such reasonable time had expired.
To the semantic analysis, buttressed by generous citation of judicial authority, which led the arbitrators to the conclusions as to the interpretation of the wording of the withdrawal clause that I have summarised, the arbitrators' added an uncomplicated reason based simply upon business commonsense:
"We always return to the point that the owners' construction is wholly unreasonable, totally uncommercial and in total contradiction to the whole purpose of the N.Y.P.E. time charter form. The owners relied on what they said was 'the literal meaning of the words in the clause'. We would say that if necessary, in a situation such as this, a purposive construction should be given to the clause so as not to defeat the commercial purpose of the contract.""
"37. In presenting this part of the owners' argument, Mr Eder emphasised that the owners do not contend that it was a repudiation of the charterparty not to pay hire, at least in the case of a failure to pay for as short a period as in this case. The point is not straightforward: as Rix LJ said in Stocznia Gdanska SA v Latvian Shipping Co [2002] 2 Lloyd's Rep 436 at para 80, there must be a good argument that 'the express right to withdraw in the case of unpunctual payment under such a clause is a breach of a condition of the contract, breach of which is in itself repudiatory'. However, the general view is, I think, that a failure to pay hire when it is due is a breach of an intermediate term, and not necessarily repudiatory and does not in itself entitle the owner to claim damages for loss resulting from the termination of the charterparty: see Time Charters, 2008, 6th Edition, at paras 16.128 and 16.132. Even if the owners had argued otherwise and I had been persuaded to award damages for such loss, the damages resulting from the termination of the charterparty would not be based upon the market rate of hire but the contractual rate, and no such claim has been advanced.
38. In these circumstances, I cannot accept that the owners' claim is recoverable as damages for the failure to pay hire. I agree with the charterers' submission that, once the breach is not said to be repudiatory, it is an answer to the claim that the loss was not effectively caused by their failure to pay hire on time because the owners' decision to withdraw the vessel breaks the chain of causation. This is, I think, why Lord Denning MR said in Tropwind AG of Zug v Jade Enterprises Ltd (The Tropwood) (No 2) [1982] I Lloyd's Rep 232 at page 237 (in a passage to which I refer further below): 'The damages for such a breach would be trifling'."
6. Under all the remaining heads of claim, the charterers argument is substantially the same, namely that any delay or loss arising from the need to discharge the cargo results from the owners' decision to withdraw. That was a decision made at their own election and for their own commercial purposes. The owners, it is said, must bear the adverse as well as the beneficial consequences of an optional decision made in their own interest. It is clear that this consideration influenced both courts below, and that it was decisive in the minds of the Court of Appeal.
7. The factual premise of the argument is of course correct. It is axiomatic that a withdrawal clause operates at the election of owners, and not automatically. Two main consequences follow from this. The first is that owners will not exercise their right of withdrawal unless it is in their commercial interest to do so. Usually, this will be because market rates of hire have risen. But it may be in owners' interest to withdraw the vessel even if they have not risen, for example, where the charterers are insolvent or owners depend on prompt payment to fund payments under a head charter or charterers' payment record occasions administrative or other difficulties. The second consequence is that any failure on the part of the charterers to pay hire when it falls due will not of itself entitle the owners to damages representing the loss of the bargain or the expenses of termination simply because the owners respond by withdrawing the vessel. This is because the non-payment does not itself destroy the bargain or occasion the expenses, unless in the circumstances it is a repudiation which owners have accepted as such. But the present claim is not a claim for damages, and the non-payment of the June 2008 hire payment in this case was not a repudiation. This, however, is as much as can usefully be said. The fact that rather than perform the contract the owners found it more advantageous to exercise an express right of termination is morally and legally neutral. There are no standards by which the owners' reasons may be judged, other than those to be found in the contract. There is no legal policy specific to termination rights restricting their availability or the consequences of their exercise more narrowly than does the language of the contract or the general law. More generally, the reasons for any particular withdrawal cannot affect the principle to be applied in resolving an issue like the present one."
"52. The general contractual context in my view also supports a conclusion that the express indemnity clause is inapt to apply to the present situation. Clause 8 of the charterparty gives owners a simple contractual option. It is accepted that the mere late payment of one instalment did not constitute a repudiatory breach (or a breach of a condition in a sense like that used in the Sale of Goods Act 1979) which could entitle the owners to damages for loss of the charter. That loss flowed from the owners' exercise of their option to withdraw. The phrase in clause 8 "without prejudice to any claim owners may otherwise have on charterers under this charter" does not create a right of action, and looks on its face only to pre-existing claims. So there is no way in which the time spent discharging in Angra dos Reis can be claimed as damages."
The authorities on categorisation of terms as conditions and time being of the essence
"No doubt there are many simple contractual undertakings, sometimes express but more often because of their very simplicity ("It goes without saying") to be implied, of which it can be predicated that every breach of such an undertaking must give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract. And such a stipulation, unless the parties have agreed that breach of it shall not entitle the non-defaulting party to treat the contract as repudiated, is a "condition." So too there may be other simple contractual undertakings of which it can be predicated that no breach can give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and such a stipulation, unless the parties have agreed that breach of it shall entitle the non- defaulting party to treat the contract as repudiated, is a "warranty."
There are, however, many contractual undertakings of a more complex character which cannot be categorised as being "conditions" or "warranties," if the late nineteenth-century meaning adopted in the Sale of Goods Act, 1893, and used by Bowen L.J. in Bentsen v. Taylor, Sons & Co. be given to those terms. Of such undertakings all that can be predicated is that some breaches will and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that be should obtain from the contract; and the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend upon the nature of the event to which the breach gives rise and do not follow automatically from a prior classification of the undertaking as a "condition" or a "warranty."
"Diplock L.J. then generalised this particular consequence into the analysis which has since become classical. The fundamental fallacy of the appellants' argument lies in attempting to apply this analysis to a time clause such as the present in a mercantile contract which is totally different in character. As to such a clause there is only one kind of breach possible, namely, to be late, and the questions which have to be asked are, first, what importance have the parties expressly ascribed to this consequence and secondly, in the absence of expressed agreement, what consequence ought to be attached to it having regard to the contract as a whole.
The test suggested by the appellants was a different one. One must consider, they said, the breach actually committed and then decide whether that default would deprive the party not in default of substantially the whole benefit of the contract. They invoked even certain passages in the judgment of Diplock L.J. in the Hongkong Fir case [1962] 2 QB 26 to support it. One may observe in the first place that the introduction of a test of this kind would be commercially most undesirable. It would expose the parties, after a breach of one, two, three, seven and other numbers of days to an argument whether this delay would have left time for the seller to provide the goods. It would make it, at the time, at least difficult, and sometimes impossible, for the supplier to know whether he could do so. It would fatally remove from a vital provision in the contract that certainty which is the most indispensable quality of mercantile contracts and lead to a large increase in arbitrations. It would confine the sellerperhaps after arbitration and reference through the courtsto a remedy in damages which might be extremely difficult to quantify. These are all serious objections in practice. But I am clear that the submission is unacceptable in law. The judgment of Diplock L.J. does not give any support and ought not to give any encouragement to any such proposition; for beyond doubt it recognises that it is open to the parties to agree that, as regards a particular obligation, any breach shall entitle the party not in default to treat the contract as repudiated. Indeed, if he were not doing so he would, in a passage which does not profess to be more than clarificatory, be discrediting a long and uniform series of casesat least from Bowes v. Shand (1877) 2 App. Cas. 455 onwards which have been referred to by my noble and learned friend, Lord Roskill. It remains true, as Lord Roskill has pointed out in Cehave N.V. v. Bremer Handelsgesellschaft m.b.H. (The Hansa Nord) [1976] Q.B. 44, that the courts should not be too ready to interpret contractual clauses as conditions. And I have myself commended, and continue to commend, the greater flexibility in the law of contracts to which Hongkong Fir points the way (Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen (trading as H. E. Hansen-Tangen) [1976] 1 W.L.R. 989, 998). But I do not doubt that, in suitable cases, the courts should not be reluctant, if the intentions of the parties as shown by the contract so indicate, to hold that an obligation has the force of a condition, and that indeed they should usually do so in the case of time clauses in mercantile contracts. To such cases the "gravity of the breach" approach of the Hongkong Fir case [1962] 2 QB 26 would be unsuitable. I need only add on this point that the word "expressly" used by Diplock L.J. at p. 70 of his judgment in Hongkong Fir should not be read as requiring the actual use of the word "condition": any term or terms of the contract, which, fairly read, have the effect indicated, are sufficient. Lord Diplock himself has given recognition to this in this House: Photo Production Ltd. v. Securicor Transport Ltd [1980] AC 827, 849. I therefore reject that part of the appellants' argument which was based upon it, and I must disagree with the judgment of the learned trial judge in so far as he accepted it. I respectfully endorse, on the other hand, the full and learned treatment of this issue in the judgment of Megaw L.J. in the Court of Appeal.
I would add that the argument above applies equally to the use which the appellants endeavoured to make of certain observations in United Scientific Holdings Ltd. v. Burnley Borough Council [1978] A.C, 904, a case on which I do not need to comment on this occasion.
In conclusion, the statement of the law in Halsbury's Laws of England, 4th ed., vol. 9 (1974), paras. 481482, including the footnotes to paragraph 482 (generally approved in the House in the United Scientific Holdings case), appears to me to be correct, in particular in asserting (1) that the court will require precise compliance with stipulations as to time wherever the circumstances of the case indicate that this would fulfil the intention of the parties, and (2) that broadly speaking time will be considered of the essence in "mercantile" contractswith footnote reference to authorities which I have mentioned.
The relevant clause falls squarely within these principles, and such authority as there is supports its status as a condition: see Bremer Handelsgesellschaft m.b.H. v. J. H. Rayner & Co. Ltd. [1978] 2 Lloyd's Rep. 73 and see Turnbull (Peter) & Co. Pty. Ltd. v. Mundas Trading Co. (Australasia) Pty. Ltd [1954] 2 Lloyd's Rep. 198. In this present context it is clearly essential that both buyer and seller (who may change roles in the next series of contracts, or even in the same chain of contracts) should know precisely what their obligations are, most especially because the ability of the seller to fulfil his obligation may well be totally dependent on punctual performance by the buyer."
"Parties to commercial transactions should be entitled to know their rights at once and should not, when possible, be required to wait upon events before those rights can be determined. Of course, in many cases of alleged frustration or of alleged repudiatory delay it may be necessary to await events upon the happening or non-happening of which rights may well crystallise. But your Lordships' House has recently reiterated in a series of cases arising from the withdrawal of ships on time charter for non-payment of hire the need for certainty where punctual payment of hire is required and has held that the right to rescind automatically follows a breach of any such condition."
"In short, while recognising the modern approach and not being over-ready to construe terms as conditions unless the contract clearly requires the court so to do, none the less the basic principles of construction for determining whether or not a particular term is a condition remain as before, always bearing in mind on the one hand the need for certainty and on the other the desirability of not, when legitimate, allowing rescission where the breach complained of is highly technical and where damages would clearly be an adequate remedy. It is therefore in my opinion wrong to use the language employed by Diplock L.J. in the Hongkong Fir case [1962] 2 QB 26 as directed to the determination of the question which terms of a particular contract are conditions and which are only innominate terms. I respectfully agree with what Megaw L.J. said in the passage in his judgment in the instant case."
"In reply to this part of Mr. Buckley's argument Mr. Staughton drew your Lordships' attention to Halsbury's Laws of England 4th ed., vol. 9 (1974), paras. 481 and 482. He was able to show that the penultimate full paragraph in paragraph 481 had been expressly approved by no less than three of your Lordships in the United Scientific Holdings case [1978] A.C. 904, by Viscount Dilhorne at p. 937, Lord Simon of Glaisdale at pp. 941 and 944, and by Lord Fraser of Tullybelton at p. 958, while Lord Salmon at p. 950 stated the law in virtually identical terms though without an express reference to this particular passage in Halsbury. The passage in question reads:
"The modern law, in the case of contracts of all types, may be summarised as follows. Time will not be considered to be of the essence unless: (1) the parties expressly stipulate that conditions as to time must be strictly complied with; or (2) the nature of the subject matter of the contract or the surrounding circumstances show that time should be considered to be of the essence; or (3) a party who has been subjected to unreasonable delay gives notice to the party in default making time of the essence."
The relevant passage in para. 482 reads:
"Apart from express agreement or notice making time of the essence, the court will require precise compliance with stipulations as to time wherever the circumstances of the case indicate that this would fulfil the intention of the parties. Broadly speaking, time will be considered of the essence in 'mercantile' contracts and in other cases where the nature of the contract or of the subject matter or the circumstances of the case require precise compliance."
A footnote, no. 3, refers among other cases to Reuter v. Sala, 4 C.P.D. 239 and to Bowes v. Shand 2 App. Cas. 455. My Lords, I agree with Mr. Staughton that the express approval of the passage in paragraph 481 cannot be taken as involving implied disapproval of the passage I have just quoted from paragraph 482."
"My Lords, I venture to doubt whether much help is necessarily to be derived in determining whether a particular term is to be construed as a condition or as an innominate term by attaching a particular label to the contract. Plainly there are terms in a mercantile contract, as your Lordships' House pointed out in Bremer Handelsgesellschaft m.b.H. v. Vanden Avenne-Izegem P.V.B.A. [1978] 2 Lloyd's Rep. 109, which are not to be considered as conditions. But the need for certainty in mercantile contracts is often of great importance and sometimes may well be a determining factor in deciding the true construction of a particular term in such a contract.
To my mind the most important single factor in favour of Mr. Staughton's submission is that until the requirement of the 15-day consecutive notice was fulfilled, the respondents could not nominate the "one Gulf port" as the loading port, which under the instant contract it was their sole right to do. I agree with Mr. Staughton that in a mercantile contract when a term has to be performed by one party as a condition precedent to the ability of the other party to perform another term, especially an essential term such as the nomination of a single loading port, the term as to time for the performance of the former obligation will in general fall to be treated as a condition. Until the 15 consecutive days' notice had been given, the respondents could not know for certain which loading port they should nominate so as to ensure that the contract goods would be available for loading on the ship's arrival at that port before the end of the shipment period."
"The difficulty in the present case is, as Mr Buckley's excellent argument for the appellants revealed, to determine what is the true construction of the completed clause 7 of GAFTA form 119, which the parties incorporated in their contract. After some hesitation, I have concluded that the clause was intended as a term, the buyer's performance of which was the necessary condition to performance by the seller of his obligations. The contract, when made, was, to use the idiom of Diplock LJ. [1962] 2 QB 26, 65 and Demosthenes (Oratt. Attici, Reiske 867.11), "synallagmatic," i.e. a contract of mutual engagements to be performed in the future, or, in the more familiar English/Latin idiom, an "executory" contract. The seller needed sufficient notice to enable him to choose the loading port: the parties were agreed that the notice to be given him was 15 days: this was a mercantile contract in which the parties required to know where they stood not merely later with hindsight but at once as events occurred. Because it makes commercial sense to treat the clause in the context and circumstances of this contract as a condition to be performed before the seller takes his steps to comply with the bargain, I would hold it to be not an innominate term but a condition."
"The second general point which I desire to mention concerns stipulations as to time in mercantile contracts, in regard to which it has been said that, broadly speaking, time will be considered to be of the essence. To treat time limits thus means treating them as conditions, and he who would do so must pay respect to the principle enunciated by Roskill L.J. in Cehave N.V. v. Bremer Handelsgesellschaft m.b.H. [1976] Q.B. 44, 71A, that contracts are made to be performed and not to be avoided. The treatment of time limits as conditions in mercantile contracts does not appear to me to be justifiable by any presumption of fact or rule of law, but rather to be a practical expedient founded on and dictated by the experience of businessmen, just the kind of thing which Bowen L.J. could have had in mind when framing his classic observations on the implied term in The Moorcock (1889) 14 PD 64, 68:
"Now, an implied warranty, or, as it is called, a covenant in law, as distinguished from an express contract or express warranty, really is in all cases founded on the presumed intention of the parties, and upon reason. The implication which the law draws from what must obviously have been the intention of the parties, the law draws with the object of giving efficacy to the transaction and preventing such a failure of consideration as cannot have been within the contemplation of either side: and I believe if one were to take all the cases, and they are many, of implied warranties of covenants in law, it will be found that in all of them the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have. In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men; not to impose on one side all the perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party promise in law as much, at all events, as it must have been in the contemplation of both parties that he should be responsible for in respect of those perils or chances. Now what did each party in a case like this know? For if we are examining into their presumed intention we must examine into their minds as to what the transaction was."
This passage has stood the test of time and I commend it to all lawyers who undertake to advise their clients on mercantile affairs.
In order to identify an implied term (concerning which both parties to the contract, being men of business, would say, "of course; it goes without saying") one must construe the contract in the light of the surrounding circumstances and, to understand how that is done, we cannot do better than read the passage from Lord Wilberforce's speech in the Reardon Smith case [1976] 1 W.L.R. 989, 995E997C to which my noble and learned friend, Lord Scarman, has already referred your Lordships."
"I shall have to examine rather more closely what are the legal consequences of "time being of the essence" and time not being of the essence; but I do not think that the question of principle involved in these appeals can be solved by classifying the contract of tenancy as being of a commercial character. In some stipulations in commercial contracts as to the time when something must be done by one of the parties or some event must occur, time is of the essence; in others it is not. In commercial contracts for the sale of goods prima facie a stipulated time of delivery is of the essence, but prima facie a stipulated time of payment is not (Sale of Goods Act 1893, section 10 (1)); in a charterparty a stipulated time of payment of hire is of the essence. Moreover a contract of tenancy of business premises would not appear to be more of a commercial character than a contract for sale of those premises. Nevertheless, the latter provides a classic example of a contract in which stipulations as to the time when the various steps to complete the purchase are to be taken are not regarded as of the essence of the contract."
"My Lords, the rules of equity, to the extent that the Court of Chancery had developed them up to 1873 as a system distinct from rules of common law, did not regard stipulations in contracts as to the time by which various steps should be taken by the parties as being of the essence of the contract unless the express words of the contract, the nature of its subject matter or the surrounding circumstances made it inequitable not to treat the failure of one party to comply exactly with the stipulation as relieving the other party from the duty to perform his obligations under the contract. The Court of Chancery had reached this position in relation to contracts for the sale of land by the extension by Lord Eldon L.C. of the earlier doctrine that a stipulation as to the time of repayment by the mortgagor under a legal mortgage was not of the essence of the contract so as to entitle the mortgagee to refuse to reconvey the property if payment with interest was tendered after the stipulated date was passed: Seton v. Slade (1802) 7 Ves. Jun. 265."
"My Lords, I will not take up time in repeating here what I myself said in the Hongkong Fir case, except to point out that by 1873:
(1) Stipulations as to the time at which a party was to perform a promise on his part were among the contractual stipulations which were not regarded as "conditions precedent" if his failure to perform that promise punctually did not deprive the other party of substantially the whole benefit which it was intended that he should obtain from the contract;
(2) When the delay by one party in performing a particular promise punctually had become so prolonged as to deprive the other party of substantially the whole benefit which it was intended that he should obtain from the contract it did discharge that other party from the obligation to continue to perform any of his own promises which as yet were unperformed;"
"So upon the question of principle which these two appeals were brought to settle, I would hold that in the absence of any contra-indications in the express words of the lease or in the interrelation of the rent review clause itself and other clauses or in the surrounding circumstances the presumption is that the time-table specified in a rent review clause for completion of the various steps for determining the rent payable in respect of the period following the review date is not of the essence of the contract."
"77. Mr. Glennie pointed out that time for payment under a commercial contract is not normally of the essence, i.e. that time for payment is not normally a condition of such a contract: see for instance s.l0 of the Sale of Goods Act, 1979. That is true as far as it goes: see Bunge Corporation v. Tradax Export S.A., [1981] 2 Lloyd's Rep. 1; [1981] 1 WLR 711.
.
79. Moreover, The Georgios C is in my judgment of little assistance. It may be the case that in a withdrawal clause construed to mean "and for so long as default continues" the clause itself does not amount to a condition and thus the breach of non payment does not ipso facto amount to a repudiation. Since the clause only permitted withdrawal if the default was still continuing at the time of withdrawal, any remarks on the subject were in any event necessarily obiter. Our clause, however, is different from that in The Georgios C, not because it did not permit late payment as a remedy preventing rescission, for it allowed a period of grace of 21 days (cl. 5.05 first paragraph), but because it stated that those 21 days were the limit of such period of grace. There was in fact no right of rescission immediately Latreefers failed to pay by the due date, but only upon default 21 days after the due date of payment. In a contract where a vessel is to be built with funds provided by the purchaser in stages, an instalment notice is to be given requiring payment within five banking days, and a further 21 days of grace are then allowed, I do not see why provision for what is then called default entitling rescission should not be regarded as setting a condition of the contract.
80. In any event, the jurisprudence regarding time charter withdrawal clauses does not end with The Georgios C, which was itself overruled in Mardorf Peach & Co. Ltd. v. Attica Sea Carriers Corporation of Liberia (The Laconia), [1977] 1 Lloyd's Rep. 315; [1977] A.C. 850. In Antaios Compania Naviera S.A. a Salen Rederierna AB (The Antaios) [1984] 2 Lloyd's Rep. 235; [1985] A.C. 191 the withdrawal clause under consideration operated "failing the punctual and regular payment of the hire or on any breach of this charter party". The House of Lords held that "any breach" meant any repudiatory breach "that is to say: a fundamental breach of an innominate term or a breach expressly stated to be a condition, such as would entitle the shipowners to elect to treat the contract as wrongly repudiated by the charterers" (per Lord Diplock at p. 238, col. 1; p. 200F). Although the point has not been decided and is perhaps controversial, there must be a good argument that it follows that the express right to withdraw in the case of unpunctual payment under such a clause is a condition of the contract, breach of which is in itself repudiatory."
"The nature of the contract
12. The contract in the present case is one for the sale of future goods, in this case a vessel, to be constructed by the seller (the yard) and delivered to the buyer (Gearbulk) by an agreed date. It contains many detailed provisions relating to the specification and performance of the vessel, as well as other matters. In relation to delay in delivery and deficiencies in speed, fuel consumption and deadweight capacity it provided for the payment of liquidated damages by the yard and, if the delay or any of the deficiencies exceeded a certain level, ultimately gave Gearbulk a right to terminate the contract. The contract also gave the yard a right to terminate it if Gearbulk failed to pay an instalment of the price when it became due."
..
"14. It is inherent in the nature of a legally binding contract that each party expects to obtain the benefit of the bargain into which he has entered or, if the contract is not performed, a right to recover compensation in the form of damages for the loss of that benefit. Accordingly, in a case where one party's breach is such as, in the words of Diplock LJ in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1961] 2 Lloyd's Rep 478: [1962] 2 QB 26, to deprive the other of substantially the whole benefit which it was intended that he should obtain from the contract, the common law recognises the right of the injured party to treat the contract as discharged and to recover damages for the loss of the bargain. Such a breach is commonly described as "going to the root of the contract". That is all trite law, but it provides the underpinning, should it be required, for Mr Boyd QC's submission that parties to a contract of this kind, or indeed to any contract, enter into negotiations in the expectation that if one of them commits a breach which goes to the root of the contract in the sense just described, the other will be entitled to recover damages for the loss of his bargain. The parties may, of course, agree to depart from that position, but that is the point from which they start.
15. Whether a breach is sufficiently serious to go to the root of the contract depends on the terms of the contract and the nature of the breach, but it is open to the parties to agree that the breach of a particular term, however slight, is to be treated as having that effect and shall therefore entitle the other to treat the contract as repudiated. Different words have been used to express that intention. The use of the word "condition" will usually (though not always see Wickman Machine Tool Sales v Schuler AG [1973] 2 Lloyd's Rep 53; [1974] AC 235) be sufficient, but many other forms of wording can be found. Sometimes the consequences of a breach are spelled out and sometimes they are not; in each case it is necessary to construe the contract as a whole to ascertain what the parties intended.
"20. In my view Mr Dunning's submission fails properly to recognise the true nature of the contract. The primary purpose of article 10 in the present case is to provide an agreed measure of compensation for breaches of contract by way of delay in delivery and deficiencies in capacity and performance which, although important, do not go to the root of the contract. For these the parties have agreed the payment of liquidated damages which are to be deducted from the final instalment of the price and to that extent their agreement displaces the general law, at least as regards the measure of damages recoverable for a breach of that kind. However, they have also agreed that there comes a point at which the delay or deficiency is so serious that it should entitle Gearbulk to terminate the contract. In my view they must be taken to have agreed that at that point the breach is to be treated as going to the root of the contract. In those circumstances the right to terminate the contract cannot sensibly be understood as anything other than embodying the parties' agreement that Gearbulk has the right to treat the contract as repudiated, with (subject to Mr Dunning's alternative argument) the usual consequences. The same holds true in relation to the yard's right to terminate the contract under article 5.7. Although the parties may have agreed to exclude, in whole or in part, Gearbulk's right to recover damages for a repudiatory breach on the part of the yard, I am unable to accept that they intended to create by their contract a situation which differed in its effect from that which would arise on the acceptance of a repudiation under the general law. Article 5.9 and article 10 simply identify the circumstances in which one or other of the parties is entitled to treat the contract as discharged by the other's breach. In para 88 of his judgment in Stocznia Gdanska SA v Latvian Shipping Co [2002] 2 Lloyd's Rep 436 Rix LJ expressed the view that where contractual and common law rights overlap it would be too harsh to regard the use of a contractual mechanism of termination as ousting the common law mechanism, at any rate against a background of an express reservation of rights. In this case I would go further. In my view it is wrong to treat the right to terminate in accordance with the terms of the contract as different in substance from the right to treat the contract as discharged by reason of repudiation at common law. In those cases where the contract gives a right of termination they are in effect one and the same."
The language of the charterparties
"131. In Re Olympia & York Canary Wharf Ltd (No 2) [1993] BCC 159 Morritt J, as he then was, considered the authorities relating to the making of time of the essence. From that analysis and other authority I derive the following propositions:
(a) Equity, before the Judicature Acts, insisted that prima facie time for payment was not essential. But equity's patience was exhaustible. It would allow the contract to be treated as repudiated if the party in default had been given the opportunity to mend his ways by the giving of a notice to comply within a reasonable time. Whilst this is described as making time of the essence in reality the notice is the means of bringing to an end equity's interference with the contract: Behzadi v Shaftesbury Hotels Ltd [1992] Ch 1;
(b) Such a notice, which may be given in respect of any species of term, may not be served until the time for performance has expired; but it may be served as soon as that time arrives;
(c) Such a notice must state clearly what the other party is required to do and the consequence if he fails ie that the contract may he terminated: Afovos Shipping Co SA v R Pagnan and Flli (The Afovos) [1982] 1 Lloyd's Rep 562, 565 col 2; [1982] 1 WLR 848, 854C;
(d) If the defaulting party fails to perform after service of such a notice, the failure is not automatically a repudiation of the contract, giving rise to a right to terminate. The breach must go to the root of the contract;
(e) The notice operates as evidence of the date by which the promisee considers it reasonable to require the contract to be performed, failure to perform by which is evidence of an intention not to perform: see Lord Simon of Glaisdale in United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904, 946E947A; Astea (UK) Ltd v Time Group Ltd [2003] EWHC 725 (TCC) para 147."
Analysis and conclusions
Issue 3: Was GCS's conduct in relation to payment of hire a repudiation or renunciation?
The law
(1) Conduct is repudiatory if it deprives the innocent party of substantially the whole of the benefit he is intended to receive as consideration for performance of his future obligations under the contract. Although different formulations or metaphors have been used, notably whether the breach goes to the root of the contract, these are merely different ways of expressing the "substantially the whole benefit" test: Hongkong Fir at pp. 66, 72; The Nanfri at pp. 778G-779D.
(2) Conduct is renunciatory if it evinces an intention to commit a repudiatory breach, that is to say if it would lead a reasonable person to the conclusion that the party does not intend to perform his future obligations where the failure to perform such obligations when they fell due would be repudiatory: Universal Carriers v Citati at p. 436, The Afovos at p. 341 col 2.
(3) Evincing an intention to perform but in a manner which is substantially inconsistent with the contractual terms is evincing an intention not to perform: Ross T Smyth & Co Ltd v T.D. Bailey, Son & Co [1940] 3 All ER 60, 72. Whether such conduct is renunciatory depends upon whether the threatened difference in performance is repudiatory. It is not here necessary to explore the position where the innocent party misappreciates the nature or scope of his obligations (see Woodar Investment Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277 and Chilean Nitrate Sales Corporation v Marine Transportation Co Ltd (The Hermosa) [1982] 1 Lloyd's Rep 570, 572-3).
(4) An intention to perform connotes a willingness to perform, but willingness in this context does not mean a desire to perform despite an inability to do so. As Devlin J put it in Universal Carriers v Citati at p. 437, to say: "I would like to but I cannot" negatives intent just as much as "I will not."
The facts
(1) GCS had regularly failed to pay hire punctually since mid-April 2011, a period of over 5 months. Almost all payments on all three Vessels were unpaid when they fell due. Some were not paid at all, others only months after they fell due. In those months, only in July were instalments paid on time or within a few days of falling due.
(2) For most of the period the arrears fluctuated between about US$1.5m and US$2.5m, and would have been up to US$1m more but for the exercise by Spar of its lien on sub-hire/sub-freights. If one takes a total of US$2m as a very rough average, this is broadly equivalent to about eight instalments over the three Vessels; individually the arrears of hire for the Vessels fluctuated between about one and four instalments.
(3) GCS had made clear that non payment was due to cash flow difficulties caused by the fall in the market which rendered it unable to meet its hire obligations to all the owners of its chartered fleet. Since June it had repeatedly said that it expected cash injection from its parent which would enable it to make punctual payments and pay off the arrears. Despite such indications it continued to fail to make punctual payments on all three Vessels. It twice promised to pay off half the arrears by 31 August but failed to do so.
(4) By the beginning of September GCS was emphasising its cash flow difficulties, providing no concrete payment proposal, and suggesting that it would merely pass on sub-hires when received, which in a market which had substantially fallen since the date of the charterparties was bound to amount to a significant shortfall on the hire due to Spar. It sought to excuse non payment of a SPAR DRACO instalment by saying that sub-charterers had not paid the sub-hire, suggesting that it would only (part) perform its hire obligations on each vessel if timeously paid the (insufficient) sub hire, an approach aptly described by Spar as hand to mouth.
(5) At no stage did GCS provide any detail of what amounts were expected to be received from its parent, or when; or of how any such receipts would be allocated amongst competing creditor shipowners. It provided no explanation as to why its avowed expectations were unfulfilled, or why it was unable to fulfil its promise to pay off half the arrears by the end of August.
(6) The only response from GCL to the request to fulfil its guarantee obligations was on 23 September 2011, when it indicated that the group was prioritising payment of bank interest over operational payments such as the hire due to Spar, and that "financial support will come" in October. This gave no explanation of how much financial support would come in October or when in that month. It made no concrete proposal for discharge of the liabilities and belittled the amount outstanding as a "relatively small sum".
Issue 4: What is the correct principle for the assessment of damages?
(1) at the date of the termination of the SPAR CAPELLA and SPAR VEGA charters in September 2011, there was no market for a substitute time charter for the minimum unexpired term of those charters, which will expire in December 2015;
(2) there was throughout the period between September 2011 and today a market for time charters of the vessels for shorter periods, such that Spar would have been able, had they so chosen, to earn hire from time charter employment of the vessels for two or more successive charters; and
(3) Spar had acted reasonably in its choice of employment for the vessels and had not failed to mitigate its loss; nevertheless with hindsight Spar was disappointed with the earnings of the vessels in the Navig8 pool; had they been in time charter employment, the earnings of the two vessels over the period between September 2011 and today would have been several million dollars greater.
Issue 5: What alternative time charter employment was available for the SPAR CAPELLA and SPAR VEGA?
September 2011 US$14,000
September 2012 US$9,500
September 2013 US$10,750
September 2014 (no market for one year charters)
Issue 6: What other adjustments fall to be made, if any, to the quantum of Spar's claim?
Issue 7: Do the arbitration costs fall within the scope of liability under the Guarantees?
"We hereby unconditionally and irrevocably guarantee as primary obligor the full and timely performance by the Charterers of each and every obligation of the Charter Party, and in the event of any one or more defaults in performance by the Charterers, we undertake, on your first written demand to promptly rectify each and every default and hereby accept the responsibility for any liability, losses or damages that you suffer as a result or arising out of such default."
Conclusion