Maurizio Dardani July 18 2012 Undue hardship and obligation to renegotiate charter Dardani Studio Legale | Shipping & Transport - Italy Maurizio Dardani Shipping & Transport FactsDecisionCommentA judgment issued by the Court of Ravenna on May 19 2011 poses complex legal questions about the application of the concept of 'undue hardship' to charterparties; it also raises significant problems about the relationship between English and Italian jurisdiction.FactsThe dispute arose out of an amended Shelltime 4 charterparty, dated November 18 2008, between the owner of the M/T Ionian Wave and its Italian charterer. The oil tanker was chartered for a period of 24 months from delivery, plus or minus 15 days at the charterer's option. The vessel was delivered on March 20 2009; therefore, the charter would have continued until March 5 2011 at the earliest.Clause 8 of the charter stated that the charterer would pay for the use and hire of the vessel at a rate of $22,000 a day, and pro rata for any part of a day, from the time and date of the vessel's delivery until the time and date of its redelivery to the owner. Clauses 3(iii) and 9 of the charter required the charterer to effect full payment of hire in favour of the owner at the stated rate; the charterer was not allowed to suspend payment of hire unless the owner breached its obligation to maintain and restore the vessel.During the second half of 2009 market conditions changed significantly and the market rate for vessels such as the Ionian Wave dropped to about $11,000 a day.The charter did not provide for the adjustment of hire in the event of supervening changes in circumstances. However, the charterer applied to the owner and invited it to renegotiate terms and to agree on a substantial reduction. The charterer alleged that the level of the charter hire had become unsustainable for it due to unforeseeable and extraordinary circumstances, and that it would soon be rendered insolvent.The owner did not agree to open a substantial renegotiation of the charter. The charterer purported to make a deduction from the hire due on October 1 2009 and failed to make the payment due on November 1 2009. On November 12 2009 the owner gave notice to the charterer that the vessel would be withdrawn unless payment of the outstanding hire was made within three banking days. The hire was not paid and on November 18 2009 the owner gave notice and withdrew the vessel from the charter.However, on November 9 2009 - a few days before the withdrawal of the vessel from the charter - the charterer had commenced legal proceedings against the owner before the Court of Ravenna. The charterer claimed that the owner was in breach of the general good-faith rule under Article 1375 of the Civil Code and Articles 6.2.2. and 6.2.3. of the UNIDROIT Principles for International Commercial Contracts, on the grounds that the owner had refused to open negotiations for a modification of the economic terms of the charter, notwithstanding that a situation of undue hardship had arisen. In filing the writ of summons, the charterer also filed a claim for damages against the owner in the event of the owner withdrawing the vessel from the charter.The owner entered a defence in the court proceedings. It denied that the Italian court had jurisdiction, citing the arbitration clause contained in the charterparty. As a subordinate defence, it argued on the merits that it was under no obligation to renegotiate the terms of the charter. At the same time, the owner commenced arbitration proceedings against the charterer in London, in which it sought:payment of the unpaid hire until the date of withdrawal of the vessel;reimbursement on a quantum meruit basis of the sum equivalent to hire, plus expenses incurred from the date of withdrawal until the final discharge of cargo; andloss and damages for the alleged repudiatory breach of the charter by the charterer, equal to the difference between the hire payable for the unexpired part of the charter at the rate of $22,000 a day and the assessed market rate for the vessel during the same period at the rate of $11,000 a day.The charterer did not appear in the arbitration proceedings and the London arbitrators issued an award granting the owner's claims. Among other things, the arbitrators affirmed that, as a matter of English law, there was no sustainable argument that the performance of the charterparty could have been frustrated by the event which had occurred; nor was there any doctrine of good faith or hardship which would require the owner to renegotiate the charter on a basis that was more favourable to the charterer.Before the Court of Ravenna, the charterer - responding to the jurisdictional defence raised by the owner on the grounds of the arbitration clause in the charter - argued that its demands for suspension of payment of hire and for damages were based on general principles of the law of good faith and undue hardship, and that such principles derive directly from the law, not from the charter, being principles of public policy. According to such principles, which are also incorporated into the UNIDROIT Principles and Article 2 of the Italian Constitution, parties are obliged to act in good faith and to renegotiate the terms of a contract whenever a situation of undue hardship occurs.DecisionIn a judgment dated May 19 2011, the court held that the principles of good faith, although derived from law, cannot be considered non-contractual remedies; rather, they form part of the contract as modified by the law and, as such, they must ultimately be considered contractual remedies.Therefore, the court affirmed its lack of jurisdiction on the grounds that any matter arising from the contract, including the obligation to perform the contract in good faith, should be decided by arbitrators in London.CommentIt was unfortunate that the court found itself to have no jurisdiction in such an interesting case. In doing so, it denied itself the possibility of examining English and Italian law on issues such as the duty to renegotiate a charterparty when the market conditions have so radically and substantially changed that the ability of one of the parties to perform the contract is disrupted to the sole benefit of the other party. The examination of the issue would have opposed the common law doctrine of frustration against the civil law principles of good faith and undue hardship.However, the charterer has appealed to the Bologna Court of Appeal, mainly on the grounds that the duty to renegotiate a contract is, by definition, a non-contractual remedy, which is not covered by the arbitration clause contained in the contract.For further information on this topic please contact Maurizio Dardani at Dardani Studio Legale by telephone (+39 010 576 1816), fax (+39 010 595 7705) or email ([email protected] ).