In Lansat Shipping Co v Glencore Grain BV – Butterworths Law Direct 25.3.09 the Commercial Court considered as a preliminary issue the interesting question of whether a clause in a charter providing as follows was a penalty clause and therefore unenforceable.

The Charterers hereby undertake the obligation /responsibility to make thorough investigations and every arrangement in order to ensure that the last voyage of this Charter will in no way exceed the maximum period under this Charter Party. If, however, Charterers fail to comply with this obligation and the last voyage will exceed the maximum period, should the market rise above the Charter Party rate in the meantime, it is hereby agreed that he charter hire will be adjusted to reflect the prevailing market level from the 30th day prior to the maximum period [d]date until actual redelivery of the vessel to the Owners.”

The Owners argued that the clause was concerned with the breach inherent in an order for an illegitimate last voyage, not the breach which happens on late redelivery and that the clause was in fact a liquidated damages clause, ie a genuine pre-estimate of damage.

Charterers made much of Owners’ concession that if the clause had simply provided for an extra 30 days of hire to be paid in the event that the vessel was redelivered late, then that would clearly be a penalty.

The judge found that the possibility of loss arises if an illegitimate last order is given. If the order is maintained the owners can bring the contract to an end and go into the market. In that case they will suffer no loss. If they accept the order, owners’ loss is not what the vessel would have earned at market rates for the remainder of the charter period but the market rate for any overrun period. The Judge was of the view that in that case the Owners have not lost the chance of an early redelivery but have chosen not to take that chance.

The Charterer contended that the clause did not in any case create an obligation not to give an invalid last voyage order, but was about late redelivery. The Charterer submitted that, contrary to the Owner's construction, the clause could respond even when the last voyage order was legitimate, in other words, one which was reasonably expected to be completed within the redelivery date; and was a penalty, and not a genuine pre-estimate of damage resulting from a breach of contract. It was held that on a fair reading of the clause, it had to do with the possibility of an illegitimate last order and the effect of such an order on the redelivery obligation, and those were linked concepts.

Having regard to the amount claimed by the Owner on the basis of the clause, had the vessel been redelivered on hour late, the amount of the claim of USD$471,602.32 would have been payable in full. As stated by the arbitrators, that would be an 'unconscionable' amount within the meaning of the case law, and equally so in the case of a delay in redelivery of just over six days, as in this case. The primary purpose of the clause had been to deter the Charterer from breaching its obligation to redeliver the vessel in time, and whilst such a purpose might in a sense be understandable because of the limits to the Owner's knowledge about the likely length of the final voyage at the time of the order, the clause had been a penalty, and not a genuine pre-estimate of damage resulting from a breach of contract.