The Court of Appeal has recently found that a shipowner was entitled to terminate for repudiatory breach where the hirer was in persistent breach of an obligation for the punctual payment of hire: Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2016] EWCA Civ 982.

The court found that the term was not a strict condition of the charterparties, such that any delay in payment (however slight) would allow termination. However, the charterer's conduct amounted to a renunciation, as it demonstrated an intention not to perform the charterparties in a way which deprived the shipowner of substantially their whole benefit. That was, in essence, because it transformed a contract for advance payment into one for payment in arrears.

The decision is of interest in demonstrating the court's general reluctance to conclude that a term is a strict condition, so that even a minor breach will allow a party to terminate and claim loss of bargain damages – unless the parties have made it clear that that is their intention. Merely including an express contractual right to terminate for breach of the term will not necessarily be sufficient.

The decision is also of interest in demonstrating that a party may be in repudiatory breach as a result of missed payments, even if the arrears represent a relatively small proportion of the overall sums due under the contract. Each case will however turn on its facts. Here it was significant that the punctual payment of hire under a charterparty has long been recognised as being of great importance to shipowners, even though the court concluded it is not a strict condition.

Gregg Rowan, a partner in our dispute resolute team, considers the decision further below.

Background

In March 2010, the defendant's subsidiary company (GCS) agreed to hire three vessels from the claimant. The charterparties were guaranteed by the defendant. The charterparties required payment of hire 15 days in advance, and gave the claimant an express right to withdraw the vessels from service "failing the punctual and regular payment of the hire".

From April 2011 GCS was in arrears of payment of hire. That continued throughout the summer of 2011, with a chronology of missed and delayed payments. In September 2011, the claimant withdrew the vessels and terminated the charterparties.

GCS went into liquidation and the claimant commenced proceedings against the defendant under the guarantees. It was not in dispute that the claimant was entitled to terminate the charterparties under their express terms. The question was whether it was entitled to terminate for repudiatory breach at common law, so that it was entitled to damages representing its future loss of bargain. Otherwise it would only be entitled to damages representing sums due under the charterparties at the date of termination.

For the claimant to establish that it was entitled to terminate for repudiatory breach at common law, it had to establish that either:

  • the requirement for punctual payment of hire was a strict condition of the charterparties, so that any breach entitled the claimant to terminate at common law; or
  • GCS's conduct amounted to a renunciation of the charterparties, as it evinced an intention to commit a repudiatory breach. In other words, it was such as would lead a reasonable person to believe that GCS no longer intended to perform the contract in some essential respect.

At first instance, Popplewell J found that the punctual payment of hire was not a condition, but GCS's conduct did amount to a renunciation. The defendant appealed on both issues.

Decision

The Court of Appeal (Sir Terence Etherton, MR, and Gross and Hamblen LJJ) dismissed the appeal. They agreed both that the term was not a condition and that there had been a renunciation.

Strict condition?

There were conflicting obiter dicta, and conflicting first instance decisions, as to whether an obligation to make punctual payment of hire is a strict condition of a charterparty. This is, however, the first Court of Appeal decision on the point, and it confirms that such a term will not be a strict condition (unless the parties have agreed to make it so, eg by agreeing that time will be of the essence).

The Court of Appeal was not persuaded that the inclusion of an express option to terminate on breach of the term provided a strong indication (or indeed any indication) that the term was a condition. As Gross LJ put it, "…all conditions entitle the innocent party to terminate the contract – but not all contractual termination clauses are conferred for breach of condition alone."

The court agreed with Popplewell J that the term was not a condition, but instead an "innominate term" so that whether or not a breach was repudiatory depended on the severity of the breach.

As a matter of contractual construction, the charterparties did not make it clear that the term was to be categorised as a condition. The Court of Appeal noted that the courts should not be too ready to interpret contractual terms as conditions. Although punctual payment of hire was a very important term, it could not be said that any breach would derail performance; the consequences of breach could vary from the trivial to the serious. That was a hallmark of an innominate term.

Although classifying a term as a condition had advantages in terms of certainty, the downside was that trivial breaches would have disproportionate consequences, eg if there was a five minute delay in payment.

Renunciation?

Similarly, the Court of Appeal found no fault in the reasoning of Popplewell J in considering the issue of renunciation.

GCS had repeatedly failed to pay hire when due. By the beginning of September 2011 it was emphasising its cash flow difficulties, providing no concrete payment proposal and suggesting it would merely pass on sub-hires when received, which was bound to amount to a significant shortfall on the hire due to the claimant.

On that basis, Popplewell J held that an objective observer would conclude that GCS was "unwilling, because it was unable" to pay hire punctually, and that this showed an intention not to perform the charterparties in a way that deprived the claimant of substantially their whole benefit.

The Court of Appeal agreed. Even if GCS was doing its best to clear the arrears, it had nonetheless shown an intention not to perform the charterparties according to their terms. On the judge's findings, a reasonable owner in the claimant's position could have no realistic expectation that GCS would pay hire punctually in advance. The anticipated non-performance went to the root of the contract, or (which is the same thing) would deprive the claimant of substantially its whole benefit. This was, principally, because it converted a contract for advance payments into one for payment in arrears.

The Court of Appeal, like Popplewell J, also rejected the submission that, because the arrears constituted a small proportion of the total sums payable under the charterparties, it could not be said that the claimant was deprived of substantially their whole benefit. The Court of Appeal said this simply did not grapple with the importance of the bargain for payment of hire in advance.