In this case, the Court of Appeal provided a long awaited decision answering whether a charterer’s failure to pay an instalment of hire punctually is a breach of condition under a time charterparty thus enabling the shipowner to terminate the charter and claim damages.

The facts

The Claimant (“Spar”) was the registered owner of three supramax bulk carriers. These vessels (“the Vessels”), the SPAR CAPELLA, SPAR VEGA and SPAR DRACO, were time chartered under three charterparties dated 5th March 2010 on amended NYPE 1993 forms on long term charters to Grand China Shipping (Hong Kong) Co Ltd (“GCS”); SPAR DRACO for a minimum 35 maximum 37 months and SPAR VEGA & SPAR CAPELLA for a minimum 59 maximum 62 months. Under the charterparties , three letters of guarantee were issued by the defendant (“GCL”), which was the parent of GCS. The letters of guarantee were dated 25th March 2010 (“the guarantees”).

GCS defaulted on payment of hire from April 2011 and remained in substantial arrears on all three vessels throughout the summer of 2011. On 16th September, Spar called on GCL for payment under the Guarantees subsequently terminating the charterparty for and withdrawing the SPAR CAPELLA on the 23rd September. On 30th September, the SPAR VEGA and the SPAR DRACO were also withdrawn and the respective charterparties were terminated.

Arbitration proceedings were commenced against GCS. Spar claimed the balance of hire due under the charters, damages for loss of bargain in respect of the unexpired term of the charters and their costs of arbitration proceedings against GCS. Spar then brought a claim against GCL under the Guarantees following the liquidation of the GCS.

At first instance, Popplewell J disagreed with the former judgment by Flaux J in The Astra [2013] EWHC 865 (Comm) and held that payment of hire by GCS under clause 11 of the charterparties was not a condition. Spar did, however, receive US$24million in damages for loss of bargain in respect of the unexpired terms of the charterparties, as it was decided that GCS had renounced the charterparties.

GCS appealed the decision on the grounds that the Judge had applied too strict a test and Spar cross-appealed that the Judge should have awarded the additional ground that non-payment of hire was a breach of a condition.

There were two issues for the Court of Appeal to address;

1. the condition issue, cross-appealed by Spar – whether the requirement to pay hire punctually and in full was a condition or innominate term

2. the renunciation issue, appealed by GCL – whether there was renunciation by GCS based on the conduct of the charterers

The Court of Appeal’s decision

The judgment, made by Sir Terence Etherton MR, Gross and Hamblen LJJ, was handed down on 7th October 2016. The Court held that GCS’ failure to pay instalments of hire punctually and in advance under the charterparties was not a breach of condition thus upholding the judgment of Popplewell J and declaring the decision in The Astra wrong. The Judges determined that the obligation constituted no more than an intermediate or innominate term as the express withdrawal clause did not provide any strong indication that the clause should be treated as a condition. The withdrawal clause simply allowed them to withdraw the vessel for the occurrence of events in the clause and did not specify any consequences of such a breach.

When deciding the condition issue, the Court found that The Astra had been wrongly decided and that any decision on whether a term is a condition or not is a question of interpretation dependent on the terms of the charterparty concerned. When considering the terms in this case, they held that because of the construction of the terms it had not been made clear that it should be regarded as a condition. The clause did not make reference to time being of the essence or any consequences of breach. The clause read, “Payment of Hire shall be made so as to be received by the Owners or their designated payee as per Clause 50 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 may otherwise have on the Charterers.” Although the presence of this withdrawal clause gave the Owners the opportunity to terminate the charterparty on occurrence of the events specified, the judges argued it was too far to say that the presence of this made the payment of hire a condition. They emphasised it could not be said that the failure to pay the hire in advance and punctually, no matter how trivial, would have derailed Spar’s performance under the charterparties.

In consideration of the issue surrounding whether past conduct and/or prospective future conduct was repudiatory or renunciatory, a three stage test was adopted for the analysis of the facts. The three steps were;

a) what was the contractual benefit to Spar of the 3 charterparties?

b) what was the prospective non-performance shown by GCS’ conduct?

c) was the prospective non-performance such as to go to the root of the contract?

In answer to these questions, it was held that;

a) the benefit was regular, periodic payment in advance,

b) that GCS showed prospective non-performance by payment but in arrears and at uncertain times, and

c) such conduct goes to the root of the contract and is therefore renunciatory, entitling the owner to terminate

In order for an owner to be able to terminate for failure to pay hire, and claim damages for future losses – regardless of renunciation or repudiation – there are a number or remedies.

1. argue that they are entitled to treat the contact as terminated due to the consequences of the breach of the innominate term

2. argue there has been a renunciatory breach

3. clearly indicate in the contract that the obligation to pay hire is a condition. The wording would need to be very specific and include that time is of the essence and the consequences of breach

Comment

This case finally ends the uncertainty that surrounded whether payment of hire is a condition following the decision in The Astra and provides more sound legal direction on the principles of renunciation. It ascertains that following a breach of a payment term, there is no automatic right to damages for loss of bargain. A case must be carefully assessed on its individual merits in respect of termination of the contract following a repudiatory or renunciatory breach and any subsequent claim for damages.

Commercially this ends the unease that followed The Astra and sets a direction for future contracts. Those now entering into a charterparty with a payment hire clause will need to include a specific wording in the withdrawal clause to confirm that such is a condition. This clause will have to be carefully drafted for it to be effective and in itself may pose problems. For now though, all lower courts will be bound by the decision until a Court of Appeal or superior court comes to a conflicting decision .