By judgment delivered on 18 April 2013, the High Court of London examined the consequences underlying the failure and / or timely payment of freight by the Charterer.
This is an important decision that should be of significant benefit to ship-owners, given that English law applies to the majority of Charter parties entered into daily.
The Court specified that failure to pay freight will entitle the owner not only to terminate the contract (and to subsequently "withdraw" the vessel from the service of the charterer), but also to obtain full compensation for the pecuniary losses suffered as a result of the Charterer’s breach.
Before this decision of the High Court, the right of the Owner to claim not only any unpaid freight up to the date of said withdrawal, but also any loss of earnings, was residual and strictly conditional upon the existence of a specific contractual provision providing such a form of safeguard.
In other words, non-payment of freight by the charterer would entitle the Owner to "withdraw" the “booked” vessel, but would not give such the automatic right to compensation for further losses suffered as a consequence, for example, of the loss of a different charter party, or of the costs incurred to put the ship at the charterer’s disposal in a given port. Let us briefly examine the assumptions underlying the judgment in question.
The motor vessel “Astra” was chartered by the Charterer in October 2008 (on a NYPE 1946 form) for a period of 5 (five) years.
Under Clause 5 of the contract, a charterer is required to pay freight in advance, and “failing the punctual and regular payment of freight…the Owner shall be at liberty to withdraw the vessel and terminate the contract” The Charter party also contained an anti-technicality notice requiring the Owner to give the Charterer two business days in which to “settle” the outstanding sum.
In August 2010, following several delays in payment of the freight, the Owner was obliged to send the Charterer an anti-technicality notice asking such to fulfil those obligations assumed under the Charteparty, and therefore to pay the outstanding freight within 48 hours.
Following the Charterer’s failure to pay, the Owner withdrew the vessel and terminated the charter party. As per contract, arbitration proceedings were brought by the Owner, who claimed prospective damages from the date of withdrawal to the earliest redelivery date under the Charter party. The judgement in question put an "end" to the Court case.
The High Court, upholding the Owner’s claim for damages, albeit in the absence of any express contractual provision to such effect, has established a number of interesting principles.
The Court noted that:
- the obligation of timely make the payment of freight, as specified in Clause 5 of the charter party, was to be deemed to be a contractual "condition", and that
- non-fulfilment of that "condition" would give rise both to the Owner’s right to terminate the contract, and to the Owner’s entitlement to compensation for any losses suffered.
In reaching these conclusions, the High Court has "given importance" to certain elements which are strongly indicative of the parties’ intention to attribute importance to the prompt payment of the freight in the contractual relationship, and in particular:
- the non-payment of freight as a circumstance entitling the Owner to terminate the contract-was to be understood, according to the Court, as a factor determining the validity of the contract;
- the indication of a contractually-agreed "term" for the making of a payment, according to the Court, should imply that such term is “essential”;
Finally, the High Court, adopting a clearly pragmatic approach, noted the need (at a time of considerable difficulty for the market) to enable owners to rely on “firm” principles when negotiating contracts, which, in the event of a charterer’s failure to pay freight, forcing the owner to withdraw the ship, entitle the owner to claim compensation for those losses incurred.
The judgement in question is clearly open to certain observations, and raises a number of questions. For example, it would be interesting to ascertain whether, in the opinion of the Court, even if the parties did not agree to entitlement to withdraw the vessel in the event of failure to timely paythe freight, this can be deemed to be a contractual "condition". Undoubtedly the High Court’s judgement increases the chance of owners avoiding any deadlock created by defaulting charterers, in a strongly negative market.
We shall be coming back to the question for an update of the manner by which the English Courts of Arbitration, notoriously reluctant to concede the parties any rights other than those expressly set forth in the contract, perceive a ruling which, in moving away from a simple reading of the contract, towards the interpretation of the actual intentions of the parties, is clearly very "un-English" in nature.