Introduction
It was generally accepted under the English law that the mere fact that the charterers failed to pay charter hire punctually would not entitle the owners to withdraw the vessel and claim damages against the charterers for loss of bargain. However, this position has been changed by the English Commercial Court decision in Kuwait Rocks Co v AMN Bulkcarriers Inc; The Astra [2013] 2 All ER (Comm) 689, which held that the obligation to make punctual payment of hire was a condition of the contract, the breach of which would entitle the owners to withdraw the vessel and claim damages for loss of bargain.

Background
In The Astra case, the Owners chartered the vessel to the Charterers for 5 years by a time charterparty on the NYPE 1946 form as amended (the “Charterparty”) in October 2008. Clause 5 of the Charterparty provided that “failing the punctual and regular payment of the hire…the Owners shall be at liberty to withdraw the vessel from the service of the Charterers, without prejudice to any claim they (the Owners) may otherwise have on the Charterers” (“Clause 5”). Clause 31 of the Charterparty provided that “where there is any failure to make ‘punctual and regular payment’…the Owners shall notify the Charterers in writing whereupon the Charterers will have 2 banking days to rectify the failure, where so rectified the payment shall stand as punctual and regular payment” (the “Anti-technicality Clause”).

The hire rate was falling from the outset of the Charterparty; as such, the hire payable by the Charterers was higher than the rate they could command by way of sub-charter. Since January 2009, the Charterers repeatedly sought a reduction in hire, alleging that otherwise they would have to declare bankruptcy. In June 2009, the Charterers failed to pay an instalment of hire and the Owners served the 2-day notice pursuant to the Anti-technicality Clause. The parties subsequently entered into a compromise agreement which provided for a reduced rate of hire from 7 July 2009 to 7 July 2010 (the “1st Compromise Agreement”). Clause 4 of the 1st Compromise Agreement stated that “in the event of the termination or cancellation of the charter by reason of any breach by or failure of the Charterers to perform their obligations, the Charterers shall, in addition to any amounts due to the Owners at the date of termination or cancellation, pay to the Owners compensation for future loss of earnings” (the “Compensation Clause”).

Thereafter, the Charterers continued to seek reduction in hire. In early July 2010, the Charterers failed to pay hire due and the Owners issued another 2-day notice pursuant to the Anti-technicality Clause. The parties then entered into a 2nd compromise agreement, which extended the reduced rate until 29 July 2010 on terms including that the Charterers pay the hire due on 29 July 2010 at the full charterparty rate (the “2nd Compromise Agreement”). The 2nd Compromise Agreement also contained the Compensation Clause.

The Charterers failed to pay the hire due on 29 July 2010. The Owners demanded to withdraw the vessel unless payment was made by midnight on 3 August 2010. Payment was not received by the deadline. Thus the Owners withdrew the vessel and terminated the Charterparty. The Owners commenced arbitration against the Charterers and claimed damages for loss of earnings. The arbitral tribunal decided in favour of the Owners.

The Appeal
The Charterers appealed against the tribunal’s decision. This article focuses on the key issue on appeal, i.e. whether the obligation to make punctual payment of hire was a condition of the Charterparty under Clause 5, the Anti-technicality Clause and/or the Compensation Clause.

The Owners’ Arguments
The Owners raised the following arguments:-

1.         Clause 5, specifically when accompanied by the Anti-technicality Clause, made time of the essence. Thus, if the Charterers failed to pay hire within the 2 days referred to in notice under the Anti-technicality Clause, the Owners were entitled to terminate the Charterparty by withdrawing the vessel. In other words, a failure to pay within that notice period was a breach of condition.

2.         The Brimnes [1973] 1 All ER 769, which held that Clause 5 was not a condition, should be distinguished on the basis that there was no anti-technicality clause in that case making time of the essence.

3.         In cases where the market rate of hire was falling, the right to withdraw the vessel was not an adequate remedy unless the owners had a right to claim damages for loss of bargain.

4.         Even if Clause 5 and/or the Anti-technicality Clause were not a condition of the Charterparty, the effect of the Compensation Clause made the obligation to make punctual payment of a hire a condition of the Charterparty.

The Charterers’ Arguments
The Charterers, on the other hand, argued the following:-

1.         The obligation to make punctual payment of hire under Clause 5 only meant that there was certainty with regards to payment; it was not a condition of the Charterparty.

2.         The Anti-technicality Clause extended the time for punctual payment through a deeming provision. It did not make time of the essence as it was intended to work in favour of the Charterers by precluding the Owners from withdrawing on purely technical grounds. It would therefore be wrong to construe the Ant-technicality Clause as making time of the essence, where it would not have been the case in the absence of such clause.

3.         The Charterers’ construction of Clause 5 that it was not a condition of the Charterparty accorded with business common sense, providing an appropriate balance between the parties’ interest. In a rising market, the charterers would lose out through being deprived of the vessel; in a falling market, the only situation in which the owners would wish to withdraw the vessel would be if they were fed up with the charterers’ persistent late payment, which would amount to repudiatory breach and entitle the owners to claim damages. In those circumstances, it would not be necessary to hold that Clause 5 was a condition, breach of which would give rise to a right to claim damages independently of any repudiation.

4.         The Compensation Clause would not make the obligation to make punctual payment of hire a condition where it had not previously been.

The Decision of the English Commercial Court
The English Commercial Court held that Clause 5 (whether accompanied by the Anti-technicality Clause or not), was a condition of the Charterparty, breach of which entitled the Owners to withdraw the vessel and claim damages for loss of bargain. The reasons are as follows:-

1.         It was clear from the wording of Clause 5 that there was a right to withdraw whenever there was a failure to make punctual payment. In other words, regardless of whether the breach was repudiatory or not, the Charterparty treated it as sufficiently serious as to have entitled the Owners to terminate. That was a strong indication that it was intended that a failure to pay hire promptly went to the root of the Charterparty and thus Clause 5 was a condition.

2.         Where there was a “time” provision requiring something to be done by a certain time or payment to be made by a certain time, the general rule in mercantile contracts was that time was considered of the essence. Therefore, even if Clause 5 alone had not made time of the essence, the Anti-technicality Clause had made time of the essence. Further, the presence of the Anti-technicality Clause in the present case provided a valid ground for distinguishing The Brimnes case.

3.         The element of certainty in commercial transactions was of particular importance. If it were the case that the right to withdraw the vessel for non-payment of hire left the owners with no remedy in damages on a falling market, except where the charterers’ conduct could have been said to have been repudiatory, that would have left the owners in a position of uncertainty as to whether to withdraw the vessel or to soldier on with a difficult and uncooperative charterer until such time when the owners could say that the charterers were in repudiatory breach.

4.         Lastly, the English Commercial Court agreed with the Owners that the Compensation Clause made the obligation to make punctual payment of a hire a condition of the Charterparty.

Conclusion
It should be noted that The Astra is only a Commercial Court decision and it may be overruled by the higher Courts of England. However, before this case is overruled the current position is that once the charterers failed to make punctual payment, the owners may withdraw the vessel and claim loss of bargain against charterers and it is not necessary for the owners to rely upon the anti-technicality clause to withdraw the vessel. Therefore, charterers should take extra care in ensuring punctual payment of hire to the owners and should be very cautious if they wish to claim deductions from hire. In the event that the charterers are uncertain on whether they are entitled to claim deductions, it is advisable to either pay the hire under protest to the owners and then commence legal proceedings to recover the paid hire or (subject to the owners’ agreement) pay the hire into an escrow account and then commence legal proceedings for a determination on the entitlement of the payment. Finally, the charterers should consider inserting appropriate wordings in the charterparty to avoid giving the owners the right to withdraw the vessel and claim loss of bargain in the event that there is an inadvertent delay in the payment of hire.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.