Introduction

What happens when a time charterer fails to pay hire? Will it constitute a breach of condition which entitles the shipowner to terminate the charterparty and claim damages?

In 2013, to the surprise of many in the shipping community, the English Commercial Court held that the answer to the above question is “yes” in the case of The Astra [2013] 2 All ER (Comm) 689 (“The Astra”) (as discussed in our previous newsletter “Charterers May Face Severe Consequences for Not Paying Hire Punctually”). However, recently on 7 October 2016, the Court of Appeal decided otherwise in Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS [2016] EWCA Civ 982 (the “Grand China Case”) and concluded that Flaux J’s decision in The Astra was wrong.

The Grand China Case – Background

The Facts

By three time charterparties dated 5 March 2010 on amended NYPE 1993 forms, Spar Shipping AS (“Spar Shipping”) agreed to let three vessels on long term time charter to Grand China Shipping (Hong Kong) Co Ltd (“GCS”). The charterparties were on identical terms, save as to rate of hire, period, delivery laycan and vessel details. The performance of the three vessels under the charterparties was guaranteed by three letters of guarantee executed by Grand China Logistics Holding (Group) Co Ltd (the “Grand China”), the parent company of GCS.

Since April 2011, GCS began to have difficulty in paying the hire and hence defaulted in payment. Spar Shipping eventually withdrew the vessels and terminated the time charterparties. As at the date of termination, one of the charterparties had about eighteen months left to run. The remaining two charterparties each had about four years left to run. After GCS went into liquidation, Spar Shipping sued Grand China for the balance of unpaid hire before termination under the guarantees. In addition, Spar Shipping also claimed for the resulting damages for loss of bargain for the unexpired term of the charterparties under the guarantees.

The Commercial Court Decision

At first instance, Popplewell J rejected the decision in The Astra and held that payment of hire by GCS in accordance with clause 11 of the charterparties was not a condition. However, he concluded that GCS had renounced the charterparties and gave judgment in favour of Spar Shipping for the balance due under the charterparties prior to termination and damages for loss of bargain in respect of the unexpired term of the charterparties. Grand China then took out the present appeal, while Spar Shipping crossed appealed against Popplewell J’s decision that payment of hire was not a condition of the charterparties.

The Grand China Case – The Appeal

The appeal was heard by Sir Terence Etherton MR, Gross and Hamblen LJJ in June 2016. There were two issues before the Court of Appeal:

1.       whether a time charterer’s failure to pay an instalment of hire in a time charterparty is a breach of condition, thereby entitling the shipowner to terminate the charter and claim damages (“the Condition Issue”); and

2.       whether or not GCS’s conduct in the case amounted to a renunciation of the charterparties (“the Renunciation Issue”).

The Condition Issue

Regarding the Condition Issue, the Court of Appeal unanimously held that the answer to the question of whether a time charterer’s failure to pay an instalment of hire in a time charterparty is a breach of condition is “No”. It held that The Astra was wrongly decided and whether a term in a time charterparty is a condition is a question of construction of the charterparty concerned. There is also no general presumption in a mercantile contract that a stipulated time for payment is a contractual condition.

On the facts of the case, the Court is of the view that the construction of the clause 11 in question did not make it clear that it was to be regarded as a condition, and hence it was not a condition but rather an innominate term. Accordingly, GCS’s failure to pay hire, without more, merely entitles Spar Shipping to withdraw the vessel from service in accordance with the withdrawal clause. The decision therefore confirms that the obligation to pay hire under a time charterparty constitutes no more than an intermediate or innominate term.

In reaching the above conclusion, the Court of Appeal (in particular Lord Justice Gross in his leading judgment) placed considerable emphasis on what was described as the key question of “striking the right balance” between certainty and the undesirability of treating trivial breaches as carrying the consequences of breaches of condition. The Court is of the view that such trade off or balance is most acceptably achieved by treating the withdrawal clause as no more than a contractual termination option.

The Renunciation Issue

In relation to the Renunciation Issue, the Court of Appeal affirmed the lower Court’s decision and held that GCS’s conduct in the case amounted to a renunciation of the charterparties. In reaching that conclusion, the Court endorsed and applied the three-stage analysis suggested by Spar Shipping, namely:

1.       What was the contractual benefit Spar was intended to obtain from the charterparties?

2.       What was the prospective non-performance foreshadowed by GCS’s words and conduct?

3.       Was the prospective non-performance such as to go to the root of the contract?

Applying the test to the present case, the Court held that the contractual benefit that Spar Shipping intended to obtain from the charterparties as a shipowner was the regular, periodical payment of hire in advance of performance and so long as the charterparty continues. The prospective non-performance foreshadowed by GCS’s words and conduct was payment in hire but in arrears and with attendant uncertainty. Such prospective non-performance goes to the root of the contract.

Further, the Court rejected the novel argument of “accountancy” raised by Grand China, namely that the test for repudiation or renunciation in relation to defaults in payment of hire should be reduced to an arithmetical comparison between the arrears and the total sums payable over the life of the charterparties. The Court held that Grand China’s approach was wrong and whether or not the combination of the past and anticipated breaches of the time payment stipulation amounted to a renunciation of each of the charterparties involved a multifactorial assessment by the trial judge. The practical implication of this ruling is that each case will still have to be analysed on its own facts.

Conclusion

To conclude, the unanimous decision in the Grand China Case, for all practical purposes, finally settles the controversial issue of whether a failure to pay hire was a breach of condition thereby entitling the shipowners to terminate the charterparty and claim damages, providing welcoming certainty to the shipping community.

For now at least, the orthodox position that a term as to payment of hire in a time charterparty was not a condition is reinstated by the Court of Appeal in this case. That said, it remains open to the parties to include a term in their charterparties with clear wordings to the effect that the obligation to pay hire is a condition, giving the shipowners the right to withdraw the vessel and claim damages in the event that the charterers fail to pay hire punctually.  Further, if the charterers evinced an intention not to pay hire or pay hire punctually for the remainder of the charterparty, the charterers’ conduct may amount to a renunciation of the charterparty which allows the owners to terminate the charterparty and claim damages.

For enquiries, please contact our Litigation & Dispute Resolution Department:

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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.