Kuwait Rocks Co v. AMN Bulkcarriers (Astra)  EWHC 865 (Comm)
A Commercial Court judge has decided that a failure to pay hire under an NYPE charterparty amounts to a breach of condition, entitling a ship-owner to terminate and seek damages. This goes against the previous view generally held in the market that the obligation to pay hire under a time charter as it falls due is not a condition such that, if an owner wants to recover its future losses following a termination, it must seek to bring the charter to an end for repudiatory breach of contract, the latter invariably involving a series of consecutive defaults by the charterers.
The Court also considered whether the arbitrators had correctly applied the law on repudiatory breach and whether an addendum to the charter, stating that if the time charter was terminated the owners would be entitled to recover future loss of earnings, constituted a penalty clause.
The background facts
The Astra was chartered on an amended version of the NYPE 1946 form dated 6 October 2008 for a period of five years. Under Clause 5 of the NYPE form, a charterer is required to pay hire in advance and "failing the punctual and regular payment of hire... the Owner shall be at liberty to withdraw the vessel...". The charterparty also contained an anti-technicality provision which required the Owners to give the Charterers two banking days' notice of a failure to make a hire payment.
After the commencement of the charter, the market continued to decline and the Charterers found they could not employ the vessel at a profit. On various occasions, the Charterers sought a reduction in the hire rate and threatened that, if the Owners did not agree, then they would liquidate the company. In July 2009, the Owners agreed to reduce the hire rate for one year and the parties entered into an addendum to the charter. Amongst other things, the addendum recorded 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, Charterers shall... pay to the Owners compensation for future loss of earnings...". This was referred to in the judgment as the "Compensation Clause".
Even after the addendum was agreed, the Charterers continued to insist on further reductions of hire. When the Charterers failed to remit the hire payment due for August 2010 on time, the Owners withdrew the vessel from the Charterers' service and terminated the charterparty. The Owners then claimed their future loss of earnings for the remainder of the charter period in arbitration, arguing that: (i) the Charterers were in breach of condition in not paying hire on time and, alternatively: (ii) their conduct was a renunciatory/repudiatory breach of the charter.
The arbitrators' decision
As to the first argument, the arbitrators found that, whilst their instinct as commercial arbitrators would be to treat the obligation to pay hire on time as a condition, they were not persuaded that the current state of English law reflected this view. They stated that the generally accepted position under English law is that a failure to pay hire is not a breach of condition.
On the second argument, the arbitrators determined that the Charterers' conduct evinced an intention no longer to be bound by the charterparty and therefore there was a renunciation of the charter. While the late payments were not evidence of renunciatory conduct, the repeated threats by the Charterers that they would declare bankruptcy unless the Owners agreed to adjust the hire rate, compounded by the failure to honour the compromise reached in July 2009 (when the Owners agreed to reduce the hire rate) could be interpreted as an intention by the Charterers not to perform the charter in a manner consistent with its terms.
The Charterers obtained permission to appeal on two questions. First, whether evincing an intention to perform a contract in a way which is inconsistent with its terms, but which does not deprive the innocent party of substantially the whole benefit of the contract, is capable in law of amounting to a renunciation. Second, whether the obligation under the Compensation Clause to compensate the Owners for their loss of earnings following a termination of the charter amounted to a penalty clause.
The Owners obtained permission to appeal from the arbitrators' decision that a failure to pay hire did not amount to a breach of condition entitling an owner to terminate and claim damages.
The Commercial Court decision
Breach of condition
The most significant question considered by the Court was the Owners' contention that the requirement to pay hire was a breach of condition. Mr Justice Flaux reviewed in detail the various previous cases which, over the last 100 years or so, have touched upon the question of whether a failure to pay hire amounts to a breach of condition as opposed to a breach of an innominate term. (A breach of an innominate term only entitles an innocent party to terminate the contract where the breach is sufficiently serious, whereas a breach of condition entitles the innocent party to terminate a contract regardless of the severity of the breach).
It was clear from the review of the authorities that the arbitrators were right to say it has been widely recognised that, as a matter of English law, a breach of the obligation to pay hire does not constitute a breach of condition. In particular, in The Brimnes, the Commercial Court decided that Clause 5 of the NYPE form was not an essential term of the contract and so did not amount to a condition. In The Kos, both Mr Justice Smith in the Commercial Court and Lord Sumption in the Supreme Court stated that the general view is that a failure to pay hire when it is due is a breach of an innominate term and not a breach of condition.
Having reviewed the authorities, however, Mr Justice Flaux came to the view that Clause 5 of the NYPE form is a condition of the contract such that any breach entitles an owner to terminate the charter and seek damages. The following salient points arise from the judgment:
1. The Owners argued that the decision in The Brimnes could be distinguished because of the inclusion of an anti-technicality clause in the subject charter (which was not found in the charter in The Brimnes). Mr Justice Flaux agreed, but also went further than this and decided that, even without an anti-technicality provision, Clause 5 of the NYPE form was a condition.
2. The decision gives rise to an obvious question as to whether an owner can terminate immediately following a failure to pay hire in full or whether they must wait until the anti-technicality notice period has expired. This question may be particularly relevant where an anti-technicality clause only refers to the owner's right to exercise its contractual right to withdraw. Mr Justice Flaux's judgment in The Astra suggests that an anti-technicality clause constitutes a grace period for the payment of hire and, therefore, an owner can only terminate a charter for breach of a condition requiring the payment of hire where such grace periods have expired.
3. It had previously been considered that, so far as this issue required further clarification, this would need to be done by the Supreme Court, given that it was thought the point had already been decided by the Commercial Court in The Brimnes (in a judgment upheld by the Court of Appeal). By deciding that Clause 5 of the NYPE form by itself is a condition, Mr Justice Flaux's judgment directly conflicts with the earlier decision in The Brimnes. Mr Justice Flaux made it clear that he was prepared to refuse to follow the decision in The Brimnes because: (i) it conflicted with later statements by higher courts on the same issue and; (ii) it was based on a decision (in The Georgios C) which had been overruled in a subsequent case (The Laconia). Mr Justice Flaux did not consider he was bound by the Court of Appeal decision in The Brimnes because the point had not been considered at that level. Even so, it seems that this issue will only be settled if and when the Supreme Court has a chance to look at the point.
4. Mr Justice Flaux had already decided to uphold the arbitrators' decision on another ground (see below in relation to the renunciation argument). His decision regarding a breach of condition could therefore be viewed as obiter and not binding in future cases. That said, Mr Justice Flaux was only prepared to acknowledge that his decision on the point might be considered "academic" and an alternative view is that the case is one determined on a number of grounds. Therefore, the status of the judgment on this point is open to debate.
The Owners had succeeded in the arbitration by showing that the Charterers had repudiated the charter. The Charterers argued in the Commercial Court that the arbitrators had applied the wrong test in this regard because they had failed to consider whether the Charterers' conduct was substantially inconsistent with the party's obligations.
Mr Justice Flaux determined that the arbitrators had not made an error. On the evidence, the arbitrators were entitled to conclude that the Charterers were determined to perform the charter in a manner which deprived the Owners of the substantial benefit they should have obtained from further performance and that this breach went to the root of the contract.
Mr Justice Flaux had little problem dispensing with the argument that the Compensation Clause was an unenforceable penalty clause. He agreed with the Charterers that the reference to "any breach" in the Compensation Clause should be read as meaning any repudiatory breach or breach of condition. That being the case then, in providing that upon a termination the Owners were entitled to recover their loss of earnings, the Compensation Clause only reflected the losses the Owners could claim in a falling market following a termination of the charter.
For the reasons set out above, the status of the decision that the obligation to pay hire under a time charter amounts to a condition is not free from doubt. It will be necessary to see if the case reaches the higher courts on an appeal and how subsequent cases treat the decision. In the meantime, owners may wish to remain cautious when dealing with their charterers' failure to pay hire on time or at all.
The immediate impact is likely to be that arbitration tribunals and/or first instance judges may be more prepared to follow what the arbitrators in this case described as their commercial instinct, i.e. to find that a single failure to pay hire does entitle an owner to terminate the charter and claim damages.
If the decision in The Astra does indeed represent the position under English law on the question of whether a failure to pay hire constitutes a breach of condition, then it will change the balance of power between owners and charterers in a falling market. In the past, owners may have been reluctant to exercise their withdrawal rights where this might mean they could not recover damages for the losses they would suffer when re-fixing the vessel at a lower rate. In such circumstances, owners would have to wait and make a difficult decision as to exactly when charterers' conduct has constituted a repudiatory breach. Given this dilemma, many charterers may have had an expectation that they could miss several hire payments before they were at risk of facing a withdrawal and a damages claim. Such an approach is now fraught with considerably greater risks.
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