UK: New Decision: Is Failure To Pay Hire A Breach Of Condition?

Last Updated: 9 May 2013
Article by Nick Austin, Ed Mills-Webb and Leon Alexander

On 18 April 2013, Mr Justice Flaux handed down judgment in Kuwait Rocks Co v AMN Bulkcarriers Inc (The "ASTRA") [2013]. The case considers whether a charterers' failure to pay hire is a breach of a condition which entitles owners to cancel the charter, and claim damages for the unperformed part. The Judge's detailed decision is likely to have significant practical consequences for those within the industry, and in particular those with extant early redelivery disputes.

The Facts

Charterers hired the vessel on an NYPE 1946 Form for five years from 6 October 2008. The charter contained the standard clause 5 wording:

"Payment of said hire to be ... 30 days in advance ... 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".

Following the significant drop in freight rates at the time, charterers were unable to sub-charter the vessel at a profit so owners agreed a hire reduction for a defined period. When that period expired, the charterers requested a further period at a reduced rate, this time threatening that if agreement could not be reached they would declare bankruptcy. Owners agreed, and an addendum to the charter was issued that reduced the daily hire rate for a fixed period, following which the full charter rate would be payable once again.

After expiry of the fixed period, charterers continued to pay the reduced sum, and not the full charter rate as agreed. Owners held charterers in breach, gave them two days to remedy the breach (pursuant to the "anti-technicality clause"), and when charterers failed to do so, owners withdrew the vessel.

Owners commenced arbitration, claiming USD13 million, being the difference between the market and the full hire rate for the two years and three months remaining on the charter.

The Arbitration

The Tribunal considered:-

1. Was charterers' conduct tantamount to a "renunciation" or "repudiation" of the charterparty (the "Repudiatory Breach")? And

2. Were charterers in breach of condition in not paying hire punctually (the "Breach of Condition")?

For Repudiatory Breach, owners had to show that, by their words or conduct, the charterers evinced an intention not to perform the contract, which a reasonable person would regard as clear and absolute. It would be sufficient if, taking into account the history of the contractual relationship, owners could show that charterers only intended to perform the charter in a way that was substantially inconsistent with their contractual obligations.

The Tribunal did not consider that late payment was itself sufficient, but when considered objectively, charterers' repeated threats that they would declare bankruptcy unless the hire rate was reduced, and their refusal to pay the full charter rate after the end of the fixed period were tantamount to Repudiatory Breach.

Accordingly, the Tribunal ruled in owners' favour and awarded damages of around USD12.5 million.

In relation to the alleged Breach of Condition, the Tribunal said that, whilst their instinct was to treat the obligation to pay hire as a condition, they were not persuaded that was the current state of English law. The Tribunal therefore adopted the "orthodox" view under English law that the punctual payment of hire is not a condition, and dismissed owners' claim. This was the position held in The "BRIMNES" [1973], and affirmed by the Court of Appeal. There is however some contrary "obiter dicta" (i.e. additional, non-binding judicial comments) in later decisions.

The Commercial Court's decision

The Judge considered that the Tribunal had applied the correct legal test for Repudiatory Breach, and that it had reached the correct conclusion. Accordingly, the Judge dismissed charterers' appeal.

This is the rationale of the Court's decision and, therefore, as a general principle, it is only this part of the decision that should be binding on arbitration tribunals, and subsequent Court judges (unless there is a cogent and convincing reason to do otherwise).

However, the Judge proceeded to deliver his judgment in relation to the Breach of Condition.

The Judge considered all the authorities on Breach of Condition, and formed the view that the obligation to make punctual payment of hire is a condition.

The Judge's view was:

1. The fact that clause 5 gives a right to withdraw the vessel is a strong indication that it was intended that a failure to pay hire promptly would go to the root of the contract

2. As time is made of the essence, it is consistent with the requirement being a condition

3. The "BRIMNES" can be distinguished as it is a decision where there was no anti-technicality clause making time of the essence – however, the Judge stated that he would still have refused to follow the decision due to obiter dicta in subsequent decisions, and the fact that one of the authorities relied upon in The "BRIMNES" has now been overruled; and, perhaps most importantly

4. The importance to businessmen of certainty in commercial transactions – an owner needs to know whether he can withdraw the vessel and claim damages or whether he should persevere with his inconsistently performing charterers

What does this mean?

This decision is slightly problematic as the question as to what an owner should now do when presented with a defaulting charterer is perhaps less clear than before.

The reason for this is that the decision is, strictly speaking, obiter, as it was not the rationale for dismissing charterers' appeal, and it does not therefore have to be followed by subsequent courts. It may well be that if the issue comes before a different Commercial Court judge (perhaps on appeal from an arbitral tribunal), the Court may elect to follow the orthodox view.

However, LMAA (London Maritime Arbitrators Association) Tribunals may be bound, and are likely to consider themselves obliged to follow the decision in the first instance.

Irrespective of whether the decision is binding, it is definitely contrary to the position that has been adopted in the industry to date – that a failure to pay hire punctually is not a breach of condition, and that more is needed to show a Repudiatory Breach.

This may have considerable implications as whilst the case is in relation to the NYPE Form, the Judge's reasoning goes wider, and will impact the proper interpretation of most commonly used time charterparties. The Judge's comments may even apply where there is no anti-technicality clause.

The decision is slightly surprising as the Judge relied upon obiter comments in non-time charterparty cases (such as the shipbuilding disputes, Stocznia Gdanksa SA v Latvian Shipping Co [2002] and Stocznia Gdanska v Gearbulk Holdings Ltd [2009]), whilst rejecting reliance on the obiter statement of Lord Sumption in the Supreme Court's decision in The "KOS" [2012], which was a time charter case, on the basis that the relevant issue was not in dispute. In The "KOS", Lord Sumption stated:

"The second consequence is that any failure on the part of the charterers to pay hire when it falls due will not of itself entitle the owners to damages representing the loss of the bargain or the expenses of termination simply because the owners respond by withdrawing the vessel. This is because the non-payment does not itself destroy the bargain or occasion the expenses, unless in the circumstances it is a repudiation which owners have accepted as such"

Whilst obiter, this appears to be an indication of the Supreme Court's view on the question of whether a failure to pay hire punctually is a condition.On a final point, whilst the decision raises more questions for owners faced with non-paying charterers, it may assist decision-making owners in one situation. In The "AQUAFAITH" [2012], the Court held that when charterers repudiate the contract, for example by seeking to redeliver early, owners can decide whether to accept the repudiation, and claim damages, or affirm the contract, and continue to claim payment of hire at the full charter rate. This still presents owners with a difficulty: if they affirm charterers' repudiation (for example because they consider that charterers are good for the money or they are looking for alternative employment for the vessel), then they could lose their right to terminate at a later date if charterers remain silent and simply refuse to pay hire. However, for the time being at least, if owners are evaluating whether to accept a charterers' repudiation or affirm the charter whilst looking for alternative employment, they may take some comfort in knowing that they may still be able to argue, later, that the next failure to pay an instalment of hire by charterers could be a breach of condition entitling them to exercise their right of withdrawal and to claim damages.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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