UK: Court Finds Payment Of Charter Hire Is Not A Condition: Astra Not Followed

Last Updated: 23 March 2015
Article by Michael Volikas, Fionna Gavin and Amanda Urwin

Spar Shipping AS v. Grand China Logistics Holding (Group) Co. Ltd [2015] EWHC 718 (Comm)

In a decision handed down on 18 March 2015, a Commercial Court judge has declined to follow Flaux J's decision in The Astra and has concluded that payment of hire by the Charterers was not a condition of the charterparty. Mr Justice Popplewell reached his decision following a careful consideration of the authorities on this issue and, in particular, The Astra [2013] EWHC 865 (Comm).

The Court also considered issues concerning repudiatory breach, the validity of the charterparty guarantees and assessment of damages for repudiatory breach of charter. These issues are not discussed in this alert, but a more detailed article on the judgment will appear in our Spring 2015 Shipping E-Brief.

Brief background facts

By three charters dated 5 March 2010 on amended NYPE 1993 forms, three supramax bulk carriers were let on long term time charter to Grand China Shipping (Hong Kong) Co Ltd. The charters provided for performance guarantees to be issued by the Defendant ("GCL") which is the parent company of the Charterers. By April 2011, the Charterers had fallen behind with their hire payments under the charters and, in September 2011, the vessels were withdrawn from service and the charters were terminated. The Owners claimed under the guarantees in respect of the loss of the balance of the charters.

The decision in The Astra

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 contractual 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). Having reviewed the authorities, Mr Justice Flaux reached the conclusion that payment of hire is a condition of the contract and therefore that the failure to pay a single hire payment entitled the Owners to withdraw the vessel and claim loss of profit for the remaining charter period.

The Commercial Court decision

Mr Justice Popplewell also reached his conclusion following a detailed analysis of the authorities and, in particular, following a careful analysis of the principles set out in The Astra. Popplewell J considered and dismissed each of the reasons given by Flaux J in The Astra for finding that payment of hire was a condition of the contract. In summary:

  1. Popplewell J disagreed with Flaux J that the right to terminate under the withdrawal clause for any failure to make punctual payment meant that any non-payment was sufficiently serious to justify termination and therefore that a failure to pay hire promptly was intended to be a condition. The withdrawal clause in this case provided only for a liberty to withdraw the vessel from service, in other words it did no more than give the Owners an option to cancel. Without express wording to that effect, the withdrawal clause did not make payment of hire a condition.
  2. If there were no withdrawal clause in the charters and so no express right to terminate, payment of hire would not be treated as a condition of the charter. It could not have been intended that any breach of the hire payment obligation, no matter how serious or trivial, would have the same consequences and allow the Owners to terminate a long-term charter even for a trivial breach.
  3. In commercial contracts, the time for payment is not generally "of the essence" i.e. a condition, unless the contract expressly says so. In a time charter context, there is no good reason to treat the payment of hire as a condition (unless the charter says so expressly) because an owner may exercise his contractual right to terminate the charter and put an end to future performance (and the future expense of operating the vessel for the benefit of the charterer). In Popplewell J's view, once an owner no longer has to provide a charterer with the services of the master and crew, then his interest in the prompt and punctual payment of hire disappears.
  4. The need for commercial certainty did not mean that payment of charter hire should be treated as a condition. Commercial certainty can be achieved by the withdrawal clause which offers an option to cancel, without conferring on owners an unmerited right to damages (such as is conferred by a right to repudiate a contract for breach of a condition). The desirability of commercial certainty must be counterbalanced with the need not to impose liability for a trivial breach in undeserving cases.

Having gone through his careful and lengthy analysis, Popplewell J found himself unable to follow the decision of Flaux J in The Astra and concluded that payment of hire by the Charterers under the three charters was not a condition.

Comment

It may come as little surprise that the decision in The Astra has not been followed and should not be treated as settling the law as to whether a payment of hire under a charterparty is a condition, any breach of which would justify a claim for repudiatory breach. Whether there is an appeal on this issue remains to be seen. However, for now, at least, this decision is likely to go some way to restoring the previously accepted view 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 and, in doing so, demonstrate that charterers' defaults are sufficiently serious as to deprive the owners of substantially the whole benefit of the charter.

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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