Ship Charterparty Termination Consequences
Shipowners’ and Charterers’ respective rights and obligations will depend to a large extent on whether the Ship Charterparty (Contract of Carriage) ended by reason of Frustration or Repudiation.
In the Ship Charterparty Repudiation, one party in practice, usually cargo owners will be entitled to claim substantial damages. For present purposes, however, the important point is not how the contract came to an end, but the fact that it has terminated. Shipowners’ contractual obligations to carry the goods and deliver them at destination have therefore ended.
Although Shipowners’ contractual obligations no longer exist, owners still remain in possession of the cargo. Therefore, Shipowners assume certain obligations by reason of the fact that they are in possession of another party’s goods. Cargo owners’ rights to claim possession will also survive, as they exist independently of the continuation in force of the contract of carriage.
In such a situation, Shipowners become involuntary Bailees or Custodians of the cargo.
In the event of the Ship Charterparty Termination being due to Shipowners’ breach, it is likely that the courts would impose on owners the more onerous duties of a common carrier. In bailment, Shipowners’ duty will be to take reasonable care of the goods on board, but that they are entitled to recover all expenses reasonably incurred in doing so.
Furthermore, if the Ship Charterparty has come to an end through Frustration, the carrier can require cargo owners to take delivery of the cargo and to pay any costs incurred by owners in discharging such cargo.
Shipowners are entitled to assume that the party presenting an Original Bill of Lading (B/L) is necessarily entitled to the cargo. Such an assumption is legally justified when the Bill of Lading contract is still in existence, but that is not the situation here.
It is arguable that there are strong policy reasons why Shipowners should be protected, if they deliver the goods in accordance with the terms of the now defunct Bill of Lading (B/L), notwithstanding that those terms have been discharged by Frustration.
Consequently, what if the ship is withdrawn from charterers’ service for late or non-payment of hire, at a time when she is already laden with cargo pursuant to bills of lading which, as mentioned above, remain fully binding?
It is clear that the holders of such bills of lading continue to be entitled to a number of rights against the carrier, but it is not the task of this paper to examine those rights.
Instead, let us briefly look at whether Shipowners have any rights to be remunerated, if the ship is delayed, for example while the cargo on board is removed by charterers.
In ENE Kos Ltd v Petroleo Brasileiro SA (2010) case, following withdrawal Shipowners ordered charterers to remove the cargo from the ship. In these circumstance, are Shipowners entitled to remuneration outside the Ship Charterparty (Contract of Carriage) and/or to recover expenses incurred?
It was accepted that Shipowners had a duty to care for the cargo while it continued to be on board the ship. Were they entitled to reasonable remuneration for doing so?
There was no request for a new Ship Charterparty (Contract of Carriage) once the ship was withdrawn. As there was no element of accident, emergency or necessity, remuneration which had not been expressly or impliedly agreed, could not be due.
Shipowners, therefore were not entitled to hire at the market or contract rate for the days before they sailed away. Expenses incurred by Shipowners in taking care of or preserving the cargo during actual cargo operations could be recovered.
When a Charterparty is Terminated, There are Certain Consequences
A charterparty is a legal contract between the owner of a vessel and the charterer who rents use or service of the vessel. The specifics of each charterparty may differ, but many contain similar terms. Like any contract, when a charterparty is terminated, there are certain consequences.
1. Financial Impact: The most direct impact of a charterparty termination is usually financial. The party that breaches the contract is often required to compensate the other party for losses. This can include costs associated with finding a replacement charter, loss of profits, or other direct and indirect costs. There may also be a predetermined cancellation fee stipulated in the contract.
2. Legal Consequences: If the charterparty agreement is broken, it may lead to legal disputes. Depending on the severity of the breach, and the jurisdiction under which the charterparty was signed, legal consequences can range from arbitration to litigation. The losing party in such a case could also be responsible for legal fees, in addition to any compensation awarded.
3. Reputation Damage: Particularly in industries like shipping where reputation and trust are paramount, prematurely terminating a charterparty could harm a party’s reputation. This could make it more difficult to secure future charters or partnerships.
4. Operational Impact: The termination of a charterparty could also have operational impacts. The shipowner might have to find a new charterer, which can take time and resources, potentially leading to the vessel being idle and not earning revenue. On the other hand, the charterer will have to find another vessel, which could delay their operations or cause them to miss business opportunities.
5. Consequential Damages: Beyond the immediate losses, there could also be consequential damages. For instance, if the termination of the charterparty leads to delay in the delivery of goods, the charterer might be liable for any damages suffered by the consignee due to the delay.
6. Liens: In certain cases, especially where the charterer has unpaid bills, the shipowner has a maritime lien on the cargo and can sell it to recoup the unpaid charter hire.
7. Re-negotiation Opportunities: While a termination might initially seem negative, it can also open the door for re-negotiation. Both parties may find new terms that are more beneficial to their current situation. In some instances, this can lead to a more profitable or efficient charter arrangement.
8. Return of the Vessel: Upon termination of the charterparty, the charterer is typically required to return the vessel to the owner. The vessel should be in the same condition as it was received, save for ordinary wear and tear. If it’s not, the charterer may be liable for the costs associated with returning the vessel to its original condition.
9. Termination Clauses: The actual consequences of termination can be heavily influenced by the termination clauses outlined in the charterparty. These could include stipulations about notice periods, obligations for returning the vessel, financial penalties, dispute resolution methods, etc. It is crucial to fully understand these terms before entering the agreement, as well as when considering termination.
10. Impact on Related Contracts: A charterparty may also be tied to other contracts such as bills of lading or contracts of affreightment. The termination of the charterparty may therefore have repercussions on these contracts, and parties may find themselves dealing with a complex web of contractual implications.
11. Force Majeure: If the termination was due to circumstances outside either party’s control (like natural disasters, war, etc.), referred to as “force majeure”, the terminating party might be excused from some of the usual consequences. It will, however, depend on the specific force majeure clause in the charterparty.
12. Insurance Implications: Termination of a charterparty may also have implications for insurance coverage. If a vessel is left idle due to termination, some insurance policies may not provide coverage. It’s crucial to review the insurance policy terms and maintain communication with the insurance provider.
In summary, the termination of a charterparty can have a multitude of consequences, many of which can be quite complex and far-reaching. Given the potential implications, it’s vital for parties to take all aspects into consideration and possibly seek legal counsel to navigate these complexities. The parties should also try to mitigate the risks of termination by clearly outlining termination clauses and procedures in the initial contract.
It is important to note that these consequences will largely depend on the specific terms of the charterparty and the laws of the jurisdiction governing it. Therefore, it is highly recommended to seek professional legal advice when dealing with matters related to the termination of a charterparty.
What is Ship Charterparty Repudiation?
“Charterparty” is a legal term that is specific to maritime law. It’s a contract between the owner of a ship and the charterer who wishes to hire the vessel. The terms of the contract usually detail the specifics of the rental, including duration, route, and cargo.
“Repudiation” in a legal context refers to the rejection or refusal of a contract or obligation. It signifies that one party to the agreement has indicated (either through words or conduct) that they will not fulfill their contractual obligations.
So, “Ship Charterparty Repudiation” refers to a situation where either the owner of the ship or the charterer decides to reject or not fulfill their obligations under the charterparty contract. This can lead to legal disputes, where the injured party may seek damages for losses incurred due to the repudiation.
Repudiation is a serious matter and it can’t be claimed on trivial or slight breaches. It should only be considered when the breach goes to the root of the contract, often referred to as a “fundamental breach”.
Examples of situations that may lead to charterparty repudiation include:
- The charterer refusing to pay hire or load cargo as agreed.
- The ship owner not providing a vessel that is seaworthy or refusing to follow the agreed route.
- One party behaving in a way that suggests they do not intend to be bound by the terms of the agreement in the future.
In the event of a repudiation, the innocent party may be entitled to claim damages or, in some cases, may be allowed to terminate the contract. The specifics would generally depend on the laws of the jurisdiction governing the contract, as well as the terms of the contract itself.
When there is a repudiation of a charterparty, the party who is not in breach typically has two options:
- Affirm the Contract: The innocent party can decide to keep the contract alive despite the repudiation. In this case, they would continue to abide by their own obligations under the contract and would expect the other party to do the same. This might be an attractive option if, for example, the innocent party expects market conditions to change in their favor and wants to keep the contract in place.
- Accept the Repudiation and Terminate the Contract: The innocent party can choose to accept the other party’s repudiation and terminate the contract. In this case, the contract is effectively brought to an end, and the innocent party can bring a claim for damages to compensate for the losses resulting from the repudiation.
Whether a party chooses to affirm the contract or accept the repudiation and terminate, they would typically also have the right to claim damages for losses caused by the other party’s repudiation.
Damages are usually intended to put the innocent party in the position they would have been in if the contract had been performed as agreed. In the context of a charterparty, this could include things like lost profits, additional costs incurred as a result of the repudiation, or the cost of arranging alternative transportation for cargo.
It’s worth noting that these are general principles and the exact rights and remedies available in the event of a charterparty repudiation can depend on various factors, including the terms of the contract, the laws of the relevant jurisdiction, and the specific circumstances of the case.
What is Ship Charterparty Frustration?
“Frustration” of a contract is a legal principle that applies when an unforeseen event occurs that makes it impossible or impracticable to fulfill the contract, or changes the nature of the contractual obligations so significantly that it would be unjust to hold the parties to the original terms of the agreement.
In the context of a ship charterparty, frustration could occur for a variety of reasons. Here are a few examples:
- Destruction of the Vessel: If the ship is destroyed or damaged to such an extent that it can no longer carry out the agreed voyage, the charterparty could be frustrated.
- Blockage of Port: If the designated port becomes blocked or inaccessible due to war, natural disasters, or other unforeseen events, and there are no alternative ports that could reasonably be used, this could frustrate the contract.
- Legal Changes: Changes in law or regulation could also lead to frustration. For instance, if a new law is enacted that prohibits the type of cargo specified in the charterparty from being transported, the contract could be frustrated.
- Unforeseen Delays: Delays that significantly prolong the voyage beyond what was expected at the time the contract was made can sometimes frustrate a charterparty. However, this generally requires more than just a standard delay; it would need to be so significant that it changes the nature of the contractual obligations.
When a charterparty is frustrated, it is automatically terminated and the parties are relieved of their future obligations under it. However, any obligations that fell due before the frustrating event occurred are still enforceable.
It’s important to note that the threshold for frustration is quite high. The unforeseen event must fundamentally change the nature of the contractual obligations, and it must not be due to the fault of the party seeking to claim frustration. Additionally, the contract may contain clauses that allocate risk for certain “frustrating” events, in which case those clauses will usually take precedence over the general law of frustration.
Like with repudiation, parties involved in a potential frustration scenario would be well-advised to seek legal advice due to the complex nature of these issues.
It’s worth highlighting that the doctrine of frustration is not lightly invoked. The courts tend to take a restrictive view of what constitutes a frustrating event because of the principle of pacta sunt servanda (agreements must be kept). This doctrine is also not applicable where the contract makes provision for the event which has occurred. In such situations, the parties must deal with the consequences as per their agreement.
Here are some further implications of frustration in the context of a ship charterparty:
- Frustration vs. Force Majeure: These are two distinct legal concepts, though they may seem similar. A force majeure event, like an act of God, war, or natural disaster, might potentially lead to the frustration of a contract. However, not all force majeure events will be frustrating events. Whether a force majeure event frustrates a contract depends on whether it truly renders the contractual obligations impossible or fundamentally different. Many contracts, including charterparties, often contain specific force majeure clauses which define how such events should be handled.
- Financial Consequences: When a contract is frustrated, it’s terminated automatically and the parties are excused from their future obligations. However, the financial consequences can be complex. Generally, losses lie where they fall. This means that the parties cannot recover money paid before the frustration event, nor can they demand payment of sums that become due only after the event. However, there may be exceptions to this, especially in jurisdictions that have legislation modifying the common law doctrine of frustration.
- Frustration and Delay: As previously mentioned, frustration can sometimes result from unforeseen delays. However, not all delays will frustrate a contract. The delay must be so unexpected and significant that it changes the nature of the contractual obligations. Simply having to wait longer than expected is usually not sufficient.
- Frustration vs. Hardship: It’s important to distinguish frustration from hardship. While frustration requires that performance of the contract becomes impossible or fundamentally different, hardship refers to situations where performance is still possible but has become significantly more onerous or costly. Most legal systems do not allow for a contract to be terminated for hardship, although some do allow for the contract to be revised in certain circumstances. Thus, a charterparty would not typically be frustrated just because it has become less profitable or more difficult due to changes in market conditions, for instance.
- Self-induced Frustration: If a party’s own actions or omissions are the cause of the event that would otherwise have been a frustrating event, the doctrine of frustration cannot be invoked. For example, if a charterer fails to load the cargo on time and this results in the ship missing a seasonal sailing window, the charterer cannot claim that the contract has been frustrated due to the missed window.
- Post-Frustration Liabilities: Although the doctrine of frustration discharges the parties from future obligations, liabilities incurred before the frustrating event are still enforceable. Additionally, if one party has obtained a valuable benefit under the contract before the frustration event, the other party may be able to recover it under the principle of restitution. This could potentially be relevant in a ship charterparty context if, for example, the charterer has paid in advance for a voyage that is later frustrated.
- Frustration and Charterparty Types: The impact of a frustrating event might differ depending on the type of charterparty. For instance, in a voyage charter, if a ship is delayed such that it misses the “canceling date” (the agreed date by which the vessel should be ready to load the cargo), the charterer may argue that the charterparty has been frustrated. However, in a time charter, temporary delays would typically not be sufficient to frustrate the charter, as the charterer still gets the use of the ship for the agreed period (albeit later than initially expected).
As with all legal issues, the application of the principle of frustration to a ship charterparty would depend on many factors, including the exact terms of the charterparty, the specifics of the frustrating event, and the laws of the jurisdiction governing the contract. Legal advice should be sought in any situation where frustration of a contract may be an issue.
When can Shipowners cancel Charter Party?
Whether Shipowners possess the authority to lawfully terminate or cancel the charter, re-establish the ship’s terms, and seek reparations for the profits forfeited during the remaining duration of the annulled charter party (as opposed to solely pursuing unpaid hire prior to the Shipowners’ termination of the charter party) hinges upon the repudiation of the charter party. “Repudiation” holds a specific connotation in English law, where a contract is considered repudiated in either of the following instances:
1- When the breached contractual term, namely the obligation to remit hire, is categorized as a “condition” according to English law, or
2- When the breach of the contractual term is of such gravity that it strikes at the core of the contract.
In the case of a long-term charter, an early termination of the charter party empowers Shipowners to claim a potentially substantial amount of damages, signifying the lost profits for the remaining duration of the nullified charter party.
In this scenario, Shipowners bear the responsibility of demonstrating that they have incurred losses that cannot be reasonably compensated by re-establishing the vessel, such as situations where the charter party rate has decreased subsequent to the initial charter agreement.
What are the Dangers if Shipowners wrongfully cancel a Charter Party?
If the Shipowners unjustly terminate a charter agreement and subsequent proceedings reveal that the owners lacked the right to terminate the said agreement, the situation will be reversed, putting the owners at fault. In such a scenario, the Shipowners themselves will be in breach of the charter agreement, enabling the Charterers to cancel the agreement and seek compensation and/or an indemnity from the Shipowners.
What happens if Charterers have not paid hire, can Shipowners cancel the Charter Party?
If, according to English law, the requirement to make payment for the use of a vessel, known as “hire,” is deemed a “condition” of the charter party, then the failure of the Charterers to pay even a single installment of the hire will automatically (subject to any anti-technicality clause in the charter party) grant the Shipowners the right to terminate the charter party.
For a considerable period, there existed conflicting interpretations within English law as to whether the payment of hire was a “condition” or simply a term within the charter party. The Astra case (2013) supported the former stance, while The Brimnes case (1972) argued for the latter.
Resolution of this issue is of utmost importance, as breaching a term or condition of payment carries significantly different consequences, as discussed earlier.
The Court of Appeal settled the debate regarding whether the payment of hire constituted a condition in the Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd case (2016). By overruling The Astra case (2013), the Court of Appeal concluded that the obligation to pay hire is not a “condition” but rather a term of the charter party. This ruling offers a certain degree of clarity, namely, that Shipowners do not possess an automatic right to terminate the charter party and claim for loss of profits when Charterers fail to make the required hire payments.
However, it is important to note that this is not the final aspect to consider, as indicated in point above. Despite the determination that the payment of hire alone does not constitute a condition, the court in Spar Shipping found that the overall conduct of the Charterers amounted to a Repudiatory Breach. Consequently, the Shipowners were justified in canceling the charter party and succeeded in their claim for damages and loss of potential income resulting from future hire payments they would have earned under the charter party had it not been terminated.
Therefore, in cases where there is non-payment of hire, it is crucial to comprehend what actions qualify as a repudiatory breach.
What factors are relevant in determining whether a breach is repudiatory?
A conduct becomes repudiatory if it goes to the root of the agreement or deprives the other party (i.e., Shipowners) of substantially all the benefits of the contract. In this regard, the intention of the defaulting party (Charterers) holds little relevance. What holds significance is the manner and conduct of the Charterers leading up to the breach.
The following factors are pertinent in determining whether the charterers’ conduct regarding non-payment of hire amounted to a repudiatory breach:
1- The extent of the accumulated arrears in relation to the entire duration of the charter party.
2- Failure to devise a concrete payment plan to settle the arrears.
3- Failure to provide a thorough explanation for the unpaid hire.
1- The accumulation of arrears and the duration of the charter party
It has been suggested that assessing the arrears in relation to the entire duration and potential earnings under the charter party can help determine if the non-payment of hire significantly deprived the owners of contractual benefits.
For instance, if a late payment of hire spanning two to three months represents a small fraction of the total earnings owners could have received over a five-year charter, can it be considered substantial enough to deprive owners of the entire benefit of the contract?
While this approach provides a starting point, the court cautioned against relying solely on such a mathematical comparison of arrears to determine the repudiatory nature of a breach. Such an approach overlooks the fact that a charter party entails the charterer obtaining services on credit, and failure to make payment does not automatically render the breach repudiatory. Hence, this mathematical comparison may not definitively establish whether the charterers’ breach was repudiatory.
2- Failure to devise a concrete payment plan to settle arrears
One crucial factor leading to the finding of a repudiatory breach was the charterers’ failure to present a specific payment proposal. A viable payment plan should include a detailed and reasonable timetable for settling specific portions of the debt. Additionally, incorporating an interest rate for late payments can further reinforce the credibility of the payment plan. A vague promise of punctual payment is typically insufficient as a reasonable payment plan.
It is essential to draft the payment plan carefully, as it may be construed as an admission of liability. For Charterers, including “without prejudice” qualifications and clear statements indicating that the payment plan does not constitute an admission of liability and does not affect charterers’ rights to set-off damages for other matters is advisable.
On the Shipowners’ side, accepting such a payment plan has its drawbacks. Acceptance may be viewed as compromising the claim under the charter party, potentially extinguishing the Shipowners’ right to arrest any of the Charterers’ vessels as security.
If Shipowners decide to accept the payment plan, they may qualify their acceptance by stating that it does not waive their rights to arrest the vessel in the event of a subsequent breach of the payment plan. However, the effectiveness of such statements in extinguishing arrest rights would depend on the local admiralty laws of the relevant jurisdiction.
3- Inadequate Explanation for Unpaid Hire
A failure to provide a comprehensive explanation for the non-payment of hire can have significant implications. The tribunal may interpret a consistent pattern of non-payment or underpayment by the Charterers, coupled with their refusal to disclose the underlying reasons, as an act of repudiation. For instance, if the charterers persistently insist on paying a daily rate that is $5,000 below the agreed charter rate for an extended period of over three years, arbitrators have deemed it a breach that fundamentally undermines the contract (as demonstrated in the case of The Astra).
To avoid allegations of repudiatory behavior, it is essential for Charterers to be forthcoming about the reasons behind their failure to fulfill their payment obligations. Common justifications often involve cash flow issues, a declining market, economic downturn, or even unpaid sub-hire.
While Charterers may be apprehensive about divulging excessive information due to concerns of revealing commercial vulnerability or prejudicing their legal position, it is necessary to maintain a certain level of transparency. The courts have established that the Charterers’ failure to provide specific details regarding anticipated incoming funds can be deemed as a repudiatory breach.
What factors are irrelevant in determining whether a breach is repudiatory?
Considerations that tribunals have deemed irrelevant in determining the liability of a party for a repudiatory breach encompass various aspects. Firstly, as previously mentioned, the intentions of the defaulting party (Charterers) hold no significance. The fact that Charterers express willingness or intention to fulfill the contract and make the required payment does not alter the reality of non-payment.
Secondly, the financial strength of the owners is also inconsequential. Hence, it is not a valid defense for charterers to argue that Shipowners, having substantial resources, could absorb the Charterers’ failures and anticipated inability to perform the charter party. The mere fact that owners possess greater financial backing does not impose an obligation on them to accept delayed hire payments, especially when the original intention of the parties was for prompt payment.
Based on the aforementioned factors, several key considerations determine whether the Charterers’ failure to pay hire amounts to a repudiatory breach of the charter party, granting Shipowners the right to terminate said charter party. If charterer members find themselves unable to fulfill their payment obligations, they should take note of these factors and ensure they take adequate steps to refute any allegations of repudiatory breach.
Conversely, Shipowners should carefully review the aforementioned factors to assess whether the Charterers’ conduct does, in fact, constitute a repudiatory breach.
A tribunal’s determination of whether a breach is repudiatory or not hinges on the specific facts of the case. Particularly, tribunals are likely to closely scrutinize the correspondence between the parties to assess whether charterers are in repudiatory breach of the charter party. Therefore, it is of utmost importance that both Shipowners and Charterers contemplate the content and timing of such correspondence with due care.
Ship Charterparty Termination and Spar Shipping Case
Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd (2016)
The backdrop of the Spar Shipping case revolved around the events of 2010 when Spar Shipping engaged the services of three vessels to Grand China Shipping (Hong Kong) Co. Ltd. These vessels were secured under three long-term NYPE 1993 time charters, sharing essentially identical provisions.
Every charterparty encompassed a withdrawal clause, which, to the extent that it was substantial, delineated the following:
11. Hire Payment
Payment of Hire shall be made so as to be received by the Owners or their designated payee….in United States currency, in funds available to the Owners on the due date, 15 days in advance…..… Failing the punctual and regular payment of the hire, or on any fundamental breach whatsoever of this Charter Party, the Owners shall be at liberty to withdraw the Vessel from the service of the Charterers without prejudice to any claims they (the Owners) may otherwise have on the Charterers.”
Since April 2011, the charterer has been in arrears for the payment of hire under all the charterparties. Despite the charterer’s promise to pay in due course, Spar Shipping withdrew the vessels and issued termination notices in late September 2011. Initially, Spar Shipping initiated arbitration proceedings against the charterer. However, shortly before the hearing, the charterer went into liquidation. Consequently, Spar Shipping took legal action against the parent company guarantor in the English High Court to recover the outstanding historic hire balance under the charterparties and seek damages for the loss of the remaining term of the charterparties.
Decision of the High Court
In the first instance, Judge Popplewell determined that clause 11 of the 1993 NYPE time charters did not constitute a contractual condition. Consequently, the ship owner was not entitled to receive anything more than the outstanding historic hire based on the operation of Clause 11(a). However, Judge Popplewell also concluded that the charterer’s actions at termination, by essentially failing to fulfill its obligations in accordance with the explicit terms, amounted to a renunciation of the charterparties. This meant that the ship owner could additionally seek compensation for the loss of the bargain, totaling approximately US$25 million, along with interest and legal costs. Subsequently, this decision was appealed.
Court of Appeal Ruling
The Court of Appeal deliberated on two crucial inquiries: (i) Does the charterer have an obligation to promptly pay the hire as a contractual condition? and (ii) Did the charterer’s proposal to pay the hire at a future point, rather than in advance, constitute a renunciatory breach of the contract?
Regarding the question of whether timely payment of the hire is a contractual condition, the Court of Appeal acknowledged the existence of conflicting opinions among the High Court decisions and academic analysis.
The Court of Appeal extensively examined the various types of terms found in a contract, categorizing them into well-established classifications:
Conditions – pivotal terms, breaching which would substantially deprive the innocent party of the entire benefits of the contract, allowing termination and a claim for damages;
Warranties – minor terms, breaching which would not deprive the innocent party of the contract’s benefits; and
Innominate (or intermediate) terms – more intricate obligations, for which the remedy for any breach depends on the nature, consequences, and impact of that breach. Gross LJ summarized that “unless the contract explicitly stated whether a particular stipulation was a condition or a warranty, it should be treated as an innominate term. Courts should not be too eager to interpret contractual clauses as conditions.”
The Court of Appeal concluded that, in the absence of explicit language in the Spar Shipping time charters, the obligation to make timely hire payments was not a condition of the contract, but rather an innominate term. After careful consideration of the conflicting case law, the Court of Appeal determined that despite the significance of punctual hire payment, any failure to pay the hire in advance, no matter how trivial, would not hinder Spar’s performance under the charterparties. Additionally, the fact that the NYPE standard form or other industry standard forms did not explicitly classify payment of hire as a condition was noteworthy.
Consequently, the Court of Appeal’s decision meant that, in relation to the first question, while Spar Shipping had the option to withdraw the vessel, it would only be entitled to claim hire up until termination and could not seek compensation for the hire that should have been due for the remaining term of the three charterparties.
However, the Court of Appeal proceeded to examine the second query. The Court of Appeal acknowledged that there exist various formulations of the renunciation test due to the necessity of applying it across a wide range of factual scenarios. Gross LJ succinctly summarized:
“…it is crucial to bear in mind that renunciation is not limited to a manifested unwillingness to fulfill the contract entirely; a manifested unwillingness to fulfill the contract in accordance with its terms (whether due to incapacity or otherwise) may also constitute a renunciation if the proposed performance is significantly contradictory to the obligations of that party thereunder… Furthermore, renunciation may be inferred when it becomes apparent that the defaulting party is merely procrastinating in the hope that something favorable might arise…”
The Court of Appeal emphasized three pivotal questions to consider in determining whether renunciation had taken place: (i) what was the benefit the innocent party was meant to derive from the contract; (ii) was the anticipated non-performance indicated by the words and actions of the breaching party; and (iii) was the anticipated non-performance of such magnitude as to strike at the core of the contract?
In this case, the Court of Appeal found no room for uncertainty; Spar Shipping could not have “any realistic expectation” that the charterer would henceforth make timely advance payments, and the initial judge could conclude that the charterer had renounced the charterparties at the time of the termination notices. Consequently, although the Court of Appeal determined that there had been no breach of an explicit contractual condition, Spar Shipping was entitled to compensation for the loss of its agreement due to the charterer’s common law renunciation of the contract.
The approach of English law regarding termination due to a breach of contract remains unchanged. Termination based on breach of a condition, as outlined in the contract’s termination terms, is considered equivalent to termination under common law. Consequently, breach of a condition will result in common law damages unless the contract explicitly states otherwise.
The Court of Appeal’s verdict has significant implications for drafters of charterparties and similar contracts:
While this decision brings clarity to the conflicting statements made by different judges in the past regarding the consequences of failing to pay hire on time, it may now be more challenging for ship owners to recover losses when their vessels are withdrawn due to non-payment, unless there is a specific contractual provision allowing such claims. The NYPE standard form has been revised in the 2015 version to enhance the possibility of recovery, but other standard forms, such as BIMCO, have not yet followed suit. Given these circumstances, it would be prudent for ship owners to take the opportunity to review their charters now. This review should ensure that the charters explicitly state the following, where applicable:
- Punctual payment of hire is an essential condition of the contract.
- Timely payment is crucial for all amounts due under the contract.
- If the ship owners decide to withdraw the vessel due to failure to make punctual payment, they shall also be entitled to damages for the loss of hire rates for the remaining duration of the contract. The effectiveness of these additional provisions is likely to depend on the specific facts and circumstances of each case.
Finally, it is interesting to note that both the High Court and the Court of Appeal determined that the charterers’ repeated failure to pay constituted a renunciation of the charterparty. Although these findings are fact-specific and may not have general applicability, the decision appears to be based on the fundamental principle that paying the hire in advance is an essential aspect of a charterparty. When a charterer explicitly communicates its inability to pay in advance or when it is evident from the factual records that it cannot do so, it effectively renounces its capacity to fulfill the contract as originally agreed. Such a situation may arise through words or conduct in various circumstances where the charterer is facing solvency issues. Consequently, charterers must exercise extreme caution when communicating with owners in times of financial difficulties. Additionally, financially distressed charterers unable to make repeated payments may find it challenging to avoid a claim for renunciation if the vessel is withdrawn due to non-payment.