Shipping Contract Law
Agreements Vs Contracts
The nature of Commercial Relationships is that Agreements are made whereby parties promise to deliver goods or services to each other, usually in return for financial payment, reward, or consideration. It is crucial to establish to what extent such agreements and promises are deemed Legally Binding.
Contracts are agreements that do give rise to rights and liabilities. In English Law, only Contracts may be deemed as being Legally Binding.
In English Law, although the parties may have an Agreement that in the usual practice of commercial life would be carried out. This Agreement may not necessarily lead to Legal Liability if one party deviates from the Agreement. Without Legal Liability, the injured party may not be able to pursue any redress from the other party’s Breach of Agreement. Therefore, Shipbrokers should comprehend the difference between a Contract and an Agreement.
Contracts are legally binding Agreements. Contracts may be either:
1- Simple Contracts: Contracts that are not under seal. Simple Contracts incorporate almost all trade contracts. Therefore, Charterparties
2- Contracts Under Seal: special types of contracts
Legally Binding Contract
The requirements must be satisfied for a Legally Binding Contract:
A contract must have an Offer, an Acceptance, and a Consideration. Furthermore, a contract must be Legal.
An offer is an unquestionable declaration of willingness to contract on specified terms.
An offer should be distinguished from other negotiations and from the Invitation to Treat. Invitation to Treat is simply an expression of a willingness to receive offers.
Unfortunately, many Shipbrokers loosely use the expression Offer. Therefore, Shipbrokers should be careful to use the expression Firm Offer.
Shipbrokers should be cautious when replying to a request for information, such as requesting what is the lowest rate a shipowner would accept for a particular cargo or indication. Responding to such a request does not constitute an Offer.
An Offer has to be an absolute expression of a willingness to be bound.
Duration of Offer:
An offer may be terminated by:
1- Lapse of Time
2- Death or Incapacity
2- Rejection or Counter-Offer by the Offeree
3- Revocation by Offeror
Offeror: is the person who is making the offer
Offeree: is the person who is receiving the offer
An Offeree’s authority of acceptance can also be discontinued by the non-occurrence of any condition of acceptance under the terms of the offer.
The offer made by the offeror must now be accepted by the offeree on the specified terms. Therefore, the acceptance shifts the offer into an agreement.
The acceptance must be completed in reply to the offer. The acceptance must precisely match the offer. If the offeree modifies any term, this will not be an Acceptance but a Counter-Offer. Therefore, the original offer is expired.
The acceptance must be intercommunicated to the offeror. The acceptance has not materialized until received by the offeror. Expressed terms must be heard. For example, if the negotiations are via the telephone and loud noise drowns out the offeree’s terms, then no acceptance has materialized. This rule applies to instantaneous communications and not to postal communications.
In English law, where acceptance is made by postal communications, the contract is created as soon as the letter is posted in the posting box even though the offeror may never receive the acceptance.
In English law, it is expressed that the Post Office is the common agent of both parties. Therefore, the posting is bringing together the minds of the parties. The fundamental problem here is who should take the risk inherent in the use of the Post Office. The reason for the regulation is that the offeror should know of the risks and can protect himself. The offeror enjoys the authority to specify how and when communication is to be created. In other words, the offeror can expressly exclude postal communications.
Therefore, during chartering negotiations, it is a well-established custom when making firm offers to specify a date and time to reply.
In English law, there is no legally binding agreement without consideration. Consideration is the price given in return for the promise. In other words, the agreement must be a bargain.
The Offeree must not only accept the offer but must in return for that offer give some element that makes the agreement into the bargain. This element is named Consideration for historical grounds.
The consideration must move from the offeree to the offeror. The consideration must be of value, but need not be adequate. In other words, what is given in return for the offer must be legally recognizable. The consideration has to be more tangible than a moral obligation. Nevertheless, the consideration does not have to be of the same commercial value as the offer. For example, $500 might still be valuable consideration in return for the offer to sell a Rolls Royce. Furthermore, valuable consideration does not even have to be money.
Lately, the courts appear to have evolved relatively relaxed in their perspectives as to what will be construed as supplying consideration. For example, in the Court of Appeal’s decision in the William v Roffrey Brothers (1990) case, the parties were in a contract whereby the plaintiff carpenter was to do some refurbishment job on a block of apartments for the defendant builders. The plaintiff got into financial hardships because the plaintiff had quoted too low a price to accomplish the job. The defendants were liable to a Penalty Clause in their primary contract with a third party if the job was not finished on time. The defendant promised the plaintiff an extra £10,300 to ensure that the plaintiff completed the job on time. When the job was finished, the defendants denied liability on the basis that their agreement was not supported by consideration. The Court of Appeal held that the plaintiff had provided consideration for the promise. The Court of Appeal’s all three judges were persuaded by the fact that the defendants always knew that the plaintiffs had initially agreed to do the job for too little and that it was probable that in reality, the job would cost more. Furthermore, there was in no sense any duress exercised by the plaintiff and the defendants had expressed that the defendants intended to be bound by the promise.
In Stilk v Myrick (1808) case, during a sea voyage, two crew members escaped. The Ship Master promised the remaining crew members a bonus if crew members operated the ship back to London. This promise was held to be not binding because the remaining crew members were already under a duty in their contract to do all that they could under the troubles of the voyage. The original crew member contract expected crew members to exert themselves to the utmost to steam the ship back safely to the destined port. Consequently, the Ship Master had provided no consideration for the promise of the bonus.
In Williams v Roffrey Brothers (1990) case, Russell LJ expressed that in the late twentieth century the stringent approach to the concept of consideration as found in Stilk v Myrick (1808) case was neither necessary nor desirable. Today, the approach was that the courts should be more inclined to encounter the existence of consideration to reflect the intention of the parties to the agreement where the parties were bargaining on an equal level. The court believed that the defendants had obtained a benefit from the promise. The defendants were saved the disadvantage of having to hire another carpenter. Furthermore, the defendants were saved from the Penalty Clause. According to Russell LJ, although the plaintiff had not undertaken an extra job, there had been a divergence in the agreement, and on a pragmatic approach, the promise was supported by consideration.
In some exceptional cases, the Agreement can still be enforceable even though there is No Consideration in the strict sense of the term. Sometimes, a Promise may be enforceable because there is a developing Doctrine of Equity. For instance, in a contract where an individual to receive the money promises that, as a promisor, he will not collect the money, and based on this promise the promisee so arranges himself in such a way that he is no longer in a position to be able to pay it. Nothing was given in return for the promisor’s promise not to demand payment so that the new promise which is accepted by the promisee is not a contract but simply a Mere Agreement. However, it would at this point be unfair and against good conscience to allow the promisor to retract his promise and insist upon his full legal rights to collect the money. Therefore, Equity raises a defense to the claim on the bases of fairness and prevents the promisor from rejecting his promise. This is the Doctrine of Promissory Estoppel.
The basic principle is that the promisor will not be allowed to enforce his rights where it would be inequitable having regard to the dealings which have taken place between the parties. For this rationale, it is expressed that Equitable Estoppel is a shield rather than a spear.
Promissory Estoppel and Shipbrokers’ Commission
In Vistafjord (1988) case, the courts applied the principle to estopp a shipowner from claiming the funds kept by a shipbroker which the shipbroker somewhat fairly and reasonably thought would be due to the shipbroker as commission.
Vistafjord (1988) case was before the introduction of the Contracts (Rights of Third Parties) Act 1999. Before 1999, a shipbroker, having no privity to the contract could not sue the shipowner directly for the shipbroker’s commission. Before 1999, under English law, the best alternative was to convince the charterer to sue the shipowner as trustee for the shipbrokers. In Vistafjord (1988) case, the shipbroker deducted the shipbroker’s commission when handing the collected freight to the shipowner.
The contract must be for a legal purpose.
Other Elements of Legally Binding Contract
The parties must have the intention to be legally bound. This is usually fulfilled in a commercial contract.
The parties must be of sound mind. The parties must be of age; a minor cannot enter into a legally binding contract except for:
2- Purchase of Necessities
Except for contracts relating to land, most contracts may be either Oral or in Writing. Both Written Contracts and Oral Contracts are legally binding and enforceable.
In most commercial transactions, the contracts are in written form, but except for Marine Insurance Contracts, this is usually a matter of choice rather than law.
Shipbrokers and Contract (Right of Third Parties) Act 1999
The Doctrine of Privity of the contract states that a person who is not a party to the contract cannot enforce the contract even where that contract is expressly for his benefit. In other words, a person who has not provided consideration cannot enforce the contract. In such a situation, the beneficiary of the contract has no redress in Common law and is faced with seeking redress in Equity.
This regulation has been radically modified in favor of Shipbrokers by the Contract (Right of Third Parties) Act 1999.
Contract (Right of Third Parties) Act 1999 expressly allows a Third Party (Shipbroker) to enforce rights given under a Contract (Charterparty) to which a Shipbroker is not a party in particular cases. Contract (Right of Third Parties) Act 1999 concerns Ship Brokerage Payments under a Contract (Charterparty).
Shipping Contract (Charterparty) Terms
1- Express Terms
2- Implied Terms
The terms of the Contract (Charterparty) are the instructions upon which both parties to the Contract (Charterparty) will act. Each contracting party has particular instructions.
Contract (Charterparty) Terms may be either:
1- Express Terms: Express Terms are expressly stated by the contracting parties
2- Implied Terms: Implied Terms are said to be in the Contract (Charterparty)
1- Express Terms
Express Terms are the terms that are expressly agreed upon between the contracting parties. The court will determine between promises made by the contracting parties which are the Express Terms and Statements of Intention or Fact made by the contracting parties, which are not regarded as Express Terms but as representations.
2- Implied Terms
When the contracting parties have not expressly agreed upon a term, there will at times be particular terms that are implied in the Contract (Charterparty).
Governments are becoming increasingly concerned with providing rules to imply terms into certain Contracts (Charterparties). For instance, English Law imposes The Sale of Goods Act 1979 which implies in certain contracts of sale specific terms about the title of the goods, the description of the goods, and the merchantable quality and fitness for purpose of the goods. Particular terms are implied in Contracts (Charterparties) relating to the Carriage of Goods by Sea, both at Common Law and under Statute.
In some cases, English courts hold that the contracting parties must have in certain circumstances, intended certain terms to be implied into the Contract (Charterparty). Generally, it is expressed that those terms which are required to give the Contract (Charterparty) Business Efficacy were intended, as of a fact, to have been included in the Contract (Charterparty). Therefore, such terms are implied by the English courts.
Classification of Contract (Charterparty) Terms
3- Innominate Terms
Breach of Contract (Charterparty) means one of the contracting parties does not fulfill his part of the agreement. In other terms, one of the contracting parties is in breach of one of the terms with which he should comply. Consequently, the query materializes as to what may the other party do in response to this breach. This is determined by the examination of the importance of the term which has been breached. Contractual Terms are classified according to their importance to the contract.
Conditions are essential terms of the Contract (Charterparty). Conditions go to the root of the Contract (Charterparty). Breach of such a Condition is said to be fundamental and entitles the innocent party to terminate the Contract (Charterparty) and claim damages.
Warranties are less important (minor) terms of the Contract (Charterparty). Warranties do not affect the overall implementation of the Contract (Charterparty) as intended by the contracting parties. Breach of a Warranty does not entitle the innocent party to terminate the Contract (Charterparty). However, the innocent party may claim damages.
Innominate means not having a name. The Hong Kong Fir Shipping Co Vs Kawasaki Kisen Kaisha (1962) was a milestone case, the Court of Appeal judge Lord Justice Diplock expressed that Innominate Terms are terms that may be fitted into the category of either Conditions or Warranties. A breach of one of the Innominate Terms is more complicated terms could in one case give rise to a fundamental breach, whilst in a different case give rise to simply a minor breach. To determine, we examine the effect of the breach upon the Contract (Charterparty) and the loss incurred by the innocent party.
The Breach of the Innominate Term would be a Condition if that breach would deprive the innocent party of substantially the whole benefit of the Contract (Charterparty). On the other hand, it would be a Warranty if the problem is capable of solution by the payment of damages.
In the Hong Kong Fir Shipping Co Vs Kawasaki Kisen Kaisha (1962) case, the issue was a main engine breakdown due, it was claimed, to inefficiency by the engine room team. Engine breakdown required substantial time for repairs. The Charterers withdrew from the Contract (Charterparty) claiming that the vessel was unseaworthy. On the other hand, the shipowners contested the situation. Appeal Court judge Lord Justice Diplock and other Appeal Court judges agreed with the Court of the First Instance that the delays caused by the main engine repairs did not prevent the vessel from completing the time charter commitment. Appeal Court dismissed the Charterer’s appeal.
Contract (Charterparty) Exclusion Clauses
One party to the contract may add a term (Exclusion Clause) into the Contract (Charterparty) which purports to exclude that party’s liability for the breach of the contract.
It is vital to determine how far such an Exclusion Clause may be effective. The Common Law rules were developed to regulate the incorporation of Exclusion Clauses. Furthermore, these regulations force some exclusion clauses to be ineffective.
Common Law Exclusion Clause:
1- Exclusion Clause must not be ambiguous
2- Exclusion Clause must not be misrepresented
3- Exclusion Clause must be properly incorporated into the contract
Exclusion Clause cannot be incorporated once the contract has been formed. For example, in Thornton v Shoe Lane Parking (1971) case, the ticket created by an automated car park barrier referred to conditions displayed inside the car park which purported to exclude liability for damage to cars and damage to drivers. Notice of the Exclusion Clause had been given after the contract was formed. The contract was formed when the driver took the ticket from the automated machine. Therefore, Additional Terms, such as Exclusion Clauses, could not be incorporated after that moment.
4- Exclusion Clause must not be repugnant to the primary purpose of the contract
For example, in a Contract (Charterparty) for the carriage of cargoes by sea which will be evidenced by a Bill of Lading (B//L), there can be no effective exclusion for delivery of the goods to a non-holder of the Bill of Lading (B//L). Contracts (Charterparties) of such carriage are established on the assumption that delivery will be to a Bill of Lading Holder. Only in extremely rare cases may the cargo be delivered to anyone else. Therefore, such an Exclusion Clause would be repugnant to the primary purpose of the contract.
5- It is possible to incorporate an Exclusion Clause that excludes liability for a fundamental Breach of Contract.
Whether or not such Exclusion Clauses were effective had been the source of much judicial disagreement until the House of Lords’ decision in Photo Productions v Securicor (1980).
In Photo Productions v Securicor (1980 case, the plaintiffs engaged the defendants to make regular visits to their factory to re-enforce their fire precautions. Unfortunately, the defendants engaged for this purpose an employee who was a fire-setter who set fire to the plaintiffs’ factory and burned it down. The Court of Appeal held that this was a Fundamental Breach of Contract and that liability could not be excluded by terms. The House of Lords decided that the terms used in the Securicor Standard Form were clear and were sufficient to exclude Securicor’s liability. Suitable considerations were that the clause was clear and that both parties were trading on Equal Levels. Therefore, the plaintiffs were in a position properly to comprehend the nature of the Exclusion Clause, and there was nothing ambiguous about the nature of the Exclusion Clause.
Statutory Rules Exclusion Clause:
Today, numerous countries provide specific regulations as to Exclusion Clauses.
In the United Kingdom, there is the Unfair Contract Terms Act 1977 that incorporates inter alia that the provisions apply to both contractual relationships and tort. Furthermore, there can be no exclusion of liability for Death or Personal Injury. Unfair Contract Terms Act 1977 specifies that all other exclusions must be reasonable although reasonableness is not specifically defined by the Unfair Contract Terms Act 1977.
Frustration of Contract (Charterparty)
In some cases, the Contract (Charterparty) becomes impossible to perform, or where one contracting party is precluded from fulfilling his obligations.
In such cases, the Contract (Charterparty) is frustrated and the obligations and liabilities of the contracting parties cease. In other terms, when a contracting party is compelled to breach a Contract (Charterparty) because of a Frustrating Event that contracting party is not liable for that Breach of the Contract (Charterparty).
The Contract (Charterparty) is said to be Frustrated when the Contract (Charterparty) becomes impossible to perform by an external intervening event that was not possible to predict when the Contract (Charterparty) was created and which was not the fault of either contracting party.
Formerly, when a Contract (Charterparty) became frustrated the courts, under Common Law, would state that the loss would lie where it fell. Today, the position in the United Kingdom is governed by the Frustrated Contracts Act 1943. The Frustrated Contracts Act 1943 fairly mitigates the harshness of the Common Law rule. For instance, the Frustrated Contracts Act 1943 stipulates that sums payable before the Contract (Charterparty) is terminated are now recoverable. Sums yet to be paid in cease to be payable. The court may at its discretion allow a contracting party to recover expenditures incurred before the termination of the Contract (Charterparty). Furthermore, when one contracting party receives a valuable benefit, other than money, as a result of something done by the other party, a sum of money may be demanded as payable to that other party in respect of the valuable benefit.
Contract (Charterparty) Vitiating Factors
Vitiate means to make invalid or ineffectual. Some factors affect the validity of the Contract (Charterparty).
1- Force Majeure
3- Void and Illegal Contracts
4- Duress and Undue Influence
6- Unenforceable Contracts
1- Force Majeure: Force Majeure relieves the contracting party from responsibility for non-performance or varied performance in cases that are completely beyond the contracting party’s control.
2- Incapacity: A Contract (Charterparty) will be void if one contracting party is not identified as being qualified of entering into the Contract (Charterparty). For instance, in the case of minors, drunks, or lunatics.
3- Void and Illegal Contracts: A Contract (Charterparty) will be void if, for instance, it is a restraint of trade. A Contract (Charterparty) will be illegal if it is to conduct an unlawful act.
4- Duress and Undue Influence: Duress and Undue Influence causes the contract voidable at the option of the contracting party who was compelled or influenced, as the contracting party’s consent to the making of the Contract (Charterparty) was not freely given.
5- Mistake: The fact that one party to a Contract (Charterparty) acted under a mistake does not necessarily affect the validity of the Contract (Charterparty). A Contract (Charterparty) is only void for a mistake where the mistake is such that there was never any actual agreement between the contracting parties, or if there was, the Contract (Charterparty) was only formed out of the same common mistake by both parties on some paramount issue.
6- Unenforceable Contracts: Where the Contract (Charterparty) does not comply with required formalities.
Remedies for Breach of Contract (Charterparty)
In some cases, one contracting party does not perform his side of the deal. In other words, one contracting party is in breach of his contractual commitments under the contract. Thus, it is crucial to analyze the redress that the Injured Party may seek.
There are some remedies that the injured party may claim regarding the breach by the other contracting party. These remedies are available both in:
1- Common Law
1- Common Law Remedy is available as of Right. Injured Party is entitled to his Common Law remedy if the Injured Party can prove that there was a Contract (Charterparty) and that the other party is in Breach of the Contract (Charterparty).
2- Equitable Remedy is available at the discretion of the Court. Equity is applied where it is just and fair to do so in all circumstances. Thus, even though the Injured Party may prove his claim, the Court may decide that in all the circumstances it would not be fair to award an Equitable Remedy Therefore, a Common Law remedy will be applied instead of Equitable Remedy.
Remedies for Breach of Contract (Charterparty) are a critical element of any commercial life.
Common Law Remedy is a Money Award. The Injured Party is compensated in Money for the loss he has suffered due to the other party’s Breach of Contract (Charterparty). The main Money Remedy available in Common Law is called Damages.
Types of Damages:
1- Liquidated Damages
2- Unliquidated Damages
Liquidated Damages materialize when there is a Clause in the Contract (Charterparty). The Liquidated Damage Clause stipulates a specified amount to be recovered in the event of a Breach of the Contract (Charterparty). The Liquidated Damage Clause must not be punitive. In Liquidated Damages, the contracting parties have expected their respective loss which may accrue from the Breach of Contract (Charterparty). Therefore, the contracting parties have set out in the Contract (Charterparty) what they expect as an award for such a Breach of the Contract (Charterparty). Demurrage in the Contract (Charterparty) is a standard example of Liquidated Damages.
When there is no valid Liquidated Damages Clause, the Court must estimate the damages themselves. The injured party presents to the court the amount which he considers to be suitable compensation for his loss, but there must be some unbiased methods upon which the court can decide whether the claimed amount is realistic. All civil liability strives to compensate the Injured Party and not to punish the Wrongdoer. Deterrents, punishment, and retribution are exclusively within the scope of Criminal Law and are not Civil Law cases.
Usually, the Courts estimate damages based on Expectation Loss (Loss of Profit), which the Injured Party has suffered through the Breach of the Contract (Charterparty). when the Expectation Loss cannot be estimated due to the nature of the Contract (Charterparty), then damages are awarded based on Reliance Loss.
Reliance Loss is solely to be considered when Expectation Loss cannot be estimated. In Reliance Loss, the Injured Party has not at that point suffered an actual loss of profit or cannot demonstrate what the profit loss is.
It is vital to mention that Double Recovery is not allowed, and Reliance Loss is just to be considered where Expectation Loss cannot be estimated. The aim of damages in a Contract (Charterparty) is to put the Injured Party (Plaintiff) into the position as if the Contract (Charterparty) had been accomplished adequately. Therefore, the damages contain Profit Loss.
The Remoteness of Damages
Damages must not be too remote. In other words, there must be some limit to the liability of the party in Breach of a Contract (Charterparty). Thus, the Courts must estimate whether or not the damage is too remote.
In Hadley v Baxendale (1854) case, it was decided that the Injured Party may recover:
1- Inevitable Damages
2- Special Damages
1- Inevitable Damages: All those damages that arise reasonably and naturally from the Breach of a Contract (Charterparty) or which may reasonably be considered to have been in the contemplation of both parties when entering into the Contract (Charterparty).
2- Special Damages: The party in the breach was aware when he entered into the Contract (Charterparty). Damages that would not normally arise from a breach of this type of Contract (Charterparty), but in some cases, the defendant knew that would arise from his breach of this particular Contract (Charterparty).
Mitigation means to make milder or less severe. In other words, the Injured Party may not recover damages for losses that the Injured Party could have taken appropriate steps to avoid.
The Injured Party must take all reasonable and practical actions to mitigate the loss which is resulting from the damage the Injured Party has suffered. The Injured Party is simply under a duty to take reasonable steps. The reasonable steps depend upon the events of the case.
An injunction is an equitable order that is depriving the defendant of a stipulated action. In other words, it may be invoked to stop the breach of a negative term in the Contract (Charterparty).
In some circumstances, the Courts may make an order enforcing the performance of the Contract (Charterparty). However, some Contracts (Charterparties) will not be especially enforceable because of the nature of the obligations. Consequently, damages must be awarded.
Statutory Rules for Contracts (Charterparties)
In the United Kingdom, in addition to the basic Common Law regulations relating to Contracts, many Contracts nowadays have supplementary rules furnished by Statute.
The Carriage of Goods by Sea Act 1971 the United Kingdom is among the numerous governments that have ratified the international convention entitled The Hague-Visby Rules. Hague-Visby Rules are incorporated into the Carriage of Goods by Sea Act 1971 which applies to all contracts of carriage of goods by sea which are evidenced by a Bill of Lading (B//L). The Carriage of Goods by Sea Act 1971 incorporates specific conditions into such contracts. The Carriage of Goods by Sea Act 1992 replaced the Bill of Lading Act 1855.
The Factors Act 1889 has codified and amplified the Common Law about Mercantile Agents. The Factors Act 1889 incorporates agents having a General Lien on goods in their possession and on the proceeds of the sale of such goods for the balance of account between the agent and his principal.
The Sale of Goods Act 1979 applies to specific types of Contracts exclusively. The Sale of Goods Act 1979 applies to Contracts where the ownership of the goods is exchanged for money. The Sale of Goods Act 1979 is supplemented by the Sale and Supply of Goods Act 1994 and is amended as the Sale of Goods Act 1995. The Sale of Goods Act 1979 incorporates Implied Terms that are to be deemed as incorporated into the Contract. For instance, the quality and soundness of the goods.
The Supply of Goods and Services Act 1982 applies to specific Contracts for services and goods supplied. Such Contracts will not fall within the scope of the Sale of Goods Act 1979. Therefore, the Supply of Goods and Services Act 1982 provides similar provisions concerning Contracts for the supply of goods and services as are found in the Sale of Goods Act 1979 concerning contracts of sale.