Geden Operations v Dry Bulk Handy Holdings - the Bulk Uruguay

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DMC/SandT/14/14

England

Geden Operations Ltd v Dry Bulk Handy Holdings Inc (The “Bulk Uruguay”)

English Commercial Court: Popplewell J: [2014] EWHC 885 (Comm): 28 March 2014

Charles Kimmins QC and Thomas Corby (instructed by Lax & Co) for Geden

Timothy Hill QC and Jeremy Lightfoot (instructed by Ince & Co) for Dry Bulk

TIME CHARTER: ANTICIPATORY REPUDIATORY BREACH: RIGHT TO GIVE VOYAGE ORDERS TO TRANSIT GULF OF ADEN: ARBITRATION ACT 1996 SECTION 69 APPEAL

Summary

The disponent owners of the vessel were not in anticipatory repudiatory breach of a three-year time charter where, contrary to the terms of that time charter, the head charter required the consent of the head owners for Gulf of Aden transits, as the disponent owners had not thereby expressed, or been deemed to have expressed, an intention not to perform the charter. The charterers were not thereby so substantially deprived of the whole value of their charter, when set in the context of the background circumstances, that they could treat themselves as discharged from further performance.

Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor of England & Wales, and International Contributor to DMC’s Case Notes

Background

Dry Bulk (“Owners”) time chartered the 58,000MT Supramax bulk carrier “BULK URUGUAY” to Geden (“Charterers”) on an amended NYPE form dated 2 July 2010 for about 35-37 months at a daily rate of USD18,500 (“Charter”).

The Charter was concluded while the vessel was under construction in the Philippines with anticipated delivery in July 2011. The Charter by clause 8 provided in the usual way for the Master to be under the orders and directions of the Charterers as regards the vessel’s employment.

The Charter contained a Conwartime 2004 clause and an amended BIMCO piracy clause. Paragraphs (a)-(b) of the Piracy clause were deleted, reflecting the market practice where the intention was to allow the vessel to transit the Gulf of Aden (“GOA”) without the owners’ consent, called “GOA OK”. This offered a competitive advantage over vessels for which owners’ consent was required – the evidence put the value of that advantage at about USD1,250 per day. Charterers had made clear during negotiations that failure to agree to the GOA OK status was a deal breaker.

The head charter was subject to the head owners’ consent to transit GOA. This led to problems around the time of delivery in July 2011 as Owners made clear under the Charter that compliance with GOA transit orders or directions would be subject to head owners’ prior consent in each instance.

Charterers treated Owners’ insistence for head owners’ prior consent for each GOA transit as a repudiatory breach, which they purported to accept as a termination of the Charter. Owners in turn accepted Charterers’ purported termination itself as repudiation that terminated the Charter.

The arbitral tribunal by a majority found in favour of Owners on the basis that Owners were not in anticipatory repudiatory breach of the Charter, that Charterers were not entitled to terminate, that Charterers’ purported termination was itself a repudiatory breach, which Owners had accepted, and that Owners were entitled to damages of over USD6.5 million.

The essence of the reasoning of the majority of the arbitral tribunal was that: Owners had not expressed an intention to refuse to perform the Charter, by making compliance with GOA transit orders dependent on the head owners’ prior consent; and Charterers had not been substantially deprived of the whole benefit of the Charter, based on the anticipated trading pattern of the vessel, the value of the GOA OK status compared to the hire rate, and viewing the competitive disadvantage of no GOA OK status against the vessel’s ability to trade elsewhere worldwide.

Judgment

The judge identified that there were two key issues that arose in the context of the alleged repudiation, being:

1. Did Owners by their words or conduct evince an intention not to perform, or expressly declare that they would be unable to perform, their obligation under the Charter?

2. If so, did such refusal have the effect of substantially depriving Charterers of the whole benefit which it was the intention of the parties that they should have obtained from the Charter?

Issue 1

The essence of Charterers’ argument was that Owners had made it impossible by their conduct to perform the Charter at a later date and thereby evinced an intention to refuse to comply with an order to transit the GOA if and when made, which amounted to a renunciation of the Charter. The judge identified that Charterers were attempting to dress up a question of fact, decided in Owners’ favour by the majority of the arbitral tribunal, as an issue of law.

In applying the relevant principles, the judge saw no warrant for the central plank of Charterers’ argument, which was that there is some principle of law whereby a party who had made his performance dependent on a discretion to be exercised by a third party is deemed to be evincing an intention not to perform.

The majority of the arbitral tribunal had made a finding of fact that Owners’ stance was not to be understood as being that they were unable or unwilling to perform if and when Charterers gave a voyage order requiring GOA transit. That was the majority's finding of fact. Why, the judge asked, should the contrary be deemed as a matter of law? There was no authority to support such deeming, and it was contrary to established principle.

Issue 2

The judge’s finding on the first sub-issue meant that the second sub-issue did not arise, though he briefly expressed his views thereon.

Charterers’ position was that the relevant question was to ask whether it would be a repudiatory breach for Owners to fail to comply promptly with a voyage order for GOA transit if and when made. This arose where the circumstances were such that there would inevitably be a breach going to the root of the Charter, with clause 8 of the NYPE form being an innominate term, when the GOA OK status had been expressed to be a deal breaker and Owners knew of its importance to Charterers.

Owners’ position was that the correct approach was to identify the benefit which Charterers would have derived under the Charter for the remainder of the contractual period, looking at the question prospectively at the date of anticipatory breach, and then to ask whether Owners’ conduct deprived them of substantially the whole of that benefit.

The judge accepted that the correct approach dictated by principle accorded with Owners’ submissions. That essentially meant that the ground of appeal was one of fact not law where Charterers were unable to point to an error in the legal test applied. The finding of fact of the majority of the arbitral tribunal was that Charterers were not deprived of substantially the whole benefit of the Charter. That was a finding of fact that was not open to challenge under section 69 of the Arbitration Act 1996.

Comment

The judgment highlights the conflicting results sometimes reached between the perceived overriding commercial importance of a key term of a contract and the correct legal and factual analysis of the effect of an impairment of such a key term. The correct approach to an appeal of this nature has again been confirmed in this judgment. An appeal under section 69 of the Arbitration Act 1996 can only succeed where there has been an underlying error of law by the arbitral tribunal leading to the wrong result. This remains the case even when there is considerable latitude for a difference of views to be reached in relation to the correctness of the key findings of fact made.