Isabella Shipowner v Shagang Shipping The Aquafaith
Isabella Shipowner SA v Shagang Shipping Co Ltd (The “Aquafaith”)
English Commercial Court: Cooke J:  EWHC 1077 (Comm): 26 April 2012
TIME CHARTERPARTY: ARBITRATION ACT 1996 SECTION 69 APPEAL: AMENDED NYPE FORM: RULE IN WHITE AND CARTER V MCGREGOR: WHETHER OWNERS OBLIGED TO ACCEPT PREMATURE RE-DELIVERY OF VESSEL BY CHARTERERS
Timothy Hill QC and James Shirley (instructed by Ince & Co LLP) for the Claimant, Owners
Timothy Young QC and Simon Milnes (instructed by Holman Fenwick Willan LLP) for the Defendant, Charterers
In the absence of an extreme case, Owners are not obliged to accept repudiation of a time charter by Charterers who repeatedly refuse performance of the charter and tender the vessel for premature re-delivery. Owners are, accordingly, entitled to affirm a time charter in the face of persistent repudiation by Charterers and require performance of the charter until the expiry of the minimum charter period.
Case note by Jim Leighton, BSc (Hons), LLB (Hons), LLM (Maritime Law), Solicitor of England & Wales, Foreign Qualified Lawyer (Practising Foreign Law) in Singapore, Associate at Hill Dickinson LLP and International Contributor to DMC’s CaseNotes
The facts were as follows:
“Aquafaith” was chartered by Owners to Charterers under a charter on an amended NYPE form, dated 19 September 2006, for a duration of 59-61 months. The charter also included an express warranty "that the vessel will not be re-delivered before the minimum period of 59 months".
In admitted anticipatory breach of the charter, on 6 July 2011, Charterers stated they would re-deliver “Aquafaith” on dropping the last outward sea pilot after discharge in China under the then current voyage. Charterers made plain they had no further use for “Aquafaith” for the balance of the minimum period of charter. As the minimum charter period did not expire until 10 November 2011, re-delivery was about 94 days premature.
Owners commenced arbitration on 25 July 2011, before re-delivery occurred, seeking a partial final award declaring that Owners were entitled to refuse such re-delivery, as they had done, and to affirm the charter, holding Charterers liable for hire for the balance of the minimum period.
In his award of 6 September 2011, the arbitrator held that Owners were required to take re-delivery of “Aquafaith”, trade her on the spot market by way of mitigation and claim damages in respect of their loss.
Owners, on appeal to the Commercial Court, submitted that the arbitrator was wrong in law both to hold that time charters fell outside the scope of the rule in White and Carter v McGregor and to hold that Owners had no legitimate interest in refusing early re-delivery, whilst wrongly holding that Owners could only avoid the limitation on the White and Carter v McGregor principle if they could show that the facts here constituted an exceptional case.
The question of law on appeal was:
"Whether, as a matter of law, Owners were entitled to refuse early re-delivery of ‘Aquafaith’ at Jintang on 9 August 2011 and affirm the charter, or whether they were bound in law to accept early re-delivery and merely entitled to sue for damages?"
The judge noted that the present decision was dependent on the leading House of Lords authority of White and Carter v McGregor (fn.1), with consideration of the later decisions of the lower courts in light of that authority, particularly those in the shipping context (fn.2).
The judge summarised the basic principle of and exception to White and Carter v McGregor: “if one party to a contract repudiates it, in the sense of making it clear to the other party that he refuses or will refuse to carry out his part of the contract, the innocent party has the option of either accepting that repudiation and suing for damages for breach of contract, or refusing to accept the repudiation and affirming the continuation of the contract. If then the innocent party can complete the contract himself, without the need for any action on the part of the contract breaker, he will be in a position to sue for the agreed price.”
Having considered the authorities, the judge first considered whether or not the arbitrator was justified in ruling out application of the rule in White and Carter v McGregor altogether, due to the exception to that rule concerning contracts requiring continual active performance by the repudiating party.
The judge considered the question was a simple one. He asked: “Could the owners claim hire from the charterers under this time charter without the need for the charterers to do anything under the charter?” He considered the answer was “yes”.
The judge reasoned that if Charterers failed to give any orders, “Aquafaith” would simply stay where she was, awaiting orders but earning hire. Although Charterers would be obliged under the terms of the charter to provide and pay for fuel, should the bunkers run out whilst awaiting orders, it would be open to Owners to stem “Aquafaith” and to charge that to Charterers' account. In order to complete their side of the bargain, Owners would not, therefore, need Charterers to do anything in order for Owners to earn the hire in question. The earning of hire after purported redelivery was not, therefore, dependent on any performance by Charterers of their obligations.
The judge considered this to be the position regardless of the fact that a time charter is a contract for services. This was because the relationship between owners and charterers is nothing like those which exist in the entertainment or sporting worlds where "the services are so linked to some special skill or talent whose continued display is essential to the psychological, material or physical well being of the servant" (fn.3) so as to make negative injunctions restraining breach of the contracts of service impossible.
There was also a necessary distinction between a demise charter and a time charter, where the nature of a demise charter was such that if charterers redelivered and removed their personnel from the vessel, owners would have no choice other than to put their personnel on board to take possession. That distinguished The “Puerto Buitrago” decision concerning a demise charter from that of a time charter, as at all times the vessel’s personnel remain the servants of owners under a time charter.
The judge consequently held that a clear error of law had been made by the arbitrator in finding that the White and Carter v McGregor principle was of no application to the subject charter.
The judge next considered whether or not the arbitrator erred in law by finding that the exception to the rule in White and Carter v McGregor applied. The effect of the authorities was that an innocent party will have no legitimate interest in maintaining the contract if damages are an adequate remedy and his insistence on maintaining the contract can be described as “wholly unreasonable” or “extremely unreasonable”.
The judge thought that the arbitrator had clearly applied the wrong test when considering whether or not Owners had a legitimate interest in maintaining the charter for the balance of 94 days and claiming hire, as opposed to accepting the repudiatory breach of Charterers as bringing the charter to an end, trading on the spot market in mitigation of loss and claiming damages for the difference.
The arbitrator had concluded that because Owners could accept the repudiation, mitigate loss by trading on the spot market and claim damages representing the difference, Owners had no legitimate interest in keeping the charter alive. The arbitrator, so stated the judge, never directed his mind to the principles set out in the relevant case law. This was so because the arbitrator: never asked himself the question whether Owners should "in all reason" accept the repudiation (or to put the point the other way, whether Owners' refusal to accept the repudiation was "beyond all reason"); never asked the question whether it would be "wholly unreasonable" to keep the contract alive and never asked whether it would be more than "unreasonable" and "wholly unreasonable" to do so, by reference to the language of the Court of Appeal in the relevant cases.
The judge noted that, had the arbitrator applied the principles set out in The “Dynamic”, he would have asked himself whether Charterers had discharged the burden of showing that Owners had no legitimate interest in maintaining the charter and had done so by showing that this was an extreme case where damages would be an adequate remedy and where an election to keep the contract alive would be so unreasonable (or “perverse” to use the judge’s language) that Owners should not be allowed to do so. He should also have explored whether there was any benefit to Owners, whether or not small in comparison to the loss to Charterers.
On the arbitrator’s findings, the judge concluded that the arbitrator was right to conclude that there was nothing exceptional, extreme or unusual about this case of repudiation by Charterers. However, the crux of the arbitrator’s error was applying this factor in favour of Charterers instead of Owners.
For those reasons the judge allowed Owners’ appeal.
This judgment is a real game changer. Many shipping lawyers hold a conservative view that the rule in White and Carter v McGregor either does not readily apply to time charters, on the basis that the active co-operation of both parties is required to continue performance of the charter until expiry by effluxion of time, or that Owners’ insistence on continued performance in the face of Charterers’ repeated repudiatory conduct would generally be sufficiently unreasonable to make the exception to the rule apply.
The standard protective position is considered to be that Owners should accept the repudiation and find alternative employment for the vessel or otherwise risk losing a claim for payment of hire due to an unreasonable failure to accept the repudiation and mitigate losses by re-fixing in the market. The thorough analysis of this judgment strongly suggests that requiring performance of a time charter instead is justifiable in all but the most extreme circumstances.
The judgment indicates that such extreme circumstances would not include a situation where charterers (instead of owners) would suffer the losses resulting from a difficult or non-existent market into which to sub-let the vessel. Otherwise, that would throw onto owners that which charterers are seeking to avoid by repudiating the charter, when the potential of reward balanced against risk of losses resulting from market fluctuation is what charterers have taken on.
Therefore, this judgment shows that taking the commercial approach of insisting on continued performance is acceptable where the charter hire rate is significantly above the prevailing market rate at the time of repudiation. This equally applies where market conditions at the time of repudiation are so poor that there is no available market into which the vessel can be re-fixed by owners for the unexpired period of the subject charter.
Footnote 1:  AC 413.
Footnote 2: Attica Sea Carriers Corporation v Ferrostaal Poseidon Bulk Reederei GmbH (The “Puerto Buitrago”)  1 Lloyd’s Rep 250 (CA), The “Odenfeld”  2 Lloyd’s Rep 357 (QBD), The “Alaskan Trader”  1 AER 129 (QBD), The “Dynamic”  2 Lloyd’s Rep 693 (QBD) and Stocznia Gdanska SA v Latvian Shipping Co  2 Lloyd’s Rep 592 (QBD) and  2 Lloyd’s Rep 132 (CA).
Footnote 3: LauritzenCool AB v Lady Navigation Inc  1 WLR 3686 (CA).