Spar Shipping v Grand China Logistics Holding Group

DMC/SandT/17/03

England

SPAR SHIPPING AS v GRAND CHINA LOGISTICS HOLDING (GROUP) CO LTD (THE “SPAR CAPELLA”, “SPAR VEGA” AND “SPAR DRACO”)

Court of Appeal; Sir Terence Etherton MR, Gross and Hamblen LJJ; [2016] EWCA Civ 982; 7 October 2016

Michael Coburn QC and Josephine Davies, instructed by Holman Fenwick Willan LLP, for the appellant/defendant/charterers

Simon Rainey QC, Nevil Phillips and Natalie Moore, instructed by Thomas Cooper LLP, for the respondent/claimant/shipowners

NYPE 1993 FORM TIME CHARTERPARTY: WHETHER THE CHARTERERS’ DUTY TO PAY HIRE IS A CONDITION OR AN INNOMINATE TERM: WHETHER THE CHARTERERS’ CONDUCT AMOUNTED TO REPUDIATORY BREACH OF THE TIME CHARTER

Summary

The duty to pay hire in a time charterparty is an innominate/intermediate term. Flaux J’s decision in The Astra [2013] 2 Lloyd’s Rep 69 is overruled -[[1]].

This note has been contributed by Pak Hei Li, LLB(Hons), PCLL (University of Hong Kong).

Background

On 5 March 2010, Spar Shipping AS (“Owners”) and Grand China Shipping (Hong Kong) Co Ltd (“Charterers”) entered into three time charterparties (“Charterparties”), on the NYPE 1993 form, regarding Spar Capella, Spar Vega and Spar Draco (collectively the “Vessels”). The Charterparties provided for guarantees to be issued by Grand China Logistics (“Appellant”), the parent company of the Charterers. The Appellant issued three letters of guarantees on 25 March 2010 (“Guarantees”).

The terms of the three Charterparties were identical, except for the rate of hire, the period (ranging from 35 to 62 months), the delivery laycan and the details of the Vessels. Clause 11(a) of the Charterparties provided that “[f]ailing the punctual and regular payment of the hire, or on any fundamental breach whatsoever of the 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” (“Withdrawal Clause”).

From April 2011, the Charterers were in arrears in payment of hire. While the Owners recouped some of the arrears by exercising their lien on sub-freights, substantial arrears of hire remained. Owners called on the Appellant for payment under the Guarantees on 16 September 2011. On 23 and 30 September 2011, the Owners withdrew the Vessels and terminated the Charterparties.

The Owners then initiated arbitration and claimed against the Charterers for the unpaid hire and damages for loss of bargain in respect of the unexpired term of the Charterparties. The Charterers went into liquidation soon after and the arbitration was stayed. Therefore, the Owners commenced the current court proceedings against the Appellant under the Guarantees.

Popplewell J, the first instance judge, held that the duty to pay hire in a time charterparty was an intermediate term. However, he also held that the Charterers’ conduct amounted to a renunciation of the Charterparties. Therefore, the unpaid hire and damages for loss of bargain were awarded to the Owners.

There were two issues before the Court of Appeal. The first issue was whether the duty to pay hire in a time charterparty is a condition or an intermediate term (“Condition Issue”). The second issue was whether the Charterers’ conduct amounted to renunciation (“Renunciation Issue”).

Judgment

The Condition Issue

While the Charterparties provided the Owners a contractual right to terminate the Charterparties upon belated payment of hire, the Condition Issue was significant to determine whether the Owners could also claim damages for loss of bargain (that is, the loss suffered by the Owners in respect of the unexpired duration of the Charterparties). If the duty to pay hire were classified as a condition, then any belated payment entitled the Owners to terminate the Charterparties and claim damages for loss of bargain. On the other hand, if it were only an intermediate (or innominate) term, then the Owners’ entitlement to the aforesaid rights depended on whether the consequence of the late payment was so serious that it deprived the Owners of substantially the whole benefit of the Charterparties.

Gross LJ held that the duty to pay hire in a time charterparty is only an innominate term, for six reasons. First, he held that the presence of the Withdrawal Clause did not support the finding that the duty to pay hire was a condition. The effect of the Withdrawal Clause was limited to conferring on the Owners a contractual right to terminate the Charterparties. The mere presence of a contractual right to terminate a contract did not automatically lead to the finding of a condition.

Second, Gross LJ held that Clause 11of the Charterparties, when read as a whole, did not expressly make time of the essence. The court would not readily interpret a contractual clause as a condition. Unlike the corresponding clause in NYPE 2015 form of charterparty, Clause 11 of the Charterparties did not state that the Owners would be entitled to loss of bargain damages. There was no clear indication that punctual payment was a condition precedent to the Owners’ performance of the Charterparties.

Third, Gross LJ noted that there was no general presumption as to time being of the essence in the context of payment of hire, where specific and detailed provisions are contained in the Charterparties. In any event, a presumption that time is of the essence does not apply to the time of payment unless such intention is clearly evinced by the terms of the contract.

Fourth, while the Charterparties contained an anti-technicality clause (where a grace period was provided, when the failure to make punctual payment was due to oversight, negligence, errors or omissions of the Charterers or their bankers), the presence of an anti-technicality clause did not support the finding that the duty to pay hire was a condition.

Fifth, Gross LJ considered that the importance of certainty must be balanced against the undesirability of treating trivial breaches as a breach of conditions. It is unlikely, Gross LJ opined, that the parties intended the Withdrawal Clause to operate such that a single payment of hire a few minutes late would entitle the Owners to throw up a three- or five-year charterparty and claim loss of bargain damages. The right balance could only be struck if the duty to pay hire were treated as an innominate term and the Withdrawal Clause as a contractual termination option.

Sixth, Gross LJ noted that the general view of the market has been that the duty to pay hire is not a condition. The major standard forms of time charterparty were not amended to turn the obligation into a condition.

The Renunciation Issue

Following the conclusion that the duty to pay hire was an innominate term, the court had to decide whether the Charterers’ failure to pay hire amounted to a renunciation of the Charterparties, which would entitle the Owners to terminate the Charterparties (at common law) and claim damages for loss of bargain. The legal test is that if the breach goes to the root of the contract, or that the innocent party is deprived of a substantial part of the benefit under the contract, then such a breach amounts to renunciation.

Gross LJ affirmed Popplewell J’s decision that the Charterers’ failure to pay hire amounted to a renunciation. First, Gross LJ noted that the contractual benefit to which the Owners were entitled was the regular, periodical advance payment of hire as stipulated in the Charterparties. Second, Gross LJ agreed that a reasonable owner, in the position of the Owners, could have no realistic expectation that the Charterers would in the future pay hire punctually in advance. Third, he held that this would go to the root of the Charterparties, because payment in advance is of paramount importance in time charterparties.

Comment

The Court of Appeal’s decision should be welcomed in that it settled the two conflicting first instance decisions, that of Flaux J in The Astra and that of Popplewell J in the instant case. The detailed analysis on the Condition Issue is particularly helpful, since the appeal could have been decided on the Renunciation Issue alone. The duty to pay hire in a time charterparty is now authoritatively classified as an innominate term. For shipowners who intend to make charterers’ duty to pay hire a condition, they should adopt Clause 11 of NPYE 2015 form and expressly state the consequence of late payment as conferring on shipowners the right both to terminate the charterparty and to claim damages for loss of bargain.