A Commercial Court judge has found that payment of charter hire does not amount to a condition of the charterparty in Spar Shipping AS v. Grand China Logistics Holding (Group) Co. Ltd.

A Commercial Court judge has found that payment of charter hire does not amount to a condition of the charterparty in Spar Shipping AS v. Grand China Logistics Holding (Group) Co. Ltd.

The decision by Mr Justice Popplewell has reinstated the principle that payment of hire is an innominate term of the charterparty contract.

Star Shipping had in 2011 let three supramax bulk carriers to Grand China Logistics on long-term time charters. However the charterer fell behind hire payments and the situation did not improve for the next six months.

After sending anti-technicality notices for five months, the owner gave notice of withdrawal with immediate effect. They made two claims;

1. for the balance of hire due under the three charters prior to termination. This is a standard contractual claim and was not controversial.

2. ‘Loss of bargain’ damages for the remainder of the charter term. (The recovery of future losses emerges either upon the breach of a condition or the repudiatory breach of an innominate term).

The Standard Club explains that a condition in a contract is defined as a promise or undertaking that is fundamental, any breach of which entitles the innocent party to terminate the contract and claim damages.

Conversely, a breach of an innominate term gives the innocent party the right to terminate only if the breach is so serious that it deprives the innocent party of substantially the whole benefit of the contract (a repudiatory breach).

The question, therefore in this case, was whether the punctual payment of hire amounted to a condition and, if not, whether regularly delayed payments of hire amounted to a repudiatory breach.

The Standard Club explains the judge’s reasoning; “Popplewell J disputed that the existence of a right to terminate was suggestive that the obligation to pay hire punctually was a condition. Whilst the contractual right to withdraw a ship gives one characteristic of a condition, this alone isn’t conclusive. In his view, there was also no evidence to suggest that a single non punctual payment of hire amounted to a repudiation.

“The judge also reasoned that commercial certainty could be, and is, achieved without the general classification of all time clauses as conditions. An owner’s commercial risk in a hire relationship is to cover the ship’s running costs, but its right to withdraw the ship upon default of a hire payment adequately protects this: the owner is thenceforth able to find another charterer and extract full hire charges elsewhere.”

Whilst accepting that the sole aim of the NYPE right to withdraw is to protect future performance of the contract, Popplewell J commented that the language was neutral as to the common law rights of the parties.

In fact, he argued that both the language and its interpretation suggested punctual payment of hire to be an innominate term. (Details of how the judge came to his decision can be found on The Standard Club’s media note).

The Standard Club notes this judgment restores the previously accepted view that punctual payment of hire is not a condition. In order to recover future losses following a withdrawal therefore, an owner must be able to demonstrate a default of sufficient seriousness amounting to repudiation by the charterer.

“A failure to pay is not the same as a refusal to pay and can be effectively remedied by an owner’s prompt withdrawal and the ship’s rehire to a new charterer. It is not disputed that an owner is authorised to recover outstanding (earned) hire up to and until withdrawal.

“In reaching his judgment, Popplewell J made comprehensive use of substantial case law and gave significant attention to commercial reasoning,” The Standard Club says.

ICC Commercial Crime Services’ members are reminded of the Chartering Experience service provided as part of the membership. This allows members to make informed decisions and helps to reduce the risk of dealing with a company that has a poor record, is a habitual defaulter or already has debts.

“The service performs an important function, as once a chartering failure has happened the options facing those affected are few and invariably expensive”, commented Pottengal Mukundan, Director of IMB.