The Institute of International Shipping & Trade Law (IISTL) Blog

The Court of Appeal handed down judgment today (7^th October 2016) in Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS [2016] EWCA Civ 982 dismissing an appeal by unsuccessful time charterers. In doing so, it determined the controversial question of whether a charterer’s failure to pay an instalment of hire punctually and in advance under a time charterparty is a breach of condition, entitling the shipowner to terminate the charter and claim damages for the loss of the balance of the charterparty.

The Court of Appeal (Sir Terence Etherton MR, Gross and Hamblen LJJ) unanimously held that the answer to that question is “no” and that, without more, such a failure merely entitles the shipowner to withdraw the vessel from service in accordance with the withdrawal clause.

The decision, for all practical purposes, finally resolves an issue which has attracted much market interest and generated conflicting observations from judges of the highest standing. It also reviews modern principles applicable to the proper classification of a contract term as a condition.

The leading judgment of Gross LJ also contains a valuable summary of the legal principles relating to renunciation in the context of late and non-payment of hire under time charterparties.

The Court of Appeal firmly rejected a novel argument by the appellant time charterers that the test for renunciation by time charterers in relation to defaults in payment of hire (whether by late or short payment) was applied too strictly (“unwarrantably severe”) and was out of step with the Court’s approach in other non-payment contexts under different types of contract, thereby amounting to unjustified “preferential treatment” for shipowners under time charters.

Simon Rainey QC, Nevil Phillips and Natalie Moore appeared for the successful respondent owners.

Headline Summary of the Decision

1. The obligation to pay hire under a time charterparty is not a condition but an innominate or intermediate term. Flaux J’s decision to the contrary in The Astra [2013] EWHC 865 (Comm) was wrong.

2. The obligation to pay hire promptly and in advance under a time charterparty lay at the heart of the contractual bargain represented by such a charterparty. Late and short payment would unilaterally convert a contract for payment in advance into a transaction for unsecured credit and without any provision for the payment of interest: such conduct went to the root of the contract, was renunciatory and entitled an owner to terminate.

3. While therefore removing the availability of a condition from the shipowner’s arsenal of remedies for non-payment of hire, the Court of Appeal has roundly endorsed the critical importance of prompt and full payment of hire in advance, and has emphatically highlighted the risks which a time-charterer takes in making payment late or in missing payments, however much it protests that it wishes or intends to perform or perform better.

4. If an owner wishes to be able to terminate for any failure to pay hire – irrespective of renunciation or repudiation – and claim damages in addition, it will now have to contract on special terms to this effect (cf. the hire provisions in the new NYPE 2015 form which so provide).

The Decision in More Detail

The facts

The Respondent (“Spar”) owned three supramax bulk carriers: SPAR CAPELLA, SPAR VEGA and SPAR DRACO. By three charterparties dated 5 March 2010 on amended NYPE 1993 forms, Spar agreed to let the vessels on long term time charter to Grand China Shipping (Hong Kong) Co Ltd (“GCS”). The Appellant (“GCL”) guaranteed GCS’s performance under the charterparties by three letters of guarantee dated 25 March 2010.

From April 2011, GCS was in arrears of payment of hire. There remained substantial arrears of hire on all three vessels over the summer of 2011 and GCS continued to miss payments or be late in making payment. But GCS protested that everything would be sorted out and that a financial solution was in the offing, and it made some payments on time.

Spar called on GCL to make payment under the guarantees on 16 September 2011. GCL failed to make payment, and Spar withdrew the vessels from service.

At the date of termination, the SPAR VEGA and the SPAR CAPELLA charterparties each had about four years left to run. The unexpired term of the SPAR DRACO charterparty was about 18 months.

Spar brought a claim against GCL under the guarantees.

At first instance, Popplewell J held that payment of hire by GCS in accordance with clause 11 of the charterparties was not a condition, disagreeing with the judgment of Flaux J in The Astra [2013] EWHC 865 (Comm). However, he concluded that GCS had renounced the charterparties and that Spar was entitled to US$24 million in damages for loss of bargain in respect of the unexpired terms of the charterparties.

GCL appealed, contending that the Judge erred in holding that GCS had renounced the charterparties, applying too strict a test which was out of step with other non-payment contexts.  It was argued that, looking at the overall benefit to be expected over the whole life of the charterparties, some short or late payments could not be said to be renunciatory. Spar argued that the Judge was right on the renunciation issue. By way of Respondent’s Notice, Spar contended that judgment should have been given in its favour on the additional ground that payment of hire by GCS in accordance with clause 11 was a condition.

The Reasoning of the Court of Appeal

(1) The Condition Issue

The Court held that the obligation to make punctual payment of hire was not a condition in standard form charterparties and that The Astra was wrongly decided.

Gross LJ’s reasons were these:

1. The inclusion of the express withdrawal clause did not provide a strong or any indication that clause 11 was a condition. Historically, withdrawal clauses were included in charterparties to put beyond argument the shipowner’s entitlement to terminate the charterparty where the charterer had failed to make a timely payment of hire. As such, the withdrawal clause merely furnishes owners with an express contractual option to terminate on the occurrence of the event specified in the clause. Thus, the mere presence of a withdrawal clause gives no indication as to the consequences intended by the parties to flow from the exercise of the contractual termination clause.

2. The most pertinent guidance from the authorities in the present context was the need not to be “too ready” to interpret clause 11 as a condition – indeed only to do so if the charterparties, on their true construction, made it clear that clause 11 was to be so classified: see Bunge v Tradax [1981] 1 WLR 711. As a matter of contractual construction, the charterparties did not make it clear that clause 11 was to be categorised as a condition. Clause 11 did not expressly make time of the essence. Not did it spell out the consequences of breach (in contrast to the NYPE 2015 form). Furthermore, breaches of clause 11 could range from the very trivial to the grave.

3. Any general presumption of time being of the essence in mercantile contracts was not of significance or assistance in the present case. First, there was only limited scope for general presumptions in the specific, detailed and specialist context of payment of charterparty hire. Secondly, any presumption that time is generally of the essence in mercantile (or commercial) contracts does not generally apply to the time of payment, unless a different intention appears from the terms of the contract.

4. The anti-technicality clause does not strengthen the case for the timely payment of hire being a condition of the charterparties. The anti-technicality clause does no more and no less than protect the charterers from the serious consequences of a withdrawal in the case of a failure to pay hire on “technical grounds”.

5. Considerations of certainty are of major importance in the commercial context. But it is a question of striking the right balance. Classifying a contractual provision as a condition has advantages in terms of certainty; in particular, the innocent party is entitled to loss of bargain damages (such as they may be) regardless of the state of the market. Where, however, the likely breaches of an obligation may have consequences ranging from the trivial to the serious, then the downside of the certainty achieved by classifying an obligation as a condition is that trivial breaches will have disproportionate consequences. Considerable certainty could still be achieved by clause 11 being a contractual termination option. The trade-off between the attractions of certainty and the undesirability of trivial breaches carrying the consequences of a breach of condition is most acceptably achieved by treating clause 11 as a contractual termination option.

6. The general view of the market has been that the obligation to make timely payments of hire is not a condition.

Hamblen LJ agreed with Gross LJ and added further observations of his own.

Of particular importance, is Hamblen LJ’s conclusion that it is not necessary to construe the obligation to pay hire timeously as a condition in order to give it commercial effect on the grounds that it is the owner’s only real protection in a falling market.

As Gross LJ also observed, certainty is provided by the withdrawal clause and there may be good reasons to invoke the clause notwithstanding a falling market (e.g. where the charterers are insolvent or owners depend on prompt payment to fund payments under a head charter or charterers’ payment record occasions administrative or other difficulties).

The Court was not, therefore, persuaded by the “provisional view” expressed by Lord Phillips in the Cedric Barclay Lecture 2015 that the obligation to pay hire is a condition because otherwise the right to withdraw would be “worthless” in a falling market.

Sir Terence Etherton MR agreed with both judgments. He summarised his conclusions on the Condition Issue in three propositions:

1. There is no authority binding on the Court of Appeal as to whether or not the stipulated time for payment of hire in each of the charterparties was a condition.

2. Whether the time payment stipulation was a condition is a question of interpretation of each of the charters. However, there is some authority to the broad effect that, in the absence of a clear indication to the contrary, the court leans against the interpretation of a contractual term as a condition (viz. Bunge v Tradax).

3. The time payment stipulation was, on the proper interpretation of the charters, an innominate term. There is no presumption in a mercantile contract that a stipulated time for payment is a contractual condition. There is, in any event, no scope for any such presumption in the present case in view of the comprehensive terms of the charterparties.

(2) The Renunciation Issue

At [73] – [78] Gross LJ reviewed the authorities on the test for renunciation generally and in the specific context of the payment of hire under time charterparties.

He focused on the fact that the test for repudiatory breach and renunciation (i.e. anticipatory breach) has been described in different ways in the cases: e.g. an actual or threatened breach which deprives the innocent party of substantially the whole benefit of the contract; an actual or threatened breach which deprives the innocent party of a substantial part of the benefit of the contract; an actual or threatened breach which goes to the root of the contract; conduct evincing an intention to perform in a manner substantially inconsistent with the contract.

Considering recent extra-judicial statements as to the differences in these formulations and the unsatisfactory nature of a “goes to the root of the contract test”, Gross LJ held that the differences simply reflect the different facts and circumstances of the various cases, especially the terms of the particular contract in question, and the Court endorsed the “root of the contract” test as “useful and readily capable of application; a search for a more precise test is unlikely to be fruitful” [76].

In the time charterparty context, the Court endorsed and applied Spar’s suggested three stage analysis:

First, what was the contractual benefit Spar was intended to obtain from the charterparties?

Secondly, what was the prospective non-performance foreshadowed by GCS’s words and conduct?

Thirdly, was the prospective non-performance such as to go to the root of the contract?

Applying the law to the facts he concluded that:

1. Prompt and full payment of hire in advance lay at the heart of the bargain between owner and time charterer: “the essence of the bargain under a time charterparty that the shipowner is entitled to the regular, periodical payment of hire as stipulated, in advance of performance, so long as the charterparty continues; hire is payable in advance to provide a fund from which shipowners can meet the expenses of rendering the services they have undertaken to provide under the charterparty; shipowners are not obliged to perform the services on credit; they do so only against advance payment” [83].

2. The test for prospective non-performance was whether “a reasonable owner in the position of Spar (the formulation adopted in Universal Cargo Carriers v Citati [1957] 2 QB 401, at p. 436) could have no, certainly no realistic, expectation that GCS would in the future pay hire punctually in advance”. It was not enough that the charterer was willing to pay hire but in arrears or late. The Judge’s analysis, findings and conclusions with regard to renunciation could not properly be criticised.

3. Given the history of late payments, the amounts and delays involved, together with the absence of any concrete or reliable assurance from GCS/GCL as to the future, the Judge was amply entitled to conclude that GCS had renounced the charterparties [87]. Gross LJ made the following important statements:
   1. “[GCS’s] prospective non-performance would unilaterally convert a contract for payment in advance into a transaction for unsecured credit and without any provision for the payment of interest.”
   2. “Taken to their logical conclusion, [GCS’s] submissions would mean that charterers could hold owners to the contracts by stating that all payments of hire would be made but late and in arrears – leaving owners obliged to accept this limping performance and attendant uncertainty. In my view, that is not the law, at least in this context.”
   3. “For the avoidance of doubt, whichever test is adopted the answer would be the same; thus I am satisfied that GCS’s evinced intention would deprive Spar of “substantially the whole benefit” of the charterparties and, for that matter, that GCS would be seeking to hold Spar to an arrangement “radically different” from that which had been agreed (the test for frustration).”

In the Master of the Rolls’ words (at [103]), GCS’s conduct “evinced an intention to turn each of the contracts into something radically different from its terms, namely from a contract for payment in advance … to one for payment in arrear – in effect the performance of services by the shipowner on credit”.

(3) Disposal

Irrespective of the Court’s decision on The Astra and the status of the obligation to pay hire, the Court therefore dismissed GCL’s appeal.