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

Demurrage an exclusive remedy: the Court of Appeal gives judgment in The Eternal Bliss – Simon Rainey QC & Tom Bird

The Court of Appeal has today given judgment in The Eternal Bliss on the availability of general damages in addition to demurrage arising from delay. Allowing the appeal, the Court held that demurrage liquidates the whole of the damages arising from a charterer’s breach of charter in failing to complete cargo operations within the laytime.

The appeal raised a point on which there was no previous binding authority and which has, for almost 100 years, divided eminent judges and commentators. The leadig textbooks were split on the issue.

Scrutton took the position that where the charterer’s breach causes the shipowner damage in addition to the detention of the vessel, losses can be recovered in addition to demurrage. But the authors of Voyage Charters said the better view was that the shipowner could only recover such losses if it could show a separate breach of contract (one other than the failure to load or discharge the cargo within the time allowed).

The dispute in this case arose from a voyage charter for the carriage of soybeans from Brazil to China. The charter was drawn up on an amended Norgrain form, which provided that demurrage, if incurred, was to be paid at a daily rate or pro rata.

After arriving at the discharge port, the vessel was kept at the anchorage for 31 days due to port congestion and lack of storage space ashore. Post discharge, it was said that the cargo exhibited significant moulding and caking throughout the stow in most of the cargo holds. The owners commenced arbitration against the charterers seeking to recover the cost of settling the cargo claim. The sole breach of contract relied on was the charterers’ failure to discharge within the laytime. The charterers contended that demurrage was the owners’ exclusive remedy for that breach.

The parties invited the Court to determine this point of law on assumed facts under s.45 of the Arbitration Act 1996. At first instance, Andrew Baker J found for the shipowner. He held that the cargo claim liabilities were a different type of loss to the detention of the vessel and that the shipowner could recover damages without proving a separate breach of contract. The 1991 decision in The Bonde (in which Potter J had reached the opposite conclusion) was, he said, wrongly decided.

Like the first instance judge, the Court of Appeal approached the point as one of principle, noting that distinguished judges have struggled, without success, to discern a ratio on this issue in Reidar v Arcos (the 1926 decision to which the long debate is often traced back). In delivering the Court’s judgment, Males LJ held that the case turned on the proper meaning of the term “demurrage” as it is used in the charterparty. The Court of Appeal concluded that, “in the absence of any contrary indication in a particular charterparty, demurrage liquidates the whole of the damages arising from a charterer’s breach of charter in failing to complete cargo operations within the laytime” (para 52).

This is a significant judgment on a major point of shipping law. In reversing the first instance decision, the Court of Appeal has given a much broader scope of the meaning of “demurrage” and treated it in much the same way as a standard liquidated damages clause, rather than limiting it to a particular type of loss. But this may not be the last word on the issue, which given the lively debate would benefit from clarification from the Supreme Court.

Simon Rainey QC and Tom Bird acted for the shipowner, instructed by Nick Austin and Mike Adamson of Reed Smith LLP.

The Court of Appeal decision in SPAR SHIPPING: Defining an owner’s remedies for non-payment of hire and resolving the Astra ‘condition’ debate

SIMON RAINEY QC

When the Court of Appeal handed down judgment late last year in Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS [2016] EWCA Civ 982, dismissing an appeal by unsuccessful time charterers, 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

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.

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.

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.

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:

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.

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.

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.

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”.

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.

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:

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.

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).

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:

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].

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.

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:

“[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.”

“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.”

“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.

The assessment of damages on early redelivery and mitigation – “The New Flamenco”

The Supreme Court has now handed down its long-awaited judgement on the “New Flamenco” (Globalia Business Travel S.A.U. (formerly TravelPlan S.A.U.) of Spain v. Fulton Shipping Inc of Panama [2017] UKSC 43). The New Flamenco has addressed the controversial issue of the calculation of damages for early redelivery in cases where there is no available market and the owners decide to sell the vessel.

The facts are rather simple: The charterers redelivered the vessel (a small cruise ship) early, i.e. on 28 October 2007 instead of 2 November 2009 and the owners treated the early redelivery as anticipatory repudiatory breach. The owners then sold the vessel in October 2007 for US $23,765,000. It later transpired that, due to the global financial crisis, the vessel’s value had dropped significantly at the time she should have been redelivered in November 2009 (being worth only US$7,000,000). The dispute evolved around the calculation of damages arising out of the charterer’s repudiation and focused, in particular, on whether credit was to be given to the difference in the vessel’s capital value when sold or when she should have been redelivered.

The case was referred to arbitration and the arbitrator decided in favour of the charterers, finding that the sale of the vessel was caused by the charterers’ breach and was deemed reasonable mitigation of the owners’ loss caused by the charterers’ repudiation. On appeal ([2015] EWCA Civ 1299), Popplewell J reversed the arbitrator’s decision and allowed the owners to claim their net loss on the basis that there was no direct causative link between the owners’ benefit (the difference in the vessel’s capital value) and the charterers’ anticipatory breach. The Court of Appeal ([2015] EWCA Civ 1299) then reversed Popplewell J’s judgement and reinstated the arbitral award. Finally, the Supreme Court has unanimously allowed the owners’ appeal, reversing the Court of Appeal’s decision ([2015] EWCA Civ 1299). As a result, the Court ruled that charterers were not entitled to deduct from the owners’ loss of profit the credit for the difference in the value of the vessel when sold just after the early redelivery and the date the vessel should have been redelivered.

Lord Clarke (with whom Lord Neuberger, Lord Mance, Lord Sumption and Lord Hodge agreed) delivered the leading judgement. The correct test to be applied is that of causation and in particular, that of a sufficiently close link between the benefit obtained and the kind of loss caused by the wrongdoer (but not that of the similarity between the two in nature). In other words, if a benefit is to be credited, it must have been caused by a breach of charterparty or by a successful act of mitigation, which was not the case in The New Flamenco. In fact, the owners’ decision to sell the vessel, whether before or after termination of the charterparty, is their independent commercial decision which has nothing to do with the charterparty. The charterers’ repudiation provided the owners with the “occasion” to sell the vessel but was not the “legal cause” of the sale. In a similar vein, the absence of such a causal link would also work against the owners if the market value of the vessel had increased between the time of the sale in 2007 and the time of the agreed redelivery in November 2009.

Furthermore, the Court found that the sale of a vessel per se does not amount to an act of mitigation. In cases where there is no available market, like The New Flamenco, mitigation only entails the acquisition of an alternative income stream to the income expected under the charterparty. The sale of the vessel has nothing to do with mitigation as it is only the exercise of the owners’ property rights and does not aim at reducing the owners’ loss of income.

The Supreme Court’s decision clarifies mitigation and puts an end to the dispute as to what acts may amount to mitigation. Lord Clarke has stressed the importance of causation in defining what mitigation entails, without however making any reference to existing case law or elaborating further on the application of the test. The test is nevertheless the right one and leads to sensible solutions. The sale of the vessel is a transaction owners would have been able to undertake for their own account irrespective of the early redelivery at any time at any time, including the charter party period, and owners should not therefore be asked to pay any profits they may make by selling their own property.

The problem of foreign judicial determinations

A charterparty case today, Shagang Shipping Co Ltd v HNA Group Co Ltd [2016] EWHC 1103 (Comm) looked like a simple case of owners claiming charter hire and damages from time charterers (or rather their parent company guarantors). Unfortunately it turned into something like a nightmare for the owners’ lawyers.

The difficulty was that, while the figures were fairly straightforward, the charterers’ group (HNA) sought to escape scot-free by alleging that the charterers had only signed the charter because the owners had bribed one of the charterers’ employees to approve it. HNA was a leading and influential company in Hainan Province in China. It duly produced confessions of, and convictions in Hainan for, the relevant bribery by an officer of the owners and their own employee. Unfortunately there were distinct indications that these confessions had been obtained by some interesting police practices not unconnected with rubber truncheons, cigarette burns and near-drowning, which were testified to in the case and which Knowles J specifically stated could not be ruled out. Happily Knowles J was able to rule against HNA on the basis of external evidence that there had been no bribery.

A correct result, therefore. But the difficulties cases like this raise are of a high order. External evidence will not always be present; and where it is not the difficulties of obtaining evidence of malpractice of the kind alleged in Shagang are obvious. The only cure would seem to be a term in the relevant contract excluding a priori the use of at least some court decisions as evidence in subsequent proceedings arising out of a dispute. But that cure might well be worse than the disease.

Profits remain profits even if given away

“Sir,” said Dr Johnson on one occasion, “there is no settling the point of precedency between a louse and a flea.” To some extent, Teare J’s decision in Glory Wealth Shipping PTE Ltd v Flame SA [2016] EWHC 293 (Comm) recalls this bon mot.

In the heady days of the bull shipping market, Glory Wealth entered into a series of contracts of affreightment with Flame. On the collapse of freight rates, Flame failed to provide the necessary cargoes. Glory Wealth sued. In previous proceedings, we got the answer to one nice contract question: namely, that if you sue for damages following anticipatory repudiation you do have to prove that you could have performed the contract if called on to do so. The background to the present proceedings was slightly different. The debacle referred to above had rendered Glory Wealth essentially insolvent. Seeing this coming and rightly realising that irate Glory Wealth creditors might just consider themselves entitled to seize any monies paid by Flame, the directors of Glory Wealth at an early state conceived a dubious, and possibly illegal, scheme to frustrate those creditors. They executed a document instructing Flame to pay any sums owing to Glory Wealth to two other companies controlled by them for their own benefit instead.

In the present proceedings for damages against Flame by a pretty undeserving claimant, Flame raised a correspondingly unmeritorious defence. It took the point that because of this arrangement no loss had been suffered by Glory Wealth, since if the contracts had been performed Glory Wealth would not have received any profits anyway. Teare J smartly dismissed this plea. If one was entitled to receive monies, the fact that one might have directed them elsewhere was irrelevant: prospective profits remained an entitlement whatever the prospective profiteer might have done with them. And quite right too.

Disponent owners’ liens on cargo

Can disponent owners lien cargo for sums due under their sub-charter? Dicta in The Clipper Monarch [2015] EWHC 2584 (Comm); [2016] 1 Lloyds’ Law Rep 1, suggests that they can. The sub-charterers, Silver Rock, had failed to pay freight, deadfreight, and demurrage to disponent owners, CCS, and the vessel waited outside Chinese territorial waters. CCS obtained and order to sell the cargo under CPR Part 25.1(1)(c)(v), which provided for the gross proceeds of sale to be held by the claimant’s solicitors to the order of the court and “treated as if subject to the same rights (if any) as [CCS] had in respect of the goods prior to their sale”.

The cargo had been purchased by Silver Rock from Max Coal and sold on to Grupo Minero, the original consignee. Silver Rock found a new purchaser and the vessel berthed to discharge the cargo. The cargo was sold and its proceeds held by CCS’s solicitors pursuant to the High Court’s order. CCS obtained arbitration awards against Silver Rock for sums due under the voyage charter, and against Grupo Minero, claiming as assignee of the head owner’s right to claim an almost identical amount as carrier under the bill of lading. The awards were converted into judgements. His Honour Judge Waksman QC held that the sale proceeds representing the cargo clearly belonged to one of the two judgment debtors and CCS was entitled to the monies as judgment creditor against whichever of them was the appropriate owner.

His Honour Judge Waksman QC then considered, obiter, a second ground on which CCS would be entitled to the proceeds of the sale – by way of its rights on a lien on the cargo which arose prior to the sale. If the cargo was owned prior to sale by Grupo Minero, CCS relied on the voyage charter “lien” clause as incorporated into the bills of lading, CCS having taken an assignment of the carrier’s rights. If the cargo was owned by Silver Rock, CCS relied on the voyage charter “lien” clause as giving it a right with similar effect to a possessory lien, namely a right to procure that the cargo be withheld from Silver Rock by directing the employment of the vessel in its capacity as time charterer.

This second ground assumes that the time charterer has the right, under the employment clause, to direct the shipowner to lien the cargo by not unloading it. Such an order would only be lawful if the shipowner had the right to lien the cargo under the bill of lading, as was the case in The Clipper Monarch. It is worth noting that a similar argument was rejected in The Mathew [1990] 2 Lloyd’s Law. Rep 323 where Steyn J held that there was no implied term that the time charterers could direct the shipowners to lien cargo.

Speed warranties. “Good weather” need not last for 24 hours (and often doesn’t).

In December 2013 the Ocean Virgo [2015] EWHC 3405 (Comm) was trip chartered on the NYPE form. The charter contained speed and performance warranties on the basis of “good weather/smooth sea, up to max BF SC 4/Douglas sea state 3, no adverse currents, no negative influence of swell”. The charterers claimed damages, alleging that the vessel had failed to meet the warranties. The owner’s response was that for a period to be considered as being admissible “good weather” it had to constitute a period of 24 consecutive hours running from noon to noon. Lesser periods had to be excluded. The tribunal agreed.

However, Teare J. has now held that this constituted an error in law. The charterparty merely referred to “good weather” and contained no words which justified construing good weather as meaning good weather days of 24 hours from noon to noon. The award disclosed a further error of law by stating: “had the AWT report correctly identified the period of admissible ‘good weather’ charterer’s claim would have been restricted to the initial, leg 1, period”. Once a breach was established by looking at performance in good weather the consequential damages claim was assessed by having regard to the whole of the charter period, excluding any periods of slow steaming on charterers’ instructions excluding any periods of slow steaming on charterers’, whatever the weather, as had been stated by Bingham LJ in The Didymi [1988] 2 Lloyd’s Rep. 108 and by Lloyd LJ in The Gas Enterprise [1993] 2 Lloyd’s Rep. 352.

No loss, no damages: latest from the CA

Christmas reading from the English CA for charterparty buffs and damages enthusiasts. In The New Flamenco [2015] EWCA Civ 1299 , decided a couple of days ago, a cruise ship under time-charter at a highish rate was wrongfully redelivered a couple of years early. That’s OK, said the owners: we’ll just have those two years’ lost profits, please (there being no relevant market). Not so fast, say the charterers. You sold the ship on redelivery for a very tidy sum: had we given her back at the proper time the market would have collapsed and you’d have got many millions of dollars less for her — a figure that dwarfs any profits lost. In fact you should be d****d grateful to us for breaking our contract, since you’re actually a great deal better off than if we’d kept it.

Arbitrators hold for the charterers; Teare J on appeal for the owners. In a rare reversal of Teare J, the CA restore the arbitrators’ decision. Whatever the case where there is a market rate, in non-market cases where the claimant claims on the basis of profits lost, the general British Westinghouse rule applies and any gains resulting are in account. A salutary reminder from Longmore LJ at [29]: “compensation for actual loss is the underlying principle and … in this connection, it is the available market rule that is a gloss on that underlying principle.” Verb sap.

Happy Christmas to all.

NYPE 2015. New rights for owners against defaulting charterers.

On 15 October 2015 BIMCO released their 2015 revision to the NYPE form. It contains the following provisions which will improve owners’ position against defaulting charterers.

Clause 11 dealing with withdrawal has been amended as follows.

The grace period no longer refers to ‘oversight, negligence, errors or omissions on the part of the charterers or their bankers’ and now refers simply to a failure to make punctual payment of hire due.
Owners are now given a right to damages, if they withdraw the Vessel, for the loss of the remainder of the Charter Party. There are currently two conflicting first instance decisions as to whether owners can claim damages for the loss of the remainder of the charter following the exercise of their right to withdraw. In 2013 in The Astra [2013] EWHC 865 (Comm); [2013] 2 Lloyd’s Rep. 69, Flaux J held that there was such a right as the obligation to make punctual payment of hire was a condition, but in 2015 in Spar Shipping v Grand China Logistics v Spar Shipping [2015] EWHC 718 (Comm), [2015] 2 Lloyd’s Rep. 407 Popplewell J held that there was no such right, as hire was not a condition. The new clause makes it clear that owners do have such a right.
The right of owners to suspend performance of their obligations under the charter has been extended. This was first introduced in NYPE 1993 and was not a right which owners would otherwise have, as seen in The Agios Georgis [1976] 2 Lloyd’s Rep. 192. Under NYPE 1993 the right of suspension operated after the expiry of the grace period for as long as hire was outstanding. Hire would continue to run during this period and charterers were to indemnify owners for any consequences resulting from the owners’ suspension of performance, and to pay for any extra expenses resulting from the suspension. NYPE 2015 now provides that the owners’ right of suspension now exists ‘at any time while hire is outstanding’ and deletes the reference to the expiry of the grace period.

Clause 23 dealing with liens has been amended so as to create a lien on sub-hires and sub-freights due to any sub-charterers. This is in accordance with the interpretation of the effect of a lien on sub-freights in cases such as The Cebu [1983] 1 Lloyd’s Rep 302, QB, and The Western Moscow [2012] EWHC 1224 (Comm); [2012] 2 Lloyd’s Rep. The lien on sub-freights and or sub-hires is also extended to deadfreight and demurrage.

Demurrage is not just for ships – and cannot last for ever.

Demurrage is a provision for liquidated damages for breach of the charterer’s obligation to load or discharge the vessel within the agreed laytime. Demurrage provisions are also to be found in carriage contracts in respect of detention of containers supplied by the carrier. In MSC Mediterranean Shipping Company S.A. v. Cottonex Anstalt [2015] EWHC 283 (Comm), we have the first case considering container demurrage, which is of general interest in its treatment of the carrier’s right to keep a repudiated contract alive and continue claiming demurrage.

In the summer of 2011 the carrier made several contracts with the shipper to carry containers of raw cotton by sea from Middle East ports to Chittagong in Bangladesh. However, the goods were never collected and the containers still remain in a yard in the port at Chittagong and the customs authorities have at all material times refused to allow the containers to be released.

The carrier claimed demurrage from the shipper pursuant to cl.14.8 of the bill of lading which provided for a period of free time for the use of containers and providing that the responsibility of the “Merchant”, defined as including the shipper, was “to return to a place nominated by the Carrier the Container and other equipment before or at the end of the free time allowed at the Port of Discharge or the Place of Delivery”. Demurrage on a daily basis was to be payable by the Merchant thereafter in accordance with the carrier’s tariff. As at 1 January 2015 the total demurrage claimed, from the expiry of free time in 2011, exceeded US$1m.

Leggatt J held that the shipper was liable to pay demurrage under cl. 14 (8) and that there was no scope for reducing the amount payable for this breach on the grounds that the carrier had not taken reasonable steps to mitigate its loss. A liquidated damages clause made proof of the claimant’s actual loss unnecessary and irrelevant.

However, demurrage would not run forever. On 27 September 2011 the shipper had committed a repudiatory breach of the contracts of carriage by sending an email to the carrier in which it indicated that there was no realistic prospect of it being to arrange for any of the containers being collected. The question now arose as to whether the carrier should accept the repudiation and sue for damages or whether it could keep the contract alive.

Following a repudiation, the innocent contracting party may decide to keep the contract alive, unless it has no legitimate interest in doing so which will be the case when: (a) damages are an adequate remedy and; (b) maintaining the contract would be “wholly unreasonable”. Here, the carrier had no legitimate interest in maintaining the contract of carriage. It was restricted to a claim for damages, which would be subject to the mitigation principle. If the containers were in its possession it could mitigate by unpacking them. If, as was the case here, the containers were not in its possession, it could mitigate by buying replacements. Had cl. 14 (8) purported to give the carrier an unfettered right to ignore the shipper’s repudiation and carry on claiming demurrage indefinitely, the clause would have been treated as penal and would be unenforceable.