Charterparties

Law, Practice and Emerging Legal Issues

Barış Soyer, Andrew Tettenborn, Barış Soyer, Andrew Tettenborn

• Publisher: Informa Law from Routledge
• Year: 2017
• ISBN:
  9781351397643
• Edition: 1
• Topic: Derecho
• Subtopic: Teoría y práctica del derecho

This book consists of edited versions of the papers delivered at the Institute of International Shipping and Trade Law's 12th International Colloquium at Swansea Law School in September 2016. Featuring a team of contributors at the top of their profession, both in practice and academia, these papers have been carefully co-ordinated so as to ensure to give the reader a first class insight into the issues surrounding charterparties.

The book is set out in three parts.

-Part I offers a detailed and critical analysis of issues of contemporary importance concerning time charters.

-Part 2 carries out a similar analysis with regard to voyage charterparties.

-Part 3 deliberates issues common to both type of charterparties.

Offering critical analysis of contemporary legal issues on charterparty contracts, this book considers recent legal and practical developments and is therefore essential reading for both professional and academic readers with an interest in charterparties.

Part 1

Issues concerning time charterparties

Chapter 1

‘Interrupting the lifeblood’

The Owner’s remedies for non-payment of hire after Spar Shipping

Simon Rainey QC^*

1.1 Introduction: the obligation to pay hire

A time charter is simply a contract by which the Owners of a vessel agree to provide the Charterers with the services of the Master and crew of that vessel for the performance of the voyages for the Charterers pursuant to their orders.¹ The hire paid by the Charterer is paid in advance as it provides the funds from which the Owner draws to pay for the operating and other expenses of the vessel in conducting the operations ordered by the Charterers.

A key question is whether, in the context of a time charterparty, the Charterers’ obligation to pay hire promptly in advance is a condition of the contract or merely an innominate term. The distinction is particularly relevant in the context of time charters as these frequently include a withdrawal clause which grants the Owner a contractual right to withdraw the vessel if the Charterer fails to comply with its payment obligations. The withdrawal clauses do not usually, however, provide a contractual entitlement to damages for loss of bargain;² the Owner would only be entitled to these damages if the Charterers’ payment obligations are a condition of the contract or, if they are an innominate term, the Charterers’ conduct is sufficient to constitute a repudiatory breach or renunciation of the chapter.

An example of a common withdrawal clause (and anti-technicality clause) can be seen in clause 11 of the charterparty in Spar Shipping, which was in the following terms:

11. Hire Payment

1. (a) Payment
   1. Payment of Hire shall be made so as to be received by the Owners or their designated payee [at X A/C] in United States Currency, in funds available to the Owners on the due date, 15 days in advance … Failing the punctual and regular payment of the hire, or on any fundamental breach whatsoever of this Charterparty, 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.
      At any time after the expiry of the grace period provided in Sub-Clause 11(b) hereunder and while the hire is outstanding, the Owners shall, without prejudice to the liberty to withdraw, be entitled to withhold performance of any and all of their obligations hereunder and shall have no responsibility whatsoever for any consequences thereof, in respect of which the Charterers hereby indemnify the Owners, and hire shall continue to accrue and any extra expenses resulting from such withholding shall be for the Charterers’ account.
2. (b) Grace Period
   1. Where there is a failure to make punctual and regular payment of hire due to oversight, negligence, errors or omissions on the part of the Charterers or their bankers, the Charterers shall be given by the Owners 3 clear banking days … written notice to rectify the failure, and when so rectified within those 3 days following the Owners’ notice the payment shall stand as regular and punctual.

1.2 The nature and importance of hire

As will be considered in further detail below, a number of cases in the late 1970s and early 1980s developed the law on payment obligations and withdrawal clauses in time charters. However, while some cases contain direct consideration of the question whether such provision constitutes a condition of the contract in the classic sense, none contains any direct consideration of whether a breach of such a provision leading to the withdrawal of the ship would entitle the Owners to claim damages for loss of bargain.

Whilst this paucity of authority may be seen as surprising, when one considers the historical context of these cases it is likely to be an example of commercial realities driving the development of the law: put simply, at the time these cases were argued, the market for freight and charter hire rates was generally on the rise. Therefore, the Owners in these cases had a commercial incentive to withdraw a ship from a Charterers’ service with a view to chartering the ship to another Charterer at a higher rate. In such a commercial context there is no need for the Owners to seek to argue that they are entitled to damages for loss of bargain, as they will have made a profit not a loss. Driven by the commercial realities, the majority of these cases focussed on whether the Owners were entitled to withdraw their vessel from the Charterers’ service. In this context, the main question was the stringency with which the Court or Tribunal should read the relevant withdrawal clause and whether any small non-payment or minor delay would suffice to trigger the withdrawal. The Court’s interpretation of this clause has always been a stringent one as can be seen in the following cases.

The most frequently cited is Tankexpress A/S Compagnie Financiere Belge des Petroles S.A. (The ‘Petrofina’)³ where Lord Wright stated:⁴

The importance of this advance payment [of hire] to be made by the Charterers, is that it is the substance of the consideration given to the shipowner for the use and service of the ship and crew which the shipowner agrees to give. He is entitled to have a periodical payment as stipulated in advance of his performance so long as the charterparty continues. Hence the stringency of his right to cancel.

A similar point was made by John Hobhouse QC (as he then was) who submitted the following as counsel for appellant Owners in Mardorf Peach & Co Ltd v Attica Sea Carriers Corporation of Liberia (The Laconia),⁵ where due to a rising market the only issue was whether the Owners could withdraw (emphasis added):⁶

During the provision of the services the shipowner bears the cost of running the vessel from day to day. For this he is to get the hire in advance because the Owner puts the profit earning capacity of the ship at the disposal of the Charterer. The freights are collected by the Charterer; the shipowner never sees these profits. The shipowner is not obliged to perform the services on credit; he does so only against advance payment. He stipulates for and is entitled to advance payment monthly or fortnightly. He is not obliged to provide the services here for a given fortnight until he has had payment in full in respect of it…

The critical nature of the payment of hire was emphasised in The Astra as part of the justification for construing the obligation as a condition. In that case, Flaux J recorded the following submission of counsel:⁷

[Counsel] made a very similar submission as to why punctual payment of charter hire was critical, that a shipowner has continuous expenses incurred on a daily basis, whether direct expenses such as crew wages and vessel running costs or the costs of technical and operational support, office administrative expenses fixed overheads and financing costs, which are met from the charter hire. As Mr Hobhouse QC had submitted in The Laconia, [Counsel] submitted that the Owners were not intended to fund the costs or take any credit risk, hence time charters invariably provide for hire to be paid in advance.

The current commercial and legal context is starkly different from that which existed in the 1970s and 1980s; as such in a period of some two years two experienced Commercial Court Judges have each handed down a detailed judgment with exhaustive (though differing) reviews of the relevant case law on the nature of the obligation to pay hire punctually and in advance⁸ and the circumstances in which breach of such payment obligations (if not a condition) would constitute repudiation or renunciation of the charter. As will be seen below, the significance given to the obligation to pay hire has proven to be a key argument in favour of its characterisation as a condition and even in the different context of repudiation and renunciation has been treated as of particular importance.

1.3 The common problem: the facts in Spar Shipping

Spar were the Owners of three supramax bulk carriers (collectively referred to as ‘the vessels’). By three time charters (‘the Charters’) on amended New York Produce Exchange (‘NYPE’) 1993 forms, the Vessels were let to Grand China Shipping (Hong Kong) Co Ltd (‘GCS’). The Charters provided for guarantees to be issued by GCS’ parent company, Grand China Logistics Holding (Group) Co, Ltd (‘GCL’).

The oddity of Spar Shipping was that the arbitration (before a tribunal on London Maritime Arbitrators Association terms) never took place, due to the insolvency of the Charterers GCS and that the Owners’ claim therefore lay against GCL as guarantors under a High Court jurisdiction clause. The case is, therefore, an unusual one of a non-payment of hire case being decided on the facts by the Court, rather than as is commonplace by an LMAA tribunal with the Court only considering the matter, if at all, by way of an appeal on a question of law under s 69 of the Arbitration Act 1996. While there are many arbitration decisions on non-payment of hire, there are few Court decisions which grapple with when non-payment is sufficiently serious to allow the Owner to terminate the charterparty.

The relevant facts in Spar Shipping in relation to both the condition and renunciation questions can be summarised as follows:⁹

1. (1) GCS had regularly failed to pay hire punctually under the Charters for a period of over five months.
2. (2) Almost all payments on all vessels were unpaid when they fell due. Some were not paid at all; others were only paid months after they fell due. In those months, only in July were instalments actually paid on time or within a few days of falling due.
3. (3) For most of the period the arrears over the vessels fluctuated between about US$1.5m and US$2.5m. The arrears would have been up to US$1m more but for the fact that Spar exercised its lien on sub-hire/freights.
4. (4) GCS had made clear that it could not make payment due to cash flow difficulties caused by the fall in the market. The fall in the market had rendered GCS unable to meet its hire obligations to all of the Owners of its chartered fleet.
5. (5) Since June 2011, GCS had repeatedly said that it expected cash injection from its parent company to allow it to make punctual payments and pay off the arrears but did not make clear how much cash would be injected or how it would be allocated amongst GCS’ competing creditor shipowners. GCS still failed to make punctual payments on the Vessels. It twice promised and failed to pay off half of the arrears by 31 August 2011.
6. (6) GCS emphasised its cash flow difficulties, provided no concrete payment proposal and suggested that it would merely pass on sub-hire when received.¹⁰ GCS were apparently adopting a ‘hand-to-mouth’ policy of (part) performance of its obligations only if timeously paid the (insufficient) sub-hire/freigh...