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Payment of hire – finally a condition of certainty

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Payment of hire – finally a condition of certainty, by Electra Panayotopoulos

Electra Panayotopoulos

Electra Panayotopoulos

 

Kuwait Rocks Co -v- AMB Bulkcarriers Inc (the Astra) [2013] EWHC 865 (Comm)

In the Astra, Flaux J clarified the position in respect of Clause 5 of the NYPE form (the obligation to pay hire), after years of uncertainty. Until recently, there was no clear authority as to whether Clause 5 of the NYPE form constituted a condition of the contract, breach of which would permit Owners to terminate and claim damages.

On 18 April 2013, Flaux J confirmed that the obligation to pay hire is in fact a condition. Breach of this condition entitles the Owners to withdraw the Vessel and claim damages for loss of bargain.

Facts

AMN Bulkcarriers Inc (the Owners) chartered the ASTRA (the Vessel) to Kuwait Rocks Co (the Charterers) for a period of 5 years by a time charterparty dated 6 October 2008 on the NYPE 1946 form as amended (the Charterparty).

As usual, Clause 5 of the Charterparty provided that Charterers’ failure to make punctual and regular payment of hire would entitle the Owners to withdraw the Vessel from the service of the Charterers, without prejudice to any other claim they may have.

This was complemented by Clause 31 of the Charterparty, an anti-technicality clause whereby in the event of failure to make ‘punctual and regular payment’, the Owners must notify the Charterers whereupon the latter shall then have two banking days within which to rectify the failure.

After numerous delays on behalf of the Charterers to pay hire during the Charter period, the Owners served an anti-technicality notice on the Charterers for their failure to pay hire in a timely manner. The Charterers failed to rectify the situation and the Owners proceeded to withdraw the Vessel from the Charterers’ service and terminated the Charterparty. In order to mitigate their losses, the Owners entered into a substitute charter for the balance of the charter period but at a much lower hire rate.

Owners’ claim

Owners claimed that Charterers’ obligation to pay hire under clause 5 was a condition. Under English law, a breach of condition entitles the innocent party both to terminate the contract and to claim damages for any loss suffered as a result.

Following termination / withdrawal, the Owners claimed the following sums:

  1. Payment of unpaid hire that had accrued up to the date of withdrawal; and
  2. Damages for loss of earnings from the date of withdrawal of the Vessel until the earliest date when the Vessel could have properly been redelivered, taking into account the earnings made under the substitute charter.

The position ‘pre–Astra’

The Owners’ claim amounted to US$13, 109, 977. The position in law was unclear before this case but the generally accepted view in the industry was that payment of hire was not a condition of a charterparty contract.

As a result, in order for Owners to recover damages following the exercise of the contractual right to withdraw they would also need to show a repudiatory breach of contract by the Charterers. The Owners would have to show that the Charterers evinced an intention not to be bound by the terms of the contract (i.e. the Charterparty). This view was notably stated to be the ‘preferred’ view by the ‘bible’ on time charters (T. Coghlin, A.W. Baker, J. Kenny and J.D. Kimbal, (2008) Time Charters (6th Edition) Informa Law from Routledge).

Position after the Astra

Flaux J, hearing the case on appeal from arbitration, found that clause 5 was in fact a condition of the contract. His reasons were the following:

  1. The wording of the clause made it clear that failure to make punctual payment – irrespective of whether the breach is otherwise repudiatory – is sufficiently serious to entitle the Owners to terminate the contract.
  2. The obligation to pay hire punctually constitutes a provision where time is of the essence. Such provisions amount to conditions.
  3. Certainty is an important component of a commercial transaction. If the right to withdraw the Vessel for non- payment of hire left the Owners with no remedy in damages unless it is coupled with the Charterers’ repudiation, the Owners would be in a position of uncertainty as to whether to withdraw the Vessel or to wait until the Charterers’ non-payment amounted to a repudiation of the contract. There would be no certainty as to when the Owners could exercise their right and withdraw the Vessel without precluding the right to claim damages for the period after withdrawal. In turn, Charterers are now aware and can be certain that if they fail to pay hire promptly and Owners withdraw, they will be liable for any loss suffered.

Summary

Charterers’ obligation to pay hire is a condition of a time charterparty. Breach of this condition entitles the Owners to terminate the contract and claim damages for any loss suffered without the need to prove Charterers’ intention to repudiate the contract.

This much needed clarity comes at the end of a series of cases of withdrawals by Owners following the collapse of the chartering market in 2008 which resulted in many Charterers being unable / unwilling to service ‘expensive’ charters resulting in withdrawal by owners. It may be a few years yet before the market recovers to such an extent for the same phenomenon to be noted but, when the time comes, both parties will be clear as to the implications of their actions.

The case may be subject to Appeal, and we will keep you posted if anything changes.

 

*Partner Hill Dickinson LLP

Electra specialises in disputes arising from international trade including bills of lading, charterparties, sale and purchase disputes and associated insurance matters. She is often involved in advising on jurisdictional aspects arising out of collisions and limitation actions and in the coordination of multi-jurisdictional disputes. She has extensive experience in litigating in the High Court and the Court of Appeal and frequently represents clients in London arbitration and mediation.

Electra’s practice also benefits from experience accumulated during two secondments, first to one of the largest container line operators in 2000 and subsequently to a leading P&I Club in 2004. She transferred to the firm’s Piraeus office in March 2009.

Electra is bilingual (English and Greek) and is fluent in French.

electra.panayotopoulos@hilldickinson.com T +30 210 428 4770 M +30 6949 240 916 F +30 210 428 4777

Office Piraeus

Practice areas and sectors Marine, trade and energy

Work specialisms shipping marine insurance and reinsurance cargo claims and recoveries charterparties charterparty disputes cross border disputes dispute resolution arbitration Career Hill Taylor Dickinson, trainee, 1996 – 1998 Hill Taylor Dickinson, solicitor, 1998 – 2003 Hill Taylor Dickinson, associate, 2003 – 2005 Hill Dickinson, associate, 2005 – 2007 Hill Dickinson, partner, 2007 –

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