Court of Appeal decides obligation to pay hire is not a condition

In a decision handed down on 7 October 2016, the Court of Appeal upheld the judgment of Popplewell J. at first instance and concluded that payment of hire by charterers was not a condition of the charterparty (Grand China Logistics Holding (Group) Co. Ltd -v- Spar Shipping AS [2016] EWCA Civ 982). 

Background facts

In 2010 Spar Shipping AS let three supramax bulk carriers to Grand China Shipping (Hong Kong) Co. under three long-term charterparties on amended NYPE 1993 forms (collectively, ’the charterparties’). The charterparties provided for performance guarantees to be issued by Grand China Logistics Holding (Group) Co. Ltd, the parent company of the charterers.

From April 2011 onwards, charterers persistently failed to perform their hire payment obligations under the charterparties. Pursuant to several anti-technicality notices, in September 2011 owners withdrew their vessels and terminated the charterparties on the basis that charterers’ conduct had been repudiatory and/or renunciatory. Owners claimed under the guarantees in respect of the balance of hire due under the charterparties, plus damages for loss of bargain in respect of the unexpired period of the charterparties.

Whilst a claim for the balance of hire due is a standard contractual claim, and was not controversial, the key point in dispute was whether owners were entitled to damages for loss of bargain, which could only be recovered if there was a breach of condition, or the repudiatory breach of an innominate term.

Issues in dispute

In 2015, in Spar Shipping AS -v- Grand China Logistics Holding (Group) Co. Ltd [2015] EWHC 718 (Comm), Popplewell J rejected Spar’s argument that the court should follow the decision of Flaux J in The Astra [2013] EWHC 865 (Comm), instead reverting to the earlier approach adopted by Brandon J in The Brimnes [1973] 1 WLR 386, that punctual payment of hire by charterers is not a condition, but an innominate term. Popplewell J went on to conclude that, by way of their conduct from April 2011 onwards, charterers had renounced the charterparties at the date of the termination notices.

The issues before the Court of Appeal were therefore:

1. The condition issue - Whether the obligation to make punctual payment of hire is a condition.

2. The renunciation issue - Whether the conduct of charterers amounted to a renunciation of the charterparties.

The condition issue

The condition issue, which Gross LJ acknowledged had ‘attracted much market interest and long generated conflicting observations from judges of the highest standing’, was decided unanimously by the Court of Appeal to have been adjudged correctly by Popplewell J. 

In coming to its decision, the Court of Appeal analysed a number of judicial statements and opinions, but emphasised at paragraph 97 of the judgment that it had not been bound by any prior authority. Its findings can be summarised as follows:

• The inclusion of an express withdrawal clause in the charterparties did not provide any indication that the obligation to pay hire punctually was a condition. The withdrawal clause in this case gave owners no more than an option to cancel.
• There is no general presumption in a mercantile contract that a stipulated time for payment is a contractual condition.
• Whilst greater commercial certainty could be achieved by the classification of all time clauses as conditions, the key question was to strike the right balance. As breaches could range from the trivial to the grave, the classification of time clauses as conditions would cause disproportionate consequences to flow from trivial breaches.
• The general view of the market has long been that the obligation to make timely payment of hire is not a condition. Further, the market does not require the payment of hire to be a condition, as this result could be achieved by appropriate express wording if so desired.
• The Astra was ‘wrongly decided’ (Para 65) on the condition issue.

The renunciation issue

Whilst accepting that the punctual payment of hire is not a condition, the Court of Appeal unanimously concluded owners were entitled to claim damages for loss of bargain, as charterers had renounced the charterparties by their repeated failure to make punctual payment.

Gross LJ set out the test for renunciation, which is essentially similar to that for repudiation, concluding that the test had been expressed differently across a number of authorities simply as a reflection of the different facts of the cases. The question he asked was, in essence, whether or not owners, as the innocent party, had been deprived of substantially the whole benefit of the contract. 

The Court of Appeal adopted a three-stage approach to the question:

1. What was the contractual benefit owners intended to obtain from the charterparties?

2. What was the prospective non-performance foreshadowed by charterers’ words and conduct?

3. Was the prospective non-performance such as to go to the root of the contract?

The Court of Appeal held in this case, the answers were (1) the regular, periodical payment of hire as stipulated, in advance of performance, for the duration of the charterparties. (2) A reasonable owner could have no realistic expectation that charterers would in future pay hire punctually in advance. The best that owners could hope for was that charterers were willing to pay hire – but in arrears. (3) Yes; charterers’ conduct evidenced an intention to turn the charterparties into something radically different from their terms; namely from a contract for payment in advance, to one for payment in arrears.

Comment

The outcome of the appeal puts to bed the controversy surrounding the conflicting decisions of The Astra and Spar Shipping AS -v- Grand China Logistics Holding (Group) Co. Ltd, affirming that there is no automatic right to damages for loss of bargain following failure(s) by charterers to pay hire punctually. Instead, owners must prove that they have been deprived of substantially the whole benefit of the charter.

This will be further unwelcome news for owners in the current market. We query whether owners might, if and when the market turns in their favour, start amending their charterparties to make the timely payment of hire a condition. Only time will tell.