Payment of hire on time: an innominate term or a condition?

Commerce thrives when the law is certain, as well as true to the wisdom of the market. This combination is currently sought after for legal principles concerning the timely payment of charter hire.

Two recent cases of interest to the shipping market as a whole, and particularly shipowners, have reached opposing outcomes: one deciding that timely payment of charter hire was an essential term of the relevant contract, and the other deciding that it was not.

Although the cases arrived at different destinations, both were decided by way of a detailed review of preceding authority. The in-depth analysis afforded in each case, gives owners and charterers alike, the benefit of clear guidance on how to make their intentions plain. Higher appeal will settle a technical conclusion in due course.

In Spar Shipping¹, three ships were long term time chartered on an amended NYPE 1993 form in 2010. Pursuant to the charterparties, three letters of guarantee were also issued by Grand China Logistics Holding (Group) Co Ltd (GCL) on 25 March 2010, the defendant, which was the parent company of charterers.

The charterparties were on materially identical terms for all three ships and provided:

at clause 11(a):

“Failing the punctual and regular payment of the hire,……the Owners shall be at liberty to withdraw the Vessel from the service of the Charterers without prejudice to any claims they …. may otherwise have on the Charterers.”

at clause 11(b):

“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……the Charterers shall be given 3 clear banking days….to rectify the failure…..Failure by the Charterers to pay the hire within 3 days…….shall entitle the Owners to withdraw as set forth in Sub-clause 11(a) above.”

Charterers fell behind with hire payments for all three ships and owners withdrew all three ships from hire, and terminated the charterparties.

Owners sought recovery from GCL under the three guarantees for:

1. the outstanding hire owed at the time owners terminated the charterparties; and
2. loss of bargain damages for the remainder of the charterparties. (It is this point upon which the decision of Popplewell J in this case focused).

The facts in this case were materially the same as in Spar Shipping with the exception of:

1. The Astra² charterparty was on the NYPE 1946 form;
2. There was no guarantor in the Astra;
3. When charterers failed to make hire payments in the Astra, an agreement was entered into between owners and charterers, pursuant to an addendum to the charterparty, which:

a. provided for a reduced rate in hire; and

b. included a compensation clause, whereby charterers would pay compensation for future loss of earnings for the unexpired period of the charterparty where the charterparty was terminated owing to any breach/failure of charterers to perform their obligations. However, as he had concluded that the obligation to pay hire was a condition of the original charterparty, Flaux J did not need to decide whether this compensation clause made the obligation to pay hire a condition.

Whilst this was not one of the main issues before him, Popplewell J felt bound to decide the case for two reasons:

1. the decision in the Astra was not treated as settling the position and, having reached a concluded view which differed from Flaux J, he felt bound to decide the case and explain his reasons for not following the Astra; and
2. to ignore it would be “intellectually pusillanimous”.

Popplewell J found that punctual payment of hire clauses were not conditions of a charterparty for the following reasons:

1. The inclusion of a withdrawal clause for non-payment of hire in a charterparty, supports the proposition that failure to pay hire is not a condition, as otherwise there would be no requirement for such a withdrawal clause to be included.
2. Unless there is a clear provision in a contract to the contrary (which there was not in Spar Shipping), the presumption in commercial contracts is that the time of payment is not of the essence. The wording of the charterparties gave owners an “option” to withdraw the ships. To make the payment of hire a condition of the charterparty, there had to be express wording to this effect.
3. In withdrawing the ships from hire, owners were no longer obliged to finance the operation of the ships which would leave owners in an uncertain position until they could claim that charterers had repudiated the charterparties. However, such commercial uncertainty is regularly faced by commercial parties, and shipowners should not be treated any differently.
4. A breach of a payment of hire term may range from the trivial (eg. a delay in payment by hours), to the serious (eg. refusal to pay hire at all (i.e. a repudiation)). Accordingly, it is logical that such a term is innominate. To have such a term as a condition would permit owners to terminate long-term time charterparties because a payment was five minutes late, which cannot be within the contemplation of the parties.

Owners with ships committed on NYPE charterparty terms are currently no longer in the arguably stronger position that the Astra placed them in. Whilst owners can still withdraw a ship from service for non-payment of hire and recover that unpaid hire, they cannot terminate a charterparty for non-punctual payment of hire, unless they can show that such non-payment amounts to charterers’ repudiation, or unless there is an express clause in the charterparty making such a clause a condition. Furthermore, unless they can show repudiation of the charterparty, owners have no grounds to recover for loss of bargain.

The decision in Spar Shipping has been set down for an appeal in June 2016. In the meantime, should owners wish (i) to make punctual payment of hire a condition of a charterparty; and (ii) recover for loss of bargain, then such provisions must be expressly included in the charterparty.