Web Alert: "Spar Shipping" - The Court of Appeal confirms that payment of hire is not a condition

The Court of Appeal has confirmed the High Court’s decision in Spar Shipping [2015] EWHC 718 (Comm) that the obligation to pay hire under a time charterparty is an innominate term, not a condition of the contract.

This web alert should be read in conjunction with the club’s earlier publication: Payment of Hire: is it a condition? dated March 2015.

In 2013, the judge in The Astra [2013] EWHC 865 (Comm), Mr Justice Flaux, controversially defined a charterer’s obligation to make punctual hire payments under a time charter as a condition of the contact. Prior to this decision, the obligation to pay hire punctually under a time charter had only been considered as an innominate term.

A condition in a contract is defined as a promise or undertaking that is fundamental to the contract, any breach of which entitles the innocent party to terminate the contract, in addition to their right to damages.

Conversely, a breach of an innominate term gives the innocent party the right to terminate only if the breach is so serious that it deprives the innocent party of substantially the whole benefit he was intended to obtain from the contract. The innocent party may still recover damages for the breach, but may not have the right to terminate.

In 2015, the question came before the High Court again in Spar Shipping and Mr Justice Popplewell disagreed with the decision in The Astra that the payment obligation was a condition. The case was appealed.

The Facts

In 2010, the claimant owner let three Supramax bulk carriers to the defendant charterer using long-term time charters, on amended NYPE 1993 forms. In April 2011, the charterer fell behind on hire payments and, despite its consistent apologies, the situation did not improve for the next six months. The owner sent regular anti‑technicality notices until September 2011, when it gave notice of withdrawal with immediate effect.

Under guarantees obtained from both the parent company of the defendant and the defendant itself, the owner made two claims:

• The balance of hire due under the three charters prior to termination. This is a standard contractual claim and was not controversial.
• ‘Loss of bargain’ damages for the remainder of the charter term. The recovery of future losses emerges either upon the breach of a condition or the repudiatory breach of an innominate term.

The Court of Appeal Decision

Following a detailed review of the decision in Spar Shipping the Court of Appeal affirmed the view of Mr Justice Poppelwell that punctual payment of hire is not a condition. As a matter of construction, payment of hire will only be construed as a condition if there are express wordings to that effect (see for example the NYPE 2015). In particular, the Court concluded that the inclusion of an express right for the owners to withdraw the vessel does not indicate that the obligation to pay punctual hire is a condition, but only provides the owners with an option to cancel the charter should the charterers fail to pay hire on time (i.e. there would be no right to damages for loss of a bargain).

Unfortunately for charterers, the Court nevertheless held that charterers were in both repudiatory breach of their obligation to pay hire and had renounced the charter by their repeated failure of punctual payment of hire. Therefore owners were entitled to damages for loss of a bargain in this instance.

This judgment confirms the previously accepted view that punctual payment of hire is not a condition and lays the decision in The Astra to rest. In order to recover future losses following a withdrawal therefore, an owner must be able to demonstrate a default of sufficient seriousness amounting to repudiation by the charterer. A failure to pay is not the same as a refusal to pay and can be effectively remedied by an owner’s prompt withdrawal and the ship’s rehire to a new charterer. It is not disputed that an owner is authorised to recover outstanding (earned) hire up to withdrawal.

This article intends to provide general guidance on the issues arising as a matter of English law. It is not intended to provide legal advice in relation to any specific query. Members requiring further information on this topic should direct their enquiries to either their usual contact at the club, or to the authors of this article.

Defence cover is, by its very nature, discretionary in that the club must be satisfied as to the merits and quantum of the claim in question and the likelihood of achieving a successful outcome, if it is to lend support.