Paul Crane Partner
Court implies term into hire provision to give it business efficacy
Regal Seas Maritime SA v. Oldendorff Carriers GmbH (New Hydra)  EWHC 566 (Comm)
In a dispute over the construction of a charterparty hire provision that went to the Court on appeal, the Owners were ultimately successful in arguing that a term should be implied to make the hire provision work as the parties must be taken to have intended that it should.
The background facts
The vessel in question was a Cape size carrier of 179,258 tonnes and was on time charter from 22 November 2013 (the “Charterparty”) for a period of three to five years.
The hire clause provided:
"Hire payable every 15 days in advance including overtime. The gross daily hire to be calculated basis the average of the 4 Baltic Cape Size Time Charter routes published by the Baltic Exchange over the previous 15 days plus 4% for size adjustment."
By an Addendum No. 5 dated 16 November 2017, the charterparty was extended on the following terms:
“Charterers hereby declare the option for the second optional year with 3 months more or less in Charterers' option on final period at 104% BCI 4TCS less 3.75% address commission."
Hire was calculated by reference to the Baltic Cape Size Time Charter routes or the Baltic Capesize Index (“BCI”) with a size adjustment of 4%. The BCI uses a ‘benchmark’ ship of a defined size to calculate the daily rates. In November 2013, the benchmark ship was 172,000 tonnes and four time charter (4TC) routes were assessed in calculating the rate (172 4TC). During the course of the charterparty, the Baltic made changes to how the BCI was calculated. From 31 July 2015, no 172 4TC rate was calculated, with rates being assessed solely on the basis of a benchmark 180,000 tonne vessel. Rates for 172 4TC were still published however, based on a constant dollar differential from the 180 4TC rate, and from January 2017 the 180 5TC rate (adding a fifth route to the assessment). From December 2017, no 170 4TC rate was published, but could be calculated by applying the constant dollar differential.
The tribunal’s decision
In July 2018, the Owners asserted that the parties had been calculating the hire rate incorrectly since July 2015, when the Baltic stopped publishing 172 4TC rates. In arbitration proceedings, the tribunal considered how the hire clause was to be applied in the event of a change to the tonnage of the benchmark ship.
The Owners submitted that from August 2015, the Charterers should have been paying hire based on the 180 4TC rate plus 4%, as set out in the charterparty. Alternatively, that they should have been paying on the basis of 180 4TC but with a reasonable size adjustment, which was said to be nil as the vessel’s tonnage was nearly identical to that of the benchmark ship.
The Charterers, on the other hand, argued that hire had been calculated correctly; using the 172 4TC as the base and adding 4% and, after December 2017, using the constant dollar differential and applying that to the published daily rate for 180 5TC. Alternatively, the Charterers contended that, by the parties’ conduct, there had been a variation to the charterparty and/or that the Owners were estopped from claiming any further hire.
The tribunal accepted the Charterers’ construction of the hire provision, but did not deal with the alternative cases of variation and estoppel.
The Commercial Court decision
On appeal, the Owners focused on their alternative case; that the 180 5TC rate was to be applied and the size adjustment reduced to zero, pursuant to an implied term that the clause should be reasonably revised in light of a change to the benchmark ship.
The Charterers continued to argue that the parties’ intention was for the base rate to be for a 172,000 tonne vessel, that the 4% adjustment was unalterable and to the extent that a rate for the 172,000 tonne continued to be published, the parties must have intended that rate to be used.
In construing the charterparty, the Court should consider what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the charterparty, would have understood the language of the hire provision to mean. Where there were potentially rival meanings, the Court could give weight to the meaning that was most consistent with business common sense.
In the Court’s view, the difficulty with the Charterers’ construction was that, from 31 July 2015, the Baltic did not publish an individual 172 4TC rate. This was calculated by reference to the 180 4TC (later 5TC) rate with a differential applied, and after December 2017 no 172 4TC rate was published at all. The Charterers’ construction would, therefore, have required the hire provision to be rewritten.
The Court preferred the Owners’ interpretation, recognising that the hire clause was not restricted to a size of benchmark vessel and could, therefore, apply to whatever size the BCI used. This interpretation would also give effect to the commercial purpose of the hire provision, namely that the parties would share the risks and benefits of movements in the market.
Consequently, the Court was prepared to imply a term that a reasonable size adjustment should be made. Without this implied term, the hire provision could not be applied in the events which happened after July 2015 and the Court did not think that this could have been what the parties intended. The implied term was, therefore, necessary to give “business efficacy” or “commercial or practical coherence” to the charterparty. The Court also put some weight on the fact that the charterparty was contemplated by the parties to last three to five years, with hire being fixed by reference to the hire provision.
The matter was remitted back to the tribunal to consider the Charterers’ arguments on variation and estoppel.
Charterparties often include terms that are based on external and/or third-party factors outside the parties’ control. This decision is a useful example of when the Court will imply a term into such a contract in order to give it business efficacy. However, implied term arguments are often unsuccessful because the test is that the implied term must be necessary to make the contract work. That sets quite a high bar. Therefore, insofar as reasonable, parties should endeavour to draft their contractual provisions in a way that takes into account external factors that are beyond their control.