Max Cross Partner
Non-payment of hire - what (and how) can owners recover?
par Shipping AS v. Grand China Logistics Holding (Group) Co. Ltd  EWHC 718 (Comm)
The Commercial Court has recently made some key findings of fundamental importance to the shipping industry.
In summary, the Court held that:
- Charterers’ payment obligation under a NYPE 1993 time charter is not a condition of the contract – failure to pay a hire instalment promptly does not automatically allow owners to terminate the charter and claim damages for future loss of profits.
- The inclusion of a withdrawal clause does not affect (either positively or negatively) owners’ rights to claim damages for any post termination loss of profits.
- Owners may only claim damages for post termination loss of profits where:
- the effect of charterers’ breaches is to deprive owners of substantially the whole benefit of the charter; or
- charterers evinced an intention no longer to perform their obligations under the charter, so that owners would be deprived of substantially the whole benefit of the charter.
- Where, on the date of termination, there exists no market for a like for like substitute charter, absent any failure to mitigate, owners’ losses are calculated by reference to their actual earnings.
- The Owners could recover against the Charterers’ PRC parent company even though the guarantee had not been registered with SAFE and the parent denied that the signatory to the guarantee had authority to bind it.
The background facts
By three charters dated 5 March 2010 on amended NYPE 1993 forms, three supramax bulk carriers were chartered to Grand China Shipping (Hong Kong) Co Ltd.
Performance guarantees were issued by the Defendant (“GCL”), which was the parent company of the Charterers. They were not signed by the company’s authorised legal representative nor were they “chopped” with the company’s seal. The guarantees were not registered with the Chinese State Administration of Foreign Exchange (“SAFE”).
In 2011, the Charterers fell behind in making hire payments. In September 2011, the vessels were withdrawn and the charters were terminated. There were 18 months remaining on one fixture, and about four years remaining on the other two fixtures. At the date of the termination, there was no market for fixtures of four years, although there was a market for shorter period fixtures.
The Owners commenced arbitration proceedings against the Charterers for (i) unpaid hire, and (ii) damages in respect of the unexpired terms of the charters. Shortly before the arbitration hearing, the Charterers entered into liquidation. The arbitration proceedings were stayed.
The Owners turned to GCL under the guarantees. GCL denied liability.
The Commercial Court decision
Issue 1 – Is the payment of hire a condition of the charter?
The Owners argued that the Charterers’ obligation to pay hire was a condition: even a trivial breach entitled the Owners to terminate the charter and claim loss of profits for the remaining charter period.
The Owners relied on a 2013 decision in the Astra where, having reviewed the authorities, the Court concluded that payment of hire was a condition – i.e. a single missed hire instalment entitled the Owners to withdraw the vessel and claim loss of profit for the remaining charter period.
The decision in the Astra was controversial. It departed from the consensus view on the nature of charterers’ payment obligation under a time charter.
Significantly, the Court here refused to follow the Astra and has ruled that payment of hire is not a condition.
The Court reached its conclusion following a detailed review of the authorities and a careful analysis of the principles set out in the Astra. The Court considered and dismissed each of the reasons given in the Astra. In summary, the Court held as follows:
- The withdrawal clause provided the Owners with a liberty to withdraw the vessel from service. It was an option to cancel. Without express wording, the withdrawal clause did not make payment of hire a condition.
- In the absence of a withdrawal clause, payment of hire would not be a condition. It could not have been intended that any breach of that obligation, no matter how trivial, would allow the Owners to terminate.
- In commercial contracts and absent express wording, the time for making payment is not generally a condition. There was no good reason to deviate from this general rule.
- The desirability of commercial certainty must be counterbalanced with the need not to impose liability for a trivial breach in undeserving cases. Commercial certainty could be achieved through the withdrawal clause without granting owners an additional right to damages.
Issue 2 – When can owners terminate the charterparty and claim damages for future loss of profits?
Having found that the payment of hire was not a condition, the Court had to determine whether or not the Charterers’ failure in making payment was sufficiently serious to allow the Owners to recover their post termination loss of profits.
The Court summarised the well-established principles of English law as to when the breach of a term which is not a condition is sufficiently serious to permit the innocent party to treat the contract at an end and claim damages. In a time charter, that conduct is sufficiently serious if:
- It deprives owners of substantially the whole benefit of the charter; or
- It would lead a reasonable owner to the conclusion that the charterers are unwilling or unable to perform their future obligations, and the failure to perform those obligations would have the effect of depriving the owners of substantially the whole benefit of the charter.
Performing obligations in a manner substantially inconsistent with the contractual terms is treated as non-performance.
Whether charterers’ conduct is sufficiently serious to allow owners to terminate the contract and claim damages depends on the facts. In this instance, the Court found that the Charterers’ conduct had been sufficiently serious.
The Court rejected GCL’s argument that this was a mathematical exercise, comparing the total amount of hire in arrears with the total value of the time charters to the Owners. The Charterers’ past non-payment had the effect of evincing an intention not to make regular and punctual payments of hire instalments in the future.
The Court held that, although occasional and brief delays in payment will not usually be serious enough, regular delays measured in weeks often will be, because in those circumstances performance is substantially different from what had been agreed.
Issue 3 – How should damages be assessed?
Under English law, damages for breach of contract are intended to put the innocent party in the same financial position as if the contract had been performed.
It was common ground that, at termination, there was no market for four year fixtures, although there were markets for fixtures of shorter periods.
It was also common ground that the Owners had acted reasonably and had not failed to mitigate their loss.
However, GCL argued that the Owners’ loss should be calculated by comparing the rate of hire under the terminated charter with the market rate of hire obtainable under successive time charters of shorter periods. This argument was dismissed.
The Court held that where there was no market for a like for like replacement charter, the Owners’ loss should be calculated by reference to their actual earnings. Four six month charters could not be considered a like for like replacement of a two year charter.
Issue 4 – Were GCL bound by the guarantees?
GCL argued that they were not bound by their guarantees as:
- The signatory signed the document as Board Chairman, when at that time he was only Executive Board Chairman and did not have authority to bind GCL;
- The guarantees did not comply with Chinese exchange controls requiring the approval and registration of guarantees to overseas entities by SAFE.
Both of these arguments were rejected.
Whether or not the signatory had GCL’s actual authority was a matter of PRC law (as GCL was a PRC company). The Court heard evidence on PRC law and found, as a matter of fact, that the signatory did have actual authority to sign the guarantees. This was because GCL had:
- Authorised the signatory to sign the guarantees; or
- Been aware that the guarantees were being given and failed to disavow that the signatory was entitled to bind GCL; and
- The signatory was conducting a “duty related activity”, which the Court accepted as a principle under PRC law in which a senior employee who was not a company’s authorised legal representative could still bind the company.
The Court found that, in any of these scenarios, GCL were bound.
Alternatively, the Court found that as a matter of English law the signatory had ostensible authority to bind GCL: the Owners had treated the return of the signed guarantees by GCL as a representation that the signatory was authorised to execute them.
Alternatively, the Court held that GCL had subsequently ratified the guarantees.
GCL also claimed that as the guarantees had not been registered and approved by SAFE, they would be contrary to PRC law and so should not be recognised. The Court rejected that argument: the guarantees were governed by English law. Additionally, the Court held, as a matter of fact, that the failure to register the guarantees with SAFE was the sole fault of GCL. Accordingly, SAFE provisions would not render the guarantees unenforceable.
GCL were bound by the guarantees.
The controversial decision in the Astra has not been followed. Whether there is an appeal on this issue remains to be seen. Comment from the appeal court would be welcome.
For now, at least, this decision is likely to strengthen the previously accepted view that the obligation to pay hire is not a condition.
If an owner wants to recover their future losses following a termination, it should terminate the charter in circumstances where it can demonstrate that the defaults are sufficiently serious to deprive it of substantially the whole benefit of the charter.
The Court’s approach on the guarantees is welcome. However, when accepting a guarantee from a PRC counterparty, it is still prudent to:
- Ensure that the contract is either “chopped” with the company’s seal or signed by the company’s authorised legal representative. Checking that the signatory to any contract has authority to bind the company is straightforward.
- Ensure that any other specific guarantee formalities are complied with.
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