NYPE 1993 charterparty: punctual payment of hire is not a condition
Court of Appeal holds that charterers’ failure to pay hire in advance under time charterparties on amended NYPE 1993 forms was not a breach of a condition; the decision in The Astra was incorrect.
Subject to any further appeal, the Court of Appeal’s unanimous decision effectively settles the controversial issue of whether the charterers’ failure to pay hire punctually was a breach of condition which entitled the owners both to terminate the charterparty and claim damages for loss of bargain. It provides welcome certainty to the market on the issue.
Whilst confirming that prompt advance payment is central to the terms of a time charterparty, the court found that terms as to payment of hire are ‘innominate’ terms. Late payment by the charterers rendered the charterparty an unsecured credit transaction (without provision for interest). As such, any breach by the charterers was renunciatory, but only entitled the owners to rely on the withdrawal clause and remove the vessel from service, and payment of any balance due at the date of termination.
The classification of hire payment terms as innominate terms does leave open the possibility that owners may in limited circumstances be able, in addition to terminating the charterparty, also to claim damages for loss of bargain by way of lost profit. To allow loss of bargain damages to be recovered in all cases, however, a specific provision to this effect would need to be included in the charterparty (such as that contained in the new NYPE 2015 form).
In March 2010 the respondent shipowners let three vessels to the charterers on long-term NYPE 1993 time charterparties which included, at clause 11, hire payment terms incorporating withdrawal and anti-technicality clauses. The charterers were a subsidiary of the appellant guarantor, which issued three letters of guarantee dated 25 March 2010.
By April 2011 the charterers had fallen into arrears in payment of hire. In September 2011 the owners elected to withdraw all the vessels pursuant to the withdrawal clause and terminate the charterparties. Arbitration proceedings against the charterers were stayed once they entered into liquidation. The owners began proceedings against the guarantor, claiming the balance of hire due under the charterparties and damages for loss of bargain in respect of the unexpired periods of the charters.
At first instance, Mr Justice Popplewell declined to follow the decision of Mr Justice Flaux in Kuwait Rocks Co v AMN Bulkcarriers Inc (The Astra) . Flaux J had found that an obligation to perform punctual payment of hire pursuant to clause 5 NYPE 1946 was a condition (whether accompanied by an anti-technicality clause or not) and that any breach gave rise to a claim for damages for loss of bargain following termination. Popplewell J went on to conclude that the charterers renounced the charterparties at the date of the termination notices.
The Court of Appeal was asked to determine whether Popplewell J had erred:
- In declining to follow the decision of Flaux J in The Astra.
- In holding that the charterers had renounced the charterparties at the date of the termination notices.
- The quantum of damages (some US$25 million plus interest) was not in dispute.
The Court of Appeal held as follows:
- The obligation to make punctual payment of hire was not a condition of the charterparties. The inclusion of the contractual right to withdraw the vessel did not provide any, let alone any strong, indication to the contrary. It had not been made clear that payment of hire was a condition.
- Certainty is a consideration of major importance when construing commercial contracts. However, breaches of the obligation under clause 11 NYPE 1993 could range from the trivial (a five minute delay in the payment of a single instalment of hire) to something more serious. In these circumstances, classifying the obligation as a condition might result in disproportionate consequences.
- A relevant factor was the market’s reaction to Popplewell J’s finding that payment of hire was not required to be a condition. It had generally felt reassured by the decision at first instance, as the correctness of the decision in The Astra had been widely doubted. The market did not require payment of hire to be a condition of the contract and, in any event, appropriate express wording could have achieved the same result if desired.
- In the absence of any reliable evidence that the delays in the sizeable outstanding payments of hire were going to be rectified, it was unable to find any errors in Popplewell J’s finding that the charterers were in renunciatory breach of the charterparties at the date of termination.