Hong Kong - Whether Payment Of Hire A Condition.
Legal News & Analysis - Asia Pacific - Hong Kong - Dispute Resolution
18 October, 2016
Spar Shipping was registered owner of three supramax bulk carriers. The vessels were let on long term time charter (amended NYPE 1993 forms) on 5 March 2010 to Grand China Shipping (Hong Kong) Co Ltd ("GCS").
Clause 11 of the charterparties provided that:
"(a) Failing the punctual and regular payment of the hire, or on any fundamental breach whatsoever of this Charter Party, the Owners shall be at liberty to withdraw the Vessel from the service of the Charterers without prejudice to any claims they (the Owners) may otherwise have on the Charterers"
"(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 or their bankers, the Charterers shall be given by the Owners 3 clear banking days … written notice to rectify the failure …"
The charterparties also provided for guarantees to be issued by the defendant ("GCL"), which was the parent of GCS. Three letters of guarantee were issued on 25 March 2010.
From April 2011 GCS was in arrears in payment of hire. On 16 September 2011 Spar called on GCL for payment under the guarantees. On 23 and 30 September 2011 the three vessels were withdrawn and the charterparty was terminated.
Spar commenced arbitration proceedings against GCS claiming (1) the balance of hire outstanding; and (2) damages for loss of bargain of the unexpired term of the charters. GCS went into liquidation in Hong Kong and the arbitration proceedings were stayed. So Spar brought a claim under the guarantees against GCL claiming the balance due and damages for loss of bargain.
The main issue for decision was whether the obligation to make punctual payment of hire was a condition. If it was, Spar was entitled to terminate the charterparties and also claim damages for loss of bargain. If it was not, Spar could terminate the charterparties pursuant to the express withdrawal clause, but could only claim damages for loss of bargain if GCS renounced the charterparties.
At first instance, Popplewell J held that (1) the obligation to pay hire was not a condition; (2) GCS had renounced the charters; and so (3) GCS were liable to pay damages at common law, and GCL were bound by the guarantees.
Held: (Sir Terence Etherton, Gross and Hamblen LJJ)
- The punctual payment of hire is not a condition for the following reasons. The punctual payment of advance hire under a time charter is, no doubt, of great importance to owners, but it is by no means clear that breach of that obligation entitles owners to withdraw the vessel. For that reason, express withdrawal clauses were included in time charters. However, the presence of such a clause does not mean that payment of hire is a condition. All conditions entitle the innocent party to terminate the contract, but not all contractual termination clauses are conferred for breaches of condition alone.
- The courts should not be too ready to interpret clauses as a condition. The charterparties, on their true construction, did not make it clear that clause 11 is a condition. Clause 11 did not expressly make time of the essence, nor did it spell out the consequences of the breach. Further, the consequences of a breach of clause 11 could vary dramatically from the trivial to the grave.
- The anti-technicality clause did not strengthen the case for timely payment being a condition. Anti-technicality clauses are to protect charterers from the serious consequences of a withdrawal. They were not devised to make time for payment of the essence. No significance was derived from arguments that there is a general presumption in mercantile contracts that time is of the essence.
- Certainty is important, but so is commercial common sense. Striking a balance between the two is key: classification as a condition achieves certainty but may cause trivial breaches to carry severe and unnecessary consequences. Sufficient certainty is achieved at present with the use of express withdrawal clauses.
- GCS had renounced the charterparties: no criticism could be made of Popplewell J's application of the test to the facts. Conduct is repudiatory if it deprives the innocent party of substantially the whole of the benefit he is intended to receive in consideration for performance of his future obligations under the contract. Hire is payable in advance to provide a fund to meet the expenses of rendering services under the charterparty. The owner is not obliged to provide the services on credit. Given the history of GCS's late payments, the amounts and delays involved together with the absence of any concret or reliable reassurance from GCS/GCL as to the future, Popplewell J. was amply entitled to conclude that GCS had renounced the charterparties.
Grand China Logistics Holding (Group) Co. Ltd v Spar Shipping AS  EWCA Civ 982
For further information, please contact:
Phillip Rompotis, Partner, Stephenson Harwood