The practical effect of the judgments in Spar Shipping AS v. Grand China Logistics Holding (Group) Co Ltd

By Tom Moisley

Introduction

This article sets out to review the principal practical effect of the two judgments in the Spar Shipping AS v. Grand China Logistics Holding (Group) Co Ltd litigation (“Spar”). When the judgment at first instance came out[1] it attracted a great deal of comment in the legal press and from practitioners.  Much of that comment was directed at one part of the judgment, that is the part dealing with what Mr Justice Popplewell called issue (2):  “Is payment of hire a condition of the charterparties?”  However, it is worth noting that the court at first instance dealt with six other issues, at least three of which are of some importance generally to the shipping community.  In this article we will look at what is arguably the most important of those other issues, namely what is the correct test to establish whether a time charterer has repudiated or alternatively renounced a time charterparty?  Given the decision of Popplewell J. on the condition issue, upheld by the Court of Appeal[2], that the payment term in a time charterparty is not a condition, naturally the question of what constitutes repudiatory conduct or alternatively a renunciation of a contract by a time charterer has once again come to the fore.

The background

The basic contractual framework as regards the payment of hire contained within a typical time charterparty governed by English law is too well-known to require description in detail. In brief:

  • The owner has a right to receive hire in advance in an agreed amount on agreed dates;
  • in exchange for hire paid in advance the owner provides the charterer with a ship and crew which the charterer has the right to employ as it sees fit within certain defined limits as set out in the contract;
  • consequently the charterer has the right to exploit the ship for its own economic gain; and
  • if the charterer does not pay hire the owner (normally) has a contractual option to withdraw the ship from the charterer’s service and terminate the contract subject (usually) to complying with the requirements of an anti-technicality clause.

In a rising market this legal framework works well, not by virtue of its innate legal soundness but because market forces will oblige the time charterers to perform their obligations for fear of losing a vessel that is cheap relative to the market and therefore gives them the opportunity to make additional profit (which they are entitled to keep). However, in a falling market the inherent weaknesses of this legal structure are quickly exposed.  Whenever the freight market is falling (or even when there is a general perception by the market that future rates will drop) charterers are put in a position whereby the withdrawal of the ship by owners will be an advantage and not a disadvantage, because it will enable the charterers to go back into the market and obtain replacement tonnage at a lower cost.  The legal theory is that the deterrent to such behaviour is the risk that the owners will bring a claim for loss of bargain against the time charterer.  However, absent the payment term being a condition, the degree of risk is uncertain and may be quite low.  The effect of the decision of the Court of Appeal in Spar has been to close the door to any argument that the term as to payment of hire in a time charterparty is a condition (at least until the point is once again before an appellate court in England). That being so, for the foreseeable future owners have no automatic right[3] to claim damages for loss of bargain if a charterer fails to pay hire in accordance with the terms of the charterparty and the owner in consequence exercises his contractual right of withdrawal. Thus the deterrent to contract breaking by charterers in a falling market is considerably weakened.

The dilemma facing owners

The owner will be placed on the horns of a dilemma and will want to know: a) can I withdraw my ship? and b) can I claim damages for not only the unpaid hire but most importantly for the loss of the balance period of the time charter?  Conversely, a charterer will want to know if it is exposing itself to a loss of bargain claim.

In every case it will have to be established whether or not the late and/or non-payment of hire by the time charterer amounts to a repudiatory breach or alternatively to a renunciation of the contract in question. The difficulty facing both owners and charterers is to identify with sufficient certainty when the conduct in question has passed the (invisible) “red line” such that it has become a sufficiently serious breach in respect of which the owner may terminate the contract, claim the earned but unpaid hire and claim damages for loss of bargain

The problem in resolving the dilemma

The problem is that the tests which the courts have devised in order to establish repudiatory breach, or renunciation as the case may be, are not easy to apply in practice. In Spar, the Court of Appeal described the tests variously as “necessarily open textured”, as being “in metaphorical terms” and/or involving “conclusory description”.  The justification for what in plain language might fairly be described as these imprecise tests is that they are more readily capable of application to a wide variety of different facts.  That is probably right but it is suggested with respect that the ease of application of a test to a body of facts which have been gathered together with the benefit of hindsight is one thing but the application of the same test at the time the events in question are taking place may be very different. Critically, the owner is unlikely to know much if anything about the ability or intention of the charterer to perform in future.  A judgment call will have to be made based largely on guesswork.

Returning to the owner’s questions, the answer to question a) is: yes, normally you will have a contractual right to withdraw the ship for non-payment of hire subject to the legal niceties of the charterparty concerned and in particular the service of a properly drafted anti-technicality notice. By contrast the answer to question b) is the classic lawyer’s answer when there is no readily available solution as a matter of law, that is: “it depends”.  Thereafter any attempt to explain to an owner (or to a charterer) where the legal line is drawn requires the application of the open textured metaphorical and conclusory descriptive tests to the facts.

The test

Spar has made it clear that there is no difference between the applicable tests for repudiatory breach and renunciatory behaviour and that in both cases the applicable tests equate to those which should be applied when considering whether a contract has been frustrated. As Diplock L. J. explained in “The Hong Kong Fir”[4], the same test is applicable whether the event (breach) in question occurs with or without the fault of one of the parties to the contract.  The Diplock L.J. test is the one which has been upheld in Spar:  “Does the occurrence of the event deprive the party, who has further undertakings still to perform, of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings”?  Put simply, how serious is the breach?

Applying such a test makes the facts the real battleground. This was certainly the position in Spar.  The lawyers for GCL argued that the relatively small amounts of hire that had not been paid or only partly paid when compared to the total projected earnings of the owners over the full terms of the three charterparties concerned meant that the breaches did not deprive Spar of substantially the whole benefit of the contract.  The court both at first instance and on appeal decisively rejected this mechanical arithmetic analysis.  Furthermore, in Spar both judgments usefully clarified that payment in advance is a critical component of the legal framework of a time charterparty and therefore an important factor to be weighed in the balance when applying the various open-textured metaphorical tests.

In practice what this means is that it will be necessary to review all the evidence relating to the performance of the time charterparty in question, as an objective analysis of such evidence is required in every case to determine: i) the intentions of the defaulting party; and ii) the ability of the defaulting party to perform their future obligations.  In conclusion, the effect of Spar is to reaffirm that there are no shortcuts available to owners and that the uncertain “wait and see” approach as described by Flaux J.[5] is, once again, the only option open to an owner when faced with a defaulting charterer in a falling market.  Moreover, the wait may be a long one depending on the availability of the critically important evidence as to the ability of the charterers to perform in the future and their intentions in this regard.

——————————————————————————–

[1] [2015] EWHC 718 (Comm) Judgment dated 18 March 2015.

[2] [2016] EWCA Civ 982 Judgment dated 7 October 2016.

[3] Absent a contractual term conferring such a right, such as in NYPE 2015 clause 11(c) (ii).

[4] Hong Kong Fir Shipping Co Ltd v. Kawasaki Kisen Kaisha Ltd [1961] EWCA Civ 7.

[5] [2013] EWHC 865 (Comm) paras [115]-[116]

This article is filed under:  Industry news, Press releases

About the contributor

  • Tom Moisley Partner

    Tom is a partner in the Shipping Group in our London office. His practice includes casualty work, contractual disputes, including those arising out of charter parties, ship management contracts and bills of lading.

    Read more