Has the Astra Changed anything?

On 18 April 2013 Mr Justice Flaux gave judgment in the case Kuwait Rocks Co. v. AMN Bulkcarriers Inc. (the “ASTRA). The judgment has given rise to much comment in the shipping and shipping law world, both for and against the reasoning set out in it.

The background to the judgment was that, between June 2009 and August 2010, the charterers did not pay hire, requested renegotiated rates and threatened to declare themselves bankrupt. Eventually, owners served an anti-technicality notice in compliance with the terms of the charter party (which was on the NYPE 1946 form) and, the charterers having failed to remedy their non-payment of that particular instalment of hire, the owners withdrew the vessel.

The disputes between the parties were then referred to arbitration and the particular issue which led to the appeal to the High Court was the question whether the owners were entitled, having withdrawn their vessel lawfully, to claim damages for loss of bargain (as the 5-year time charter still had over 3 years to go at the date of withdrawal) in addition to hire up to the date of withdrawal.

As anyone familiar with this area of shipping law will know, the generally accepted position as a matter of English law up to now has been that a breach of a contractual obligation in a time charter party to pay hire is not a breach of condition but rather a breach of an innominate term. That being so, owners have no automatic right to damages and will only recover damages if they succeed in showing that the charterers intended not to be bound by the terms of the charter party. This being so, whenever an owner is faced with a non-paying charterer against the background of a falling freight market, the owner is put in a dilemma. If the owner serves an anti-technicality notice and withdraws the vessel from charterers’ service immediately the charterers fail to pay an instalment of hire, it is unlikely the owner will succeed in showing that the charterers’ conduct (missing one instalment of hire) was repudiatory.

However, in a falling market the owner will in all likelihood end up fixing his vessel for a lower rate of hire and therefore will have incurred a loss, which, if the unexpired period of the charter party repudiated by the previous charterer was lengthy, could amount to a very substantial sum of money. Up to now, faced with this predicament an owner really had only one option which was to adopt what Mr Justice Flaux described as the “wait and see” approach. In other words the owner has to struggle on with the non-performing charterer until such time as the owner is reasonably confident that the charterer will be held to be in repudiatory breach. This is exactly what happened in this case and will be a situation familiar to many owners.

Has the “ASTRA” changed this situation? One view is that nothing has been changed as the relevant parts of the judgment are obiter. However, the Court was expressly asked by both parties to decide this issue and consequently carried out a very detailed analysis of the law on this point. Arguably this judgment is one that arbitration tribunals must follow on the principle that an inferior tribunal is bound to apply the reasoning of a higher tribunal when the latter has settled the relevant question of principle for the purposes of clarifying the law. So, on the basis that the judgment in the “ASTRA” does clarify the law on this point and that the vast majority of disputes arising out of ship withdrawals will be heard in the first instance by arbitral tribunals, it does appear that the law has been changed.

In summary, Mr Justice Flaux held that the obligation to make punctual payment was a condition of the charter party and that therefore a breach of this condition entitled the owner to both terminate the contract immediately (obviously subject to any expressly agreed contractual terms for the service of anti-technicality notices, etc.) and to claim damages for any losses suffered as a result of the charterers’ repudiatory breach. The Court also held that this is so whether or not an anti-technicality clause is included in the charter party.

Having decided that the “ASTRA” does change the law, the next question is whether it is right or wrong. Those who say it is wrong point to the existing state of the law being aligned with business common sense in that, if a charterer fails to pay hire in a rising market then he will lose the ship and, if he does so in a falling market then, providing the owners have the patience and stamina to wait until repudiatory breach is established, the charterers will be exposed to a claim for damages as well as a claim for the hire earned but not paid. In addition it is said that the fact that the term regarding payment of hire is an innominate term has been established over many years means there is a marked understanding that this is the position and therefore any change will create uncertainty. As for the point about an anti-technicality clause having the effect of transforming the term requiring payment of hire from an innominate term to a condition, the critics of the decision say that withdrawal is equivalent to cancellation of the contract and not to a breach of contract. Finally, the critics say that it is not binding authority that Clause 5 of the NYPE 1946 Form is a condition because the relevant part of the judgment is obiter. In summary therefore the critics of the judgment say that the status quo is to be preferred.

It is reasonable to ask why this should be so and to question whether that is right. The following points would suggest that the critics are wrong and that Mr Justice Flaux was right. In fact the status quo promotes uncertainty, as a period of “wait and see” is, by definition, a period of uncertainty. By making it clear that the need to pay hire is a breach of condition that uncertainty is removed. The fact that there is no binding authority, in this decision or any earlier decision, to the effect that Clause 5 of the NYPE 1946 Charter Party Form is a condition should not deter the Courts from changing the law if it is apparent that the law needs clarifying.

On the basis of the “ASTRA” judgment, in a rising market the charterer now knows that if he fails to pay even one instalment he will lose the ship immediately. This represents no change from the previous position. However, in a falling market the charterer now knows that if he fails to pay even one instalment, he will not only lose the ship immediately but will have to compensate the owners for any loss and damage suffered by the owners in consequence of the charterers’ breach of a condition of the contract. In short, the “ASTRA” decision, providing it is robustly followed by arbitral tribunals and upheld if and when it is subsequently challenged in the Courts should reduce the number of disputes over unpaid hire and ship withdrawals.

This article is filed under:  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