18 June, 2012
Legal News & Analysis – Asia Pacific – Singapore – Dispute Resolution – Shipping Maritime & Aviation
Isabella Shipowner SA V Shagang Shipping Co Ltd (The “AQUAFAITH”)
The recent decision of the English High Court by Mr Justice Cooke in the case of the “AQUAFAITH” concerns the purported early redelivery of a vessel by Time Charterers to Owners. The decision confirms that Owners are entitled to reject such repudiatory breach and insist that Charterers perform the charterparty, subject to two exceptions, namely where (a) Owners have no legitimate interest to insist upon the continuation of the charterparty; or (b) Owners cannot perform their contractual obligations without Charterers’ cooperation.
This decision has particular resonance given current economic conditions in shipping, and in particular recent cases reported in the media of Charterers attempting to relieve themselves of time charter commitments by redelivering vessels early.
1. What is repudiation, and what are its practical implications?
The English law concept of “repudiatory breach” is where a contracting party (the “Defaulting Party”) manifests an intention not to be bound by the contract. For example, in the AQUAFAITH, Charterers’ attempted redelivery of the vessel 94 days prior to the contractual redelivery date constituted a repudiatory breach of the contract.
The case of White v Carter [1962] confirmed that in the event of contractual repudiation, the Innocent Party may elect to either keep the contract on foot and operational, or to terminate it. In the context of a charterparty, the decision by Cooke J in the AQUAFAITH clarifies that, subject to the abovementioned exceptions, Owners, as the Innocent Party, will have two options:
– Option A:
Owners may reject the repudiation, insist that Charterers perform, and continue to invoice Charterers for hire at the contractual times and rate up to the earliest contractual redelivery date. Owners will not be required to mitigate their loss. Owners can then bring a procedurally straightforward and speedy claim against Charterers for simple debt in respect of any hire invoice issued.
- Although this may sound like an attractive option to Owners, the claim will only be for unpaid invoices up to the point at which a claim is made, and it will be that limited sum for which security can be sought. Vessel running costs will continue to be incurred, and Owners will of course not be entitled to earn income from the vessel on the spot market, as they will remain bound under the charterparty with Charterers. Therefore, if Charterers are in financial difficulties, this option can leave Owners with significant, and increasing, exposure.
– Option B:
Alternatively, Owners may accept early redelivery, terminate the charterparty, and bring a claim for damages in arbitration at court, such claim generally being for the difference between the contractual rate of hire and that obtainable on the open market from the date of termination until the end of the original charterparty period. Owners will be obliged to mitigate, but in doing so will at least be earning revenue from the vessel.
- After electing to terminate in such circumstances, Owners would be able to seek security for their full claim arising from termination of the charterparty, which if obtained could offer significant protection. Owners’ loss and damage due to termination of the charterparty will “crystallise” into a reasonably identifiable range.
- However, there could be lengthy argument between the parties in arbitration or at court over the correct calculation of this range of loss and damage in the future. During this time, Charterers’ assets could be subject to various claims by other creditors, which, in the absence of security, could leave very little against which Owners can enforce any successful award or judgment eventually obtained.
Clearly, there are both advantages and disadvantages to choosing one or other of the abovementioned options. Owners should carefully consider the following matters before making an election: (i) the balance of time remaining until the earliest contractual redelivery date; (ii) prevailing freight market conditions; (iii) the circumstances of the particular charterparty, including the parties’ respective rights and obligations in the event of repudiation; (iv) whether competing claims against Charterers can be identified (for example, from other Owners, financial institutions, and bunker suppliers); and of course (v) the solvency of Charterers. The appropriate strategy for Owners will depend on the circumstances of the particular case.
2. What are the exceptions to owner’s right to elect one option over another?
In the AQUAFAITH, Cooke J clarified the situations where Owners would not be entitled to insist upon performance (as per Option A above), and would instead only be entitled to terminate and to sue for damages (as per Option B). These exceptions were described in White v Carter [1962] in a non-shipping context, and are further discussed below. It will be for the Defaulting Party (relevantly, the Charterers) to prove that an exception is applicable.
(a) No legitimate interest
The first exception is where Owners have no “legitimate interest” in continued performance of the contract. There will be no legitimate interest in performance where to insist upon it would be “wholly unreasonable”, “extremely unreasonable”, or even perhaps “perverse”.
This exception has its basis in equity. Simply put, equity in this sense will prevent or ameliorate the enforcement of a strict right where otherwise there could be an unjust or abusive result.
An example of wholly unreasonable, extremely unreasonable, or perhaps perverse given by Cooke J was THE PUERTO BUITRAGO case. In that case, Owners insisted that Charterers repair the vessel, in strict compliance with the contract, rather than redelivering the vessel, even though such repairs would cost double the value of the ship when repaired and four times as much as its scrap value.
Even a small benefit to Owners would ordinarily be sufficient for the court to be satisfied there is a legitimate interest, such that the Innocent Party is entitled to reject the repudiation. The court will not concern itself with whether or not electing to keep the contract on foot and operational was unreasonable, and will only consider extreme conduct by the Innocent Party.
Some relevant examples of where there could be a substantial benefit in keeping the contract operational would include: (a) difficulties in trading the vessel on the spot market; and (b) the potential insolvency of Charterers. With respect to the later, Owners in the AQUAFAITH successfully argued that as Charterers were in financial difficulty, they were at risk that Charterers would direct their limited funds to meet obligations to other parties, whilst delaying payment of any sums owing to the Owners until assessment at arbitration of what was due in damages. However, as mentioned in Section 1 above, this may not necessarily be an appropriate strategy in all circumstances.
(b) Owners’ proper performance is reliant upon Charterers performing
The second exception is where the Innocent Party’s own proper performance is reliant upon the Defaulting Party performing.
It could be said that if Charterers did not provide and pay for bunkers, Owners could not ordinarily perform their own contractual obligations and would have to accept the repudiation. However, Owners could simply stem the vessel and charge the Charterers that cost. Equally, if Charterer’s did not give orders in relation to the employment of the vessel, it might be said that Owners could not perform. Nevertheless, Owners could simply maintain the vessel’s position, awaiting orders. In either case, Owners would not be reliant on Charterer’s performance to continue to properly perform themselves.
Whether Owners can carry out their own obligations under the contract following a repudiatory breach will depend on the type of contract. The rights and obligations of the parties under a Demise Charterparty will not be the same as those under a Time Charterparty. For example, in the THE PUERTO BUITRAGO the ship was abandoned by Demise Charterers, and Owners were obliged to put their own personnel on board. This would bring the charterparty to an end as the vessel would not longer be in Demise Charterers’ possession. Owners could not continue to claim hire in such circumstances. It is notable that Cooke J’s decision should be applicable to the subject matter of contracts other than charterparties.
3. Forcing charterers to perform
In the AQUAFAITH, Owners initially sought an award at arbitration to declare that they were entitled to refuse redelivery and could hold Charterers liable for hire for the balance of the minimum hire period. Owners lost, and then appealed the case to Cooke J in the High Court, where they won.
Cooke J noted in his decision that the essential issue was whether the Innocent Party could perform, even if the Defaulting Party refuses to do so. In such circumstances, Charterers could be held to the contract. Note that to be restrained from breaching the contract in this manner is not the same as being forced to perform. However, Charterers should be aware in practical terms the effect may be equivalent, as if Charterers are not entitle to redeliver, they may have no option but to find gainful employment for the vessel (see LauritzenCool v Lady Navigation [2005]).
For further information, please contact:
Brian Nash, Partner, Clyde & Co
Sophie Drake, Clyde & Co