Is payment of hire a condition: a long-standing controversy resolved

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Kuwait Rocks Co v AMN Bulkcarriers Inc (The Astra) [2013] EWHC 865 (Comm)

On 18 April 2013, Flaux J handed down his judgment in Kuwait Rocks Co v AMN Bulkcarriers Inc (The Astra). The judgment provides long-awaited clarification that clause 5 of the NYPE form (the obligation to pay hire) is a condition of the contract, the breach of which entitles Owners to recover both unpaid hire as at the date of withdrawal and damages for future loss of earnings.

Reed Smith acted for the successful Owners.

Facts

The "ASTRA" was the subject of a five-year time charter on an amended NYPE 1946 form. Clause 5 of the charter required hire to be paid punctually and regularly in advance, failing which Owners could elect to withdraw the vessel and terminate the charter. Clause 31 was an anti-technicality provision, requiring Owners to give Charterers two banking days’ notice to rectify any failure in payment which was due to oversight, negligence, error or omission.

After a history of problems, Owners issued an anti-technicality notice in respect of unpaid hire, and when payment was not received the Owners withdrew the vessel and held the Charterers in repudiatory breach of contract.

Owners commenced arbitration and claimed damages for loss of earnings for the period from the date of withdrawal to the earliest date when the vessel could have been properly redelivered by Charterers. They argued that the obligation to pay hire under clause 5 was a condition, breach of which entitled Owners to those damages. The Tribunal rejected this argument, but did find that Owners were entitled to damages because, inter alia, the Charterers had, by their conduct, repudiated the charter.

It was Charterers’ appeal, but Owners also contended in their Respondents’ Notice that the Tribunal had erred in finding that clause 5 was not a condition of the charter. Although this issue was academic, because Charterers’ appeal was dismissed on other grounds, Flaux J decided the point at the request of both parties.

What is a condition?

A condition is an essential contract term, breach of which entitles the innocent party to treat himself as discharged from further performance of the contract, even if he has suffered no prejudice as a result of the breach. The innocent party can also claim damages for any loss suffered.

The position before Kuwait Rocks Co v AMN Bulkcarriers Inc

The generally accepted position prior to this case was that although non-payment of hire may allow the owner to withdraw the vessel and to claim for unpaid hire, an owner would have to go further, and show a repudiatory breach of contract, i.e., that the charterer had evinced an intention no longer to be bound by the contract terms, to recover additional damages. This is no longer the position.

Very few previous cases considered whether payment of hire is a condition of the contract, and none considered whether breach would entitle owners to damages for loss of future earnings. The issue does not arise on a rising market, where owners would have no need to claim damages and indeed might profit from withdrawal; it will only arise in a market where owners are likely to suffer loss and damage as a result of early withdrawal.

Time Charters, whilst noting conflicting views, expresses the opinion that the better view of the authorities is that clause 5 is not a condition; it simply has one characteristic of a condition, i.e., that any breach gives rise to a right of termination.

Flaux J’s judgment

Flaux J found that clause 5 was a condition of the contract. His key reasons were:

  1. Owners were given a clear right to withdraw if Charterers failed to make punctual payment of hire. Failure was sufficiently serious to allow Owners to terminate, indicating that such failure went to the root of the contract. On that basis, the provision was a condition.
  2. In commercial contracts, time will generally be of the essence where a provision requires something to be done, or payment to be made by a certain time. Where time is of the essence, such a provision is a condition of the contract.
  3. Certainty is essential in commercial transactions. If owners could only claim damages after withdrawal where charterers’ conduct was repudiatory, there would be no certainty as to when exactly they could do so. They would need to prove charterers’ repudiation, which is not always straightforward. Charterers must also have certainty: if they fail to pay hire promptly and owners withdraw, they should know that they will be liable for damages for loss of bargain.

Flaux J took the view that the authorities supported this interpretation of clause 5. On the commentary in Time Charters, he said that this was both contrary to the line of judicial authority and also "somewhat heretical."

He therefore concluded that the obligation to pay hire, whether on its own or in conjunction with an anti-technicality clause, is a condition of a time charter party. This means that breach of that condition, i.e., failure to pay hire, entitles the owner to terminate the contract and claim damages for any loss suffered, without more.

Comment

The decision provides much needed certainty in this area.

In the current market, where charterers regularly fail, or find themselves unable, to pay hire, the issue of whether owners can claim damages is crucial to their decision as to whether to withdraw the vessel, or to continue with the charter.

This is an important question which has required clarification for some time. Whether this case is considered by a higher court, or remains as a first instance decision, it appears that this question will finally be resolved.

For further information, please contact Andrew Taylor or your usual Reed Smith lawyer.