Time Charters. Termination. Available options Last updated 14-Aug-2014

It might be, but it never has been, the law that a person is only entitled to enforce his contractual rights in a reasonable way and that a court will not support an attempt to enforce them in an unreasonable way. One reason why that is not the law is no doubt because it was thought that it would create too much uncertainty to require the court to decide whether it is reasonable or equitable to allow a party to enforce his full rights under a contract.
Per Lord Reid in White & Carter (Councils) Ltd v McGregor [1961] 3 All ER 1178, at p.1182.

Option to disregard repudiation

In recent decision of the Commercial Court in Isabella Shipowner SA v Shagang Shipping Co Ltd (the Aquafaith) [2012] EWHC 1077, the shipowners appealed from the arbitrator’s award on the question of law, whether they were entitled to refuse early re-delivery of the vessel and affirm the charter, or whether they were bound in law to accept early re-delivery and merely entitled to sue for damages. (follow these links to read more on the general rule on the right of innocient party to elect whether to affirm or disregard to accept repudiation.)

Under a charterparty on amended NYPE form dated 19 September 2006 (the charter), the vessel was chartered by the owners to the defendant charterers for a duration of 59-61 months. The charter also included an express warranty "that the vessel will not be re-delivered before the minimum period of 59 months". Charterers repudiated the charter and made it plain that they had no further use for the vessel for the balance of the minimum period of charter, i.e. 95 days. The owners refused such re-delivery and starter arbitration, holding the charterers liable for hire for the balance of the minimum period. The held that the owners were required to take re-delivery of the vessel, trade the vessel on the spot market by way of mitigation and claim damages in respect of their loss.

Cooke J in line with decision in White & Carter (Councils) Ltd v McGregor [1961] 3 All ER 1178, stated that the owners can rightfully claim hire from the charterers under this time charter without the need for the charterers to do anything under the charter, as long as the ship is available to the charterers for any order they wish to give. If owners elected to keep the contract alive, they do not need the charterers to do anything in order for them to complete their side of the bargain and thus be able to earn the hire in question. The earning of hire after purported redelivery was not dependent on any performance by the charterers of their obligations.

On proper analysis of preceding case law on the subject the judge concluded that this case was outside of any limitation on otherwise unfettered right of the injured party to elect to disregard repudiation and keep the contract in full effect, as it was held by majority of the House of Lords in White & Carter (Councils) Ltd v McGregor [1961] 3 All ER 1178. The learned judge agreed with Simon J definition in The Dynamic [2003] EWHC 1936 (Comm) of an exception to the general rule that the innocent party has an option whether or not to accept a repudiation, with the following characteristics:

1. The burden is on the contract breaker to show that the innocent party has no legitimate interest in performing the contract rather than claiming damages.
2. This burden is not discharged merely by showing that the benefit to the other party is small in comparison to the loss to the contract breaker.
3. The exception to the general rule applies only in extreme cases: where damages would be an adequate remedy and where an election to keep the contract alive would be unreasonable.

The owners’ legitimate interest to continue performance under the charter was fortified by the assertion of risk of the charterers, who were in financial difficulty, directing their limited funds to meet obligations to other parties. Moreover while insisting on repudiation the contract-breaker was seeking to be shot of the difficulties in trading the vessel by imposing that burden on the innocent party, as well as depriving him of the assured income of advance hire.

The judge also noted in support to his decision that in the most recent edition of Time Charters (6th Edition, 2008), the authors state that the principle of limitation to general rule recognised in The Puerto Buitrago and The Alaskan Trader is applicable only in very clear cases. Moreover, the passage in fifth editions of the work which, after referring to White and Carter, The Puerto Buitrago and The Odenfeld continued that

…it seems that once it becomes clear that there is no room for a change of mind by the charterers, the courts are likely to insist that the owners accept the re-delivery and sue for damages – assuming that damages will be an adequate remedy.

which words have been completely removed from 6th edition.

It was further explained on the facts found in this case why the damages in this and similar cases might be an inadequate remedy.

Instead of paying hire up front, semi-monthly in advance, with all the cashflow implications of that, the charterers wished to compel the owners to trade the vessel in mitigation of loss and leave themselves liberty to argue about the quantum of damages at the end of the relevant period and pay whatever they could at that stage. The existence of expert reports produced by the parties, as recorded in the Reasons, showed that the views of the parties about the state of the market were not identical, giving rise to the possibility of significant argument as to proper mitigation of loss and the extent of damages recoverable. Should the charterers choose to do so, payment of any liability could be postponed until the conclusion of an arbitration, months away, by which time the charterers could conceivably have become insolvent or arguments used to secure a settlement discount on any loss claimed. The owners wished to guard against that by maintaining the charter with the ability to claim hire and sue/proceed in arbitration for it on any default, without the propensity for argument as to failure to mitigate damages.

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