Legal Briefing

Repudiation, anticipatory breach and conditions in a contract for services

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Public Sector | 01 July 2013

Kuwait Rocks Company v AMN Bulkcarriers Inc [2013]: in considering that a time charterparty is essentially a contract for the provision of services, the Commercial Court has held that a particular clause, that of the payment of hire, is a condition. The case concerns the interpretation of the hire clause in the NYPE 1946 charter and will be of interest to those who charter vessels using similar clauses. Those in the offshore oil and gas sector are used to the BIMCO Supplytime charter, which has specific procedures for withdrawal, but these clauses can be amended. Following this case, under an amended Supplytime or a bespoke charter, owners may be able to claim damages for the unexpired length of the charter following withdrawal arising out of late payment of hire.


THE FACTS

The owners chartered the vessel the MV Astra to the charterers for a period of five years, the relevant terms of the charterparty were:

Clause 5: ‘Payment of… hire to be in London… in cash in United States currency 30 days in advance for the last 30 days or part of same… otherwise failing the punctual and regular payment of the hire… or any breach of this Charter Party, the Owners shall be at liberty to withdraw the vessel from the service of the Charterers without prejudice to any claim [the Owners] may otherwise have on the Charterers…’ (emphasis added)

Clause 31: ‘… where there is any failure to make “punctual and regular payment” due to oversight or negligence or error or omission of Charterers’ employees, bankers or agents, Owners shall notify Charterers in writing where upon Charterers will have two banking days to rectify the failure, where so rectified the payment shall stand as punctual and regular payment.’

It is arguable that it has been generally accepted as industry practice (until this case) that late payment of hire was not a breach of a condition and in order for the owners to claim damages for the unexpired length of the charter, they had to show that the charterers were in repudiatory breach which was accepted by the owners giving rise to the owners’ right to claim for loss 
of bargain.

In Kuwait Rocks, the Court considered whether the clause in respect of payment of hire was a condition of the contract, breach of which entitled the owners to withdraw the vessel and claim damages for loss of bargain. Although reviewing the case law in respect of payment of hire under a time charter Flaux J helpfully sets out an overview of repudiation and what makes a condition a condition.

Hire was initially $28,600 per day and the charterers at various times had tried to renegotiate a reduction of the amount of hire in a falling market. The parties agreed an addendum to the charter reducing the hire to $21,500 per day and included a compensation clause requiring the charterers to pay the owners compensation for ‘future loss of earnings in respect of the unexpired period of the Charter’ on termination or cancellation by reason of ‘any breach’. The charterers failed to pay hire and the owners eventually advised that they withdrew the vessel and reserved their right to ‘treat the charterers’ conduct as repudiatory’.

The case was an appeal from an Arbitration Award under s69 of the Arbitration Act on two questions of law. The Tribunal had considered that the generally accepted position was that failure to pay hire is not a breach of a condition, but did consider that the charterers were in repudiatory breach and the owners were entitled to recover damages.

We shall only consider the first question of law, the second relating to whether the compensation clause was a penalty clause – the court held it was not.

The first question was:

‘Whether evincing an intention to perform a contract in a manner which is inconsistent in some non-fundamental way with the terms of the contract, and which does not deprive the innocent party of substantially the whole of the benefit of the contract is capable in law of amounting to a repudiation or renunciation.’

THE TEST FOR REPUDIATION/RENUNCIATION

The Tribunal and Flaux J referred to the following cases.

In Ross T Smyth & Co v TD Bailey & Son [1940] Lord Wright stated:

‘I do not say that it is necessary to show that the party alleged to have repudiated should have an actual intention not to fulfil the contract. He may intend in fact to fulfil it, but may be determined to do so only in a manner substantially inconsistent with his obligations…’

Lord Justice Buckley at page 380 of 
Decro-Wall International SA v Practitioners in Marketing Ltd [1971] stated:

‘To constitute repudiation, the threatened breach must be such as to deprive the injured party of a substantial part of the benefit to which he is entitled under the contract. It has been said that the breach must be of an essential term, or of a fundamental term of the contract, or that it must go to the root of the contract.’

Lord Buckley provided his own test:

‘Will the consequences of the breach be such that it would be unfair to the injured party to hold him to the contract and leave him to his remedy in damages as when a breach or breaches may occur? If this would be so, then a repudiation has taken place.’

In Kuwait Rocks, the charterers’ argument on appeal was that the Tribunal had applied a ‘less’ stringent test than that applied by Lord Wilberforce in Federal Commerce & Navigation Cov Molena Alpha Inc (the ‘Nanfri’) [1979] at 778-9. Lord Wilberforce quoted Ross and Decro and also approved the test by Lord Justice Diplock in Hong Kong Fir Shipping v Kawasaki Kishen Kaisha [1962], whether the breach was such as to deprive:

‘… the charterers of substantially the whole benefit which was the intention of the parties that the charterers should obtain from the further performance of their own contractual undertaking’.

Flaux J rejected the argument that the test in the Nanfri was a different test and held that there was not a ‘Nanfri gloss’. Rather, that there were ‘three ways of enunciating the relevant legal principle’.

On the basis of the charterers’ conduct in the subject case, the Tribunal found that the owners’ claim for repudiatory breach succeeded and the owners were entitled to recover damages.

Flaux J upheld the Tribunal’s view and 
held that the Tribunal was ‘entitled’ to conclude that:

‘… on the totality of the evidence the charterers intended to perform the balance of the charterparty in a manner not consistent with it’.

The Tribunal had applied the correct test and he dismissed the question on appeal.

IS THE OBLIGATION TO MAKE PUNCTUAL PAYMENT OF HIRE A CONDITION

By way of a respondent’s notice, the owners’ position was that the Tribunal should also have decided that the owners could recover damages on the basis that the hire clause was a condition and that the owners could recover damages for future loss of earnings arising out of breach of that condition.

Although Flaux J was specifically considering the meaning of condition in light of time charterparty terms, he reviewed the classification of contractual terms beginning with the judgement of Diplock LJ in Hong Kong Fir and the difference between a ‘condition’ and a ‘warranty’.

‘A simple contractual undertaking… every breach of which must give rise to an event which will deprive “the innocent party” of substantially the whole benefit is a condition…’

A warranty on the other hand would be:

‘… a contractual undertaking… no breach of which can give rise to an event which will deprive “the innocent party” of substantially the whole benefit which it was intended that he should obtain from the contract’.

Flaux J went on to state:

‘… where there is a breach of condition, the innocent party does not have to demonstrate that he is being deprived of substantially the whole benefit of the contract’.

Flaux J continued that:

‘… in many [authorities] the discussion is whether the particular term is an “essential term” of the contract or a term which “makes time of the essence”’.

In Flaux J’s judgement, these phrases are:

‘… equally describing a “condition” of the contract in the classic sense identified by Lord Diplock in Hong Kong Fir’.

Confusion began with the decision in Empresa Cubana de Fletes v Lagonisti Shipping Co Ltd (‘The Georgios C’) [1971]. Here, charterers paid hire late. Hire was due on the Saturday. On the Friday the charterers instructed payment to be made on the following Monday. The owners had instructed their bank on the Monday not to accept payment. Owners argued that they were entitled to withdraw the vessel. The Court of Appeal held that the owners were not entitled to withdraw as payment was tendered – ‘default in payment’ meant ‘while there is default in payment’ and owners could only withdraw if payment was not made or tendered.

Lord Denning’s finding at 504D in the Court of Appeal was that ‘default in payment’ only allows the other party a right to determine the contract if there is an express provision giving the right to determine, or if the 
non-payment is such to amount to a repudiation of the contract.

In Tenax Steamship v Reinante Transoceanica Navegacion SA (‘The Brimnes’) [1973], Lord Brandon on the facts held that the owners served the notice of withdrawal after the due date of hire and before the late hire payment was received. The charterers appealed on the basis that payment was made before withdrawal and that therefore theGeorgios C should be followed. The owners cross appealed against Lord Brandon’s finding that the owners were not entitled to withdraw on the basis that consistent late payment, viewed as a whole, amounted to a repudiation of the charter. The owners’ position was that the hire clause was an ‘essential term’, breach of which entitled the owners to terminate the charter.

Lord Denning’s judgment in the Georgios C was cited by Brandon J in the Brimnes as authority to say that the obligation to pay hire by the due date was not a condition or an essential term.

The Court of Appeal in the Brimnes upheld Brandon J’s conclusion that ‘failing punctual… payment’ meant that, even if a notice of withdrawal was served after the late payment was received, the owners were still entitled to withdraw the vessel.

Flaux J did not consider that the Brimnes directly dealt with ‘the essential term issue’.

In Mardorf Peach & Co Ltd v Attica Sea Carriers Corporation(‘The Laconia’) [1977], hire fell due on the Sunday. The charterers paid on the Monday and the owners withdrew the vessel on the Monday night. The Tribunal and the court of first instance held that the owners were entitled to withdraw. The Court of Appeal relied on the Georgios C and found that the hire clause was a forfeiture clause which was not enforceable if the charterers had remedied the breach by payment before the notice of withdrawal was given.

The House of Lords in the Laconia reversed the Court of Appeal, specifically overruled the Georgios C and followed the Brimnes, ie once there had been a breach by failure to make a punctual payment, it was not remediable and, subject to waiver, the owners were entitled to withdraw the vessel even if the payment is late. There was no discussion of a condition, but there was discussion of the requirement for certainty in commercial contracts.

Flaux J reviewed the case law in respect 
of certainty and cited Lord Salmon at 1032B-G of The Mihalios Xilas [1978] ‘certainty of meaning is of primary importance in all commercial transactions’.

In reviewing the nature of the time charterparty as a contract for the provision of services, Flaux J highlighted that the cases in the 1970s and 1980s on withdrawal clauses did not really focus on whether the clause was a condition or not. He proposed that the reason is that this was a time of rising market rates. Once the owners had withdrawn the vessel and rehired on a rising market, ‘there was no need for the owner to consider whether he had suffered a loss’. The cases discussed the withdrawal of the vessel and the right of the owners to withdraw the vessel 
rather than whether the hire clause was 
a condition or an essential term.

One of the issues in the Afovos Shipping Co SA v R Pagnan (‘The Afovos’) [1983] was whether late payment was capable of being an anticipatory breach. There was a grace period of 48 hours triggered by owners serving notice that they would not withdraw the vessel if the hire was paid within that 48 hours. Due to an error, the hire was not paid but owners served their notice of withdrawal before the expiry of the 48 hours notice period. Owners argued that at the time the notice was served, the charterers were in anticipatory breach as the charterers could not have paid in time. 
Lord Diplock stated that ‘although failure is a breach it is not converted into fundamental breach’, the doctrine of anticipatory breach applied only to what he described as ‘fundamental’ breach, ie repudiatory breach. In considering the second part of the hire clause, he stated obiter that:

‘… [the owners] are entitled to treat the breach when it occurs as a breach of condition and so giving them the right to elect to treat… [the contract as at 
an end]’.

Flaux J considered that the Afovos and other cases reflect that the obligation to pay hire is an essential term or ‘condition’ in the sense in which that expression is used in the law of contract, a term any breach of which entitles the innocent party to treat the contract as at an end.

In Stocznia Gdanska SA v Latvian Shipping Company [2002], a case arising out of a shipbuilding contract, the clause in respect of payment of instalments provided that if the buyer defaulted in payment of any instalment for 21 days after payment was due, the seller was entitled to rescind the contract. The anti technicality clause in Kuwait Rocks (clause 31) is to the same effect. Relying on the Georgios C, the buyer argued that time for payment is not normally a condition of the contract. In Stocznia Gdanska v Gear Bulk Holdings [2009], the owners exercised their right to terminate on the shipyard’s failure to carry out work and sought damages for loss of bargain. The shipyard argued that the termination clauses were a complete code and on termination there was no right to damages. The yard’s argument was unsuccessful.

Flaux J concluded that the obligation to make punctual payment is an essential term or ‘condition’… a term any breach of which entitles the owners to withdraw and claim damages for loss of bargain.

Flaux J distinguished the Brimnes on the basis that there was no anti technicality clause in the Brimnes case. He considered that the grace period makes payment time of the essence. He goes further and finds that even if the clause 31 (the anti technicality clause) was not present, he would decline to follow the Brimnes for the following reasons:

  1. Brandon J’s finding that the hire clause was not an essential term cannot be reconciled with the later House of Lords authorities;
  2. Brandon J’s decision was based on the Georgios C which was overruled;
  3. punctual payment of hire has considerable commercial importance;
  4. the importance of certainty on commercial contracts;
  5. judicial support from the Stocznia cases.

Closer to home, vessel charters used in the offshore industry are invariably subject to English law. Those contracting using a similar hire clause may now need to consider the implications of this case.

By Rose Marie O’Donnell, 
associate, Brodies LLP.

E-mail: rosemarie.odonnell@brodies.com.