Paul Bugden, Bugden + Co., London

The Claimant (‘Spar’) was the registered owner of three supramax bulk carriers each let on long term time charter to Grand China Shipping (Hong Kong) Co Ltd with guarantees issued by the Defendant as the parent of the charterer.

The charterparties each provided that “If the vessel is off-hire for more than 60 days continuously, Charterers have the option to cancel this Charter Party.”

The charterer got into arrears in payment of hire and in September 2011 Spar withdrew the vessels under the cancellation clause and terminated the charterparties. Spar then commenced suit against the Defendant as guarantor under the guarantees claiming the balance of hire unpaid under the charters and damages for loss of bargain in respect of the unexpired term of the charters.

The Judge had to consider a large number of discrete issues which all raised a number of interesting points of fact and law. The principal issues of general interest are considered below in this note.

The Defendant in the first place submitted that it was not bound at all by the guarantees for various reasons but that if it was so bound it was under no liability in relation to the unexpired periods of the charters. It said the right of withdrawal under the charters was a contractual option but there had been no breach of the charters giving rise to a right to damages at common law for repudiation or renunciation. Spar contended that it was entitled to damages for loss of bargain for such period because payment of hire was a condition of the charters; alternatively if payment of hire was an innominate term, the charterer’s conduct was repudiatory and/or evinced an intention not to pay hire timeously which constituted a renunciation of the charters.

In the further alternative the Defendant challenged the method of calculation of damages. It submitted that damages should not be based on Spar’s actual earnings, but on hire which would have been earned by replacing the charters with time charter employment, albeit that it would have required two consecutive fixtures of 30 months and about 20 months respectively, alternatively a series of shorter charters. This was not an argument that Spar had failed to mitigate its loss by acting unreasonably in not taking such time charter employment for the vessels, but an argument of law that this was the proper measure of damages.

Validity of the guarantees

Whether the signatory had actual authority to bind GCL to the Guarantees was a question governed by Chinese law. The Chinese law experts also addressed principles of apparent authority and ratification, but it was common ground at trail that such issues are not governed by Chinese law but rather by English law as the putative proper law of the contract.

The judge found in the expert evidence that there was no lack of actual authority on the part of the signatory. He also found that the return by the Defendant of the signed Guarantees was a representation that the signatory was authorised to execute them on behalf of the company. That is sufficient to establish reliance on a holding out by the Defendant that the signatory was so authorised. Had he concluded there was no actual authority he would have held the Defendant bound by reason of ostensible authority.

Yet further the judge took the view that in any event, and even absent actual or ostensible authority, ratification by conduct could be inferred without difficulty from silence or inactivity in cases such as this where the principal, by failing to disown the transaction, allowed a state of affairs to come about which is inconsistent with treating the transaction as unauthorized.

Options to cancel – the general approach

A contractual term may, however, provide for termination in the case of breach without the parties intending the consequences to be the same as would arise at common law if the term breached were categorised as a condition. Parties may agree that in the event of breach the innocent party should have the right to terminate the contract, so as to put an end to future performance obligations under the contract, but without intending that the defaulting party should be liable for any consequences of the termination.

Such provisions are concerned solely to provide the innocent party with an option to put an end to his performance obligations, but not to confer a right to claim damages flowing from the termination itself. In such cases it is the innocent party’s election to exercise his option to terminate which is treated as the cause of the termination, and the cause of whatever loss flows from it, not the breach which triggers the innocent party’s right to cancel.

Such an option to cancel leaves unaffected the innocent party’s rights to claim damages, which remain governed by the common law principles set out above. If there has been a repudiatory breach or renunciation, the right to damages is preserved; if there has been no repudiatory breach or renunciation, the option to cancel does not confer a right to damages, in the absence of clear language to the contrary, but merely confers a right to put an end to future performance obligations.

The applicability of these principles to options to cancel is apparent from the Court of Appeal decision in Financings Ltd v Baldock [1963] 2 QB 104. In that case a contract for hire purchase of a truck provided for payment of a deposit and monthly instalments over a period of two years. The hirer failed to pay the first two instalments. The owner terminated the agreement and retook possession of the truck pursuant to clauses 8 and 9 of the contract which provided that if the hirer failed to pay any instalment within 10 days after it had become due “the owner may by written notice forthwith and for all purposes terminate the hiring” and “without notice retake possession” of the truck. Having retaken possession and sold the truck at a loss, the owner claimed damages representing the difference between the two years’ hire due under the contract and the resale price. It was held that the owner was confined to a claim for the two instalments which had fallen due prior to the termination. The owner argued, among other things, that the effect of the clause giving the right to terminate was to elevate the term providing for punctual payment to the status of a condition (see p.108). This argument was rejected. At pp. 110 – 111, Lord Denning said:

“It seems to me that when an agreement of hiring is terminated by virtue of a power contained in it, and the owner retakes the vehicle, he can recover damages for any breach up to the date of termination but not for any breach thereafter, for the simple reason that there are no breaches thereafter. I see no difference in this respect between the letting of a vehicle on hire and the letting of land on a lease. If a lessor, under a proviso for re-entry, re-enters on the ground of non-payment of rent or of disrepair, he gets the arrears of rent up to the date of re-entry and damages for want of repair at that date, but he does not get damages for loss of rent or for breaches of repair thereafter.”

Did this particular option to cancel confer any greater rights than usual?

The judge started with the approach in Financings v Baldock, namely that a contractual termination clause should be treated as an option to cancel which does not confer greater rights to damages at common law than would exist apart from the clause unless there is clear language to that effect.

He found that there is no such clear language in clause 11 or elsewhere in these charters. On the contrary, the language of clause 11, providing for a liberty to withdraw the vessel from service, addresses itself solely towards future performance. Save in relation to future performance the clause neither expands nor restricts the rights of the parties. It did not purport to confer a right to damages where none would otherwise exist, nor to remove a right to damages where such right would otherwise exist. In short it was neutral as to the common law rights of the parties apart from the clause.

Did the presence of the option to withdraw clause serve to make payment of hire a condition?

A clause which merely provides a contractual remedy for default is not naturally to be interpreted as determining what remedies are available if the contractual remedy is not relied on. The judge thought that if it had been intended to introduce a provision to make clear that payment of hire was a condition (in the sense of automatically giving rise to a right to terminate the contract no matter how unimportant the breach and whether repudiatory or not) one would expect it to be framed by reference to the term requiring payment, stating that it was to be treated as a condition or that time of payment was to be of the essence, which was the formula used in the bareboat charter in Parbulk II A/S v Heritage Maritime Ltd SA (The Mahakan)[2012] 1 Lloyd’s Rep 87.

He therefore rejected the submission that the effect of the withdrawal clause is to make payment of hire a condition.

Was payment of hire a condition in the absence of the withdrawal clause.

The critical question which then arose was as such whether payment of hire would be treated as a condition in the absence of the withdrawal clause. On this issue the judge concluded that payment of hire was not a condition. and declined to follow the decision of Flaux J on this point in Kuwait Rocks Co v AMN Bulkcarriers Inc (The Astra) [2013] 2 Lloyd’s Rep 69. The judge gave five reasons for his conclusion in this respect.

Firstly he found force in the point that provision for an express right of withdrawal for failure to pay hire tends to show that the obligation was not otherwise of such a character as to be a condition. The very inclusion of the contractual right of withdrawal for non payment of hire suggests that in its absence there would be no such right. Such a provision would be otiose if the owner had the right at common law to put an end to the contract for any default in payment of hire as a breach of condition.

Secondly, there is the presumption that in mercantile contracts, stipulations as to the time of payment are not to be treated as conditions absent a contrary indication in the contract, of which there is none in these charters.

Thirdly, predicated breaches of the term may range from the trivial to the serious. Default in punctual payment may consist in being marginally late, by accident, causing no loss to owners or loss which is insignificant in the context of the long term charter as a whole. In this respect the payment term carries the hallmarks of an innominate term. Bunge v Tradax establishes that this is not determinative, but nor is it irrelevant. Absent considerations of commercial certainty which dictate a different result, the general approach should be that where predicated breaches of a term may have consequences ranging from the trivial to the serious, that is a strong indication that it is to be treated as an innominate term. This applies as much to a time charter as any other form of contract (see for example Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The Nanfri) [1979] AC 757 at 778F).

Fourthly the judge could not conceive that in the absence of a contractual withdrawal clause, owners and charterers should be taken to have intended that a payment of hire a few minutes late would entitle the owners to throw up a five year charter. It would not satisfy the test for an implied term which Lord Lowry suggested in Bunge v Tradax as a useful guide. The judge did not regard that conclusion as put in doubt by what was said in The Petrofina, The Laconia, The Mihalios Xilas and other cases emphasising the importance to owners of punctual advance payment. Those are good reasons for giving a stringent interpretation to a contractual option to cancel where that is what the parties have bargained for in clear terms; they provide no warrant for supposing that the parties would have had such an intention if they had not contracted for a right of withdrawal in such circumstances.

Although they may also colour the approach to the factual inquiry whether the default deprives the shipowner of substantially the whole benefit of the contract, and may justify setting the bar at which non payment is repudiatory or renunciatory at a lower level than would be the case in relation to payment obligations under contracts of a different nature, the judge could not regard them as sufficient to justify any failure to pay hire punctually being treated as allowing owners to put an end to a long term time charter in the absence of express agreement.

Fifthly, the judge did not regard considerations of commercial certainty as pointing to a different conclusion. As Lord Roskill observed in Bunge v Tradax certainty is a desideratum which must be counterbalanced with the need not to impose liability for a trivial breach in undeserving cases. Moreover the judge considered that a very considerable measure of certainty is conferred by the withdrawal clause itself as an option to cancel.

There is no uncertainty over the ability to put an end to future performance. It is true that if payment of hire is an innominate term and the right to terminate only entitles owners to termination damages if the breach is repudiatory, the owners will not have absolute certainty in a fallen market in determining when the exact moment comes at which exercising the right will enable them to recover damages for the loss of bargain. But that is an uncertainty regularly faced by commercial parties whose contracts commonly contain innominate terms, and charterparties contain many such terms (for example as to seaworthiness).

The judge could see no reason why shipowners should be treated more favourably in this respect than others; owners of vessels are not unique in the commercial world in relying on prompt payment by their contractual counterparty to finance their performance of the contract.

 Absent payment of hire as a condition was there in any event a renunciation by the charterer?

The judge found that an objective observer would have concluded in September 2011 that the charterer was unwilling, because it was unable, to make punctual payments of hire for the balance of the charter periods, or to pay off the arrears, unless and until the market rose again to above March 2010 levels (which might never occur); and that such defaults would likely be substantial, involving delays of payments measured in weeks or months and arrears of the order of US$2 million or more. The avowed expectation that the position would be remedied by capital and cash flow injection of funds in October 2011 would properly have been discounted by a reasonable owner in Spar’s position in the light of the past history of broken promises and confounded “expectations”, and by the lack of any specific assurances.

In those circumstances there was objectively evinced an intention not to perform the charters in a way which deprived Spar of substantially their whole benefit of their further performance. The charterer had renounced the charterparties at the date of the termination notices and that the notices were to be treated as an election to terminate the charters preserving Spar’s common law right to damages for loss of bargain arising out of such termination.

In arriving at his conclusions in this respect the judge helpfully elaborated on some differences between Renunciation and Repudiation as follows:

(1) Conduct is repudiatory if it deprives the innocent party of substantially the whole of the benefit he is intended to receive as consideration for performance of his future obligations under the contract. Although different formulations or metaphors have been used, notably whether the breach goes to the root of the contract, these are merely different ways of expressing the “substantially the whole benefit” test: Hongkong Fir at pp. 66, 72; The Nanfri at pp. 778G-779D.

(2) Conduct is renunciatory if it evinces an intention to commit a repudiatory breach, that is to say if it would lead a reasonable person to the conclusion that the party does not intend to perform his future obligations where the failure to perform such obligations when they fell due would be repudiatory: Universal Carriers v Citati at p. 436, The Afovosi at p. 341 col 2.

(3) Evincing an intention to perform but in a manner which is substantially inconsistent with the contractual terms is evincing an intention not to perform: Ross T Smyth & Co Ltd v T.D. Bailey, Son & Co [1940] 3 All ER 60, 72. Whether such conduct is renunciatory depends upon whether the threatened difference in performance is repudiatory. It was not here necessary to explore the position where the innocent party misappreciates the nature or scope of his obligations (see Woodar Investment Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277 and Chilean Nitrate Sales Corporation v Marine Transportation Co Ltd (The Hermosa) [1982] 1 Lloyd’s Rep 570, 572-3).

(4) An intention to perform connotes a willingness to perform, but willingness in this context does not mean a desire to perform despite an inability to do so. As Devlin J put it in Universal Carriers v Citati at p. 437, to say: “I would like to but I cannot” negatives intent just as much as “I will not.”

It follows from these principles that conduct comprising a breach or breaches of obligations which have fallen due may be insufficient to be a repudiation but nevertheless be conduct which is a renunciation because it would lead the reasonable observer to conclude that there was an intention not to perform in the future, and the past and threatened future breaches taken together would be repudiatory.

Such conduct is not infrequently referred to in the cases simply as a repudiation, but is more accurately described as a renunciation. The reason why a defaulting party commits an actual breach is generally irrelevant to whether it constitutes a breach, or whether the breach is a repudiation. But the reason may be highly relevant to what such breach would lead the reasonable observer to conclude about the defaulting party’s intentions in relation to future performance, and therefore to the issue of renunciation. Often the question whether conduct is a renunciation falls to be judged by reference to the defaulting party’s intention which is objectively evinced both by past breaches and by other words and conduct.

Damages – available market

The judge’s starting point was that where a charterer wrongfully repudiates a time charter and there is an available market at the date of termination in which the owner may let the vessel on time charter for the unexpired term, on materially equivalent terms save as to hire, damages are to be assessed by reference to the difference between the charterparty rate of hire and the rate for such substitute charter, irrespective of what employment the owner chooses for the vessel. Such is the principle established in Koch Marine Inc. v D’Amica Societa di Navigazione ARL (The Elena D’Amico) [1980] 1 Lloyd’s Rep 75 (for the converse situation of an owner’s repudiation).

It was also common ground that at the date of the termination of the charters in September 2011, there was no market for a substitute time charter for the minimum unexpired term of those charters, which would have expired in December 2015 but that there was throughout the period between September 2011 and thereafter a market for time charters of the vessels for shorter periods, such that Spar would have been able, had they so chosen, to earn hire from time charter employment of the vessels for two or more successive charters and Spar had acted reasonably in its choice of employment for the vessels and had not failed to mitigate its loss.

The Defendant submitted that in those circumstances Spar’s damages were to be calculated by reference to the market rate of hire obtainable under successive time charters, irrespective of the actual employment of the vessels. Spar contended that once it was established that there was no market for a time charter for the full unexpired term at the date of termination, the damages were to be measured by reference to the actual earnings of the vessels to date and projected actual earnings from now to expiry.

The judge found that where at the date of termination there is no market available for a replacement charter for the full length of the unexpired term, there is no “available market”. This is because a time charter for a particular period reflects the appetite for risk which the owner and charterer are willing to take for that period. The agreed rate of hire is fixed for the period of the charter, during which market rates, whether on the spot market or for shorter term time charters, may vary up or down. Each party takes the risk that the hire locked in for the fixed term will prove more beneficial or burdensome than would have been the case had they fixed for a shorter period and been free, or required, to go into the market before the end of the fixed term. The length of the period for which each party is willing to take this risk is an essential element of the bargain.

One element in determining the rate of hire will be a reflection of that risk. For these reasons the length of charters available in the market is an essential element in determining whether there is an available market for a replacement charter. A six month time charter represents a different bargain from a two year charter because of the different nature of the risk each party is willing to run. If the unexpired term is two years and there is no appetite in the market to fix for longer than six months, the owner cannot replace what he has lost in specie. Four successive six month charters are not a like for like replacement for a two year charter. His lost contractual rights cannot therefore be valued by reference to a market in which he can replace them.

Once this is recognised, it is apparent that if at the date of termination there is no available market for a substitute charter of the length of the unexpired term of the broken charter, there is no question of the owner breaking the chain of causation in his choice of employment for the vessel over the unexpired term. He cannot replace the bargain he has lost. He has to choose to mitigate his loss by employing the vessel in a different kind of revenue earning contract. It follows that absent any argument of failure to mitigate, the owner’s loss in such a situation is to be calculated by reference to his actual earnings, irrespective of the availability of a market for two or more successive charters for the unexpired term.

The availability of a market for shorter charters does not constitute an available market in which he can replace his lost bargain. Shorter time charters are merely one of a number of forms of substitute employment by which the owner may mitigate the loss caused by the charterer’s breach in circumstances where there is no ability to replace the lost bargain with a like for like replacement.

A failure to replace the lost bargain with a series of successive shorter time charters does not break the chain of causation any more than a choice to employ the vessel on the spot market. Neither reflects an ability to replace the lost bargain in specie. Provided the course taken by the owner is reasonable, his actual earnings from the subsequent employment of the vessel in either manner, or a combination of the two, or any other combination of reasonable methods of earning revenue from the vessel, are legally caused by the charterer’s breach; and the amount by which actual earnings in such employment fall short of the hire which would have been earned under the broken charter is the measure of loss naturally arising out of the charterer’s breach.