An acceptable degree of uncertainty
A recent case on payment of time charter hire inspires a reflection on the role of certainty in maritime law.
Certainty, we are told, is a good thing, as a matter of both legal principle and commercial common sense. Certainty means predictability, which companies and merchants value because it allows them to plan and make decisions in the knowledge of the likely outcomes. This has been a major feature of English commercial law since at least the time of Lord Mansfield.
However, certainty is not absolute, it is not an end in itself, and in recent years one could be forgiven for thinking that the importance of certainty was under attack. Lord Bingham clearly thought so in his strong dissent in The Golden Victory : "the existing decision undermines the quality of certainty which is a traditional strength and major selling point of English commercial law". However, the majority decision was recently endorsed by the Supreme Court in Bunge SA v Nidera BV.
The Court of Appeal had to grapple with the issue of certainty (amongst others) in deciding recently whether or not the payment of time charter hire is a condition, that is to say a term of a contract any breach of which (however trivial) gives the innocent party the right both to terminate the contract and to claim damages for loss of bargain.
In Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS, the Court of Appeal (with Gross LJ giving the leading judgment) upheld the decision of the Judge at first instance (Popplewell J) that payment of hire was not a condition. In doing so, the Court overruled the decision of Flaux J in The Astra and restored what was the general understanding of the position, at least since the judgment in The Brimnes in 1973. Normal service, it might be said, has been resumed, and indeed the importance of having appellate courts reaffirmed.
Much has already been written on the reasons for this decision, and even more on the previous conflicting judgments of Flaux J and Popplewell J. For shipowners and charterers, however, and to a large extent for those advising them, the bottom line is all that matters. Non-payment of hire in itself only gives rise to the contractual right to withdraw the vessel; it does not entitle owners to additional damages such as (if the market has gone down) the difference between the contract and market rates of hire for the balance of the charter period.
If owners do not like this result, they can negotiate for an express right to damages for loss of bargain, such as that given in the NYPE 2015 revision (and as is common in bareboat charters). Charterers, conversely, would be advised to resist such a term, probably successfully in the current market.
But if no such term is agreed, one is left with uncertainty as to when an owner faced with a non-paying time charterer can terminate and claim damages. The right to withdraw the vessel exists, which provides a degree of certainty. However, as can be seen from the other half of the judgment in Spar Shipping, determining when damages can be claimed remains fraught with uncertainty. This is because it requires owners to prove a renunciation of the contract by charterers.
A renunciation occurs where one party to a contract demonstrates an intention to commit a repudiatory breach; hence it is often called an anticipatory repudiatory breach. A repudiatory breach is one going to the root of the contract or depriving the innocent party of substantially the whole benefit of the contract or turning the contract into something radically different from that which was agreed.
Renunciation may be inferred from both the nature of and reasons for past breaches of the contract (although not in themselves sufficient to justify termination) and evidence of unwillingness or inability to perform in the future. This involves what the Master of the Rolls referred to as "a multifactorial assessment". It may also be summarised as looking at the totality of the party's conduct – what they have done, what they have not done, and the reasons for each, as well as what they have said, and occasionally external factors.
There are obvious cases where it is clear that a party has no intention of performing, or is simply unable to perform, in one or more key respects. Spar Shipping itself was such a case, the key consideration being the charterer's unwillingness and/or inability to pay hire punctually in advance.
However, in many cases, the position is far less clear and a difficult judgement call is required.
- Has the charterer missed or delayed the last couple of payments because of temporary cash-flow difficulties or is this evidence of insolvency?
- Are excessive deductions being made opportunistically or because similar deductions have been made down the chain?
- What if there has been no default yet but the other party is seeking court protection (e.g. The Sanko Iris)?
- Are rumours of financial difficulties enough?
- What if a related company has applied for court protection (e.g. The STX Mumbai)?
- How many unpaid instalments are sufficient if the charterer says nothing at all?
The problems are particularly acute when the vessel is on a laden voyage. Withdrawing an empty ship at least means the owner can put her straight back onto the market. However, cases such as The Kos and The Bulk Chile notwithstanding, withdrawing a laden vessel with no certainty of a claim for damages exposes the owner to potentially significant and unrecoverable losses. Even if a charter has been renounced, the owner must be careful not to do anything to affirm it (as in the rather unsatisfactory case of The Fortune Plum).
While general guidance is given in Spar Shipping and other authorities, cases of renunciation are ultimately extremely fact-specific and the particular circumstances in which one case was decided are often too different for any useful comparison to be made.
As Gross LJ acknowledged, classifying the obligation to pay hire as a condition would have created greater certainty, although in his view that would have been at the cost of disproportionate consequences flowing from trivial breaches. Because of the difficulties described above in proving renunciation, I am not convinced the Court's decision in Spar Shipping is an entirely satisfactory balance either, and prefer the view that the presence of an anti-technicality clause should make a difference.
A final word on certainty. In his concluding paragraph, Hamblen LJ noted that the law had been settled for 40 years since The Brimnes and that the Court "should be very cautious before departing from such a decision so as to disturb the predictability of the law and detract from its certainty". It seems, though, that a certain uncertainty is also a virtue.