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English law – Early re-delivery under a time charter

In a case involving early re-delivery the English High Court has allowed owners to affirm the charterparty and hold the charterers liable for hire for the balance of the minimum period of the contract.

Recent times have been turbulent times for the shipping industry and many will be well aware of cases where vessels have been re-delivered to the owners prior to the agreed re-delivery date – usually preceded by a fall in the market.  The usual advice in such circumstances in the recent past was that the re-delivery should be accepted and damages sought for any losses incurred. The decision of the English High Court in The AQUAFAITH1 now shows that course of action may not be necessary.

The facts
The AQUAFAITH was chartered on an amended NYPE Form dated 19th September 2006 for a period of 59-61 months.  The charter included an express warranty “that the vessel will not be re-delivered before the minimum period of 59 months”.  The earliest permissible date of re-delivery was 10th November 2011 but on 6th July 2011 the charterers stated that they would be re-delivering the vessel 94 days prior to the contractual date of re-delivery. There was no debate as to whether the re-delivery was lawful or otherwise. The question was whether the owners were obliged to accept re-delivery and seek damages or, in the alternative, affirm the contract. The parties arbitrated the matter and the arbitrators held that the owners must take re-delivery of the vessel.  The owners appealed that decision to the High Court.

The High Court decision
The general position under English law is that, where a party repudiates a contract, the innocent party can accept that repudiation and claim damages or, following the decision of White & Carter v. McGregor,2 he can affirm the contract and, if he can then complete the contract himself, without the need for any action on the part of the contract breaker, claim the contract price.3 The decision in White & Carter is subject to an exception, namely, where the innocent party has no interest to insist upon the continuation of the contract.

Dealing with the exception, the judge concluded that the effect of the authorities was that an innocent party would have no legitimate interest in maintaining a contract if damages were an adequate remedy and his insistence on maintaining the contract could be described as “wholly unreasonable”, “extremely unreasonable” or even “perverse”. He pointed out that the owners were at risk, if they did not continue to seek semi-monthly payments of hire in advance, of the charterers directing “their limited funds to meet obligations to other parties” and “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 the failure to mitigate the damages.” The judge pointed out further that the charterers were seeking to “foist” upon the owners the burden of seeking to trade the vessel in a difficult market where a substitute charterparty was “impossible”.

Owners’ election to maintain the charterparty and a right to hire was, therefore, not unreasonable, extremely unreasonable or perverse.

Dependent on all the material facts and the particular legal position, it now appears that the owners have a further weapon in their armoury.  If owners do accept early re-delivery (where such re-delivery is unlawful) and then re-fix the vessel – it is likely that the remuneration for the remaining period would be below that which they initially contracted for.  They will be left seeking damages with the inherent risk that the charterers will not have the assets in order to satisfy any award or judgment.  They will also have the burden of proving their case (especially insofar as mitigating their losses was concerned).  On the other hand, if the owners affirm the contract, they will continue to seek the payment of hire on, for instance, a half monthly basis.  They will not have to mitigate their loss as they will simply be pursuing the matter as a debt. The problem for them is, however, that the vessel may not, in truth, actually be earning anything should the charterers have insufficient funds to pay for their hire. The question to be asked is, therefore, is it better to receive some remuneration, with the prospect of obtaining damages at a later date, or alternatively, continue to charge hire and hope that the charterers will have the funds available to meet the debt?

1Isabella Shipowner SA v. Shagang Shipping Co Ltd (The AQUAFAITH) [2012] EWHC 1077 (Comm).
2  White and Carter (Councils) Limited v. McGregor (1962) AC 413.
3 The judge pointed out that in the case at hand if the charterers failed to give any orders then the vessel would simply stay where it was and, pending any orders, hire would continue. He summed up the matter as follows: “The earning of hire after purported re-delivery was not dependent on any performance by the charterers of their obligations”.

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