THE ASTRA. Kuwait Rocks Co v AMN Bulk Carriers Inc [2013] EWHC 865 (Comm) 2. Isabella Shipowner SA v Shajang Shipping Co Ltd [2012] EWHC 1077 (Comm)

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1 THE ASTRA Except for anyone living as a hermit over the last year, the Judgment of Flaux J in The Astra 1 will be well known. In a lengthy, careful and reasoned analysis he concluded that the obligation to pay hire, as expressed in Clause 5 of the NYPE charter, was a condition of the contract, a fortiori where, in addition, there is, as is usual, an anti-technicaltiy clause. The case prompts several observations. In a speech some years ago Sir Bernard Rix raised the issue of whether the relative difficulty in obtaining leave to appeal against arbitration awards would have the consequence in some fields that the law would in a general sense atrophy. The context of his remarks was insurance and reinsurance arbitration and, in particular, whether a gap could arise before market driven solutions of arbitrators and the law. In all events it is crucial for practitioners that the common law can develop as commerce develops. I make this general point because, to the extent that it remains difficult to appeal against an arbitration award, there is sense that an unsatisfied demand for judicial intervention has built up. Without wishing to suggest that the dam has now burst, it is certainly the case that there have been some noteworthy decisions in the last couple of years of which, of course, The Astra is one. I can remember several mantras from the time that I was an assistant solicitor in the late 70 s and early 80 s. One was Redelivery is a fact of life. This, of course, requires review in the light of the decision of Mr Justice Cooke in The Aquafaith 2. I highlight this point because it would probably be fair to say that the common understanding in the context of a conventional cargo ship and time charter was that early redelivery was, indeed, a fact of life. The Owners were effectively compelled to accept the Charterers anticipatory repudiatory breach, re-fix the ship and claim damages. Once such common understandings gain traction it takes courage or an unusual set of circumstances for that understanding to be challenged. When a common understanding is given concrete form in a leading text book, even greater courage is required to challenge it. This brings me specifically to The Astra and the undercurrent of surprise with which it was greeted. I suspect the main reason it was greeted with surprise was that we have all been 1 Kuwait Rocks Co v AMN Bulk Carriers Inc [2013] EWHC 865 (Comm) 2 Isabella Shipowner SA v Shajang Shipping Co Ltd [2012] EWHC 1077 (Comm) EME_ACTIVE ADTAYLOR

2 indoctrinated by the relevant passages in Time Charters where the Editors have over several editions offered the view:- it is thought that the better view is that the obligation to pay hire is by nature of an intermediate term, so damages for the loss of the charter are recoverable only where the failure to pay hire by the due date can be shown to be repudiatory. It may be that the judicial remarks recorded above should not be understood as meaning that Clause 5 is a condition, but only that its draftsman, by adding an option to withdraw to the obligation to pay hire, has given to that obligation one characteristic of a condition, namely that any breach gives a right of termination. But uncertainty will remain until the House of Lords has shed more light on this important question. This bi-cameral approach based on Brandon J s judgment in The Brimnes 3, was heretical in Flaux J s view. A condition is a condition. To the extent that the decision of Mr Justice Flaux contradicts the received wisdom, then it was, I suppose, a surprise. Although many have lined up to criticise the decision, the suggestion that the obligation to pay hire under Clause 5 of the NYPE is a condition of the charter is not heretical. Indeed I have seen opinions from leading members of the Commercial Bar to the effect that it is a condition. And it should not be forgotten that it was the preferred view of the very experienced Tribunal of Christopher Moss, Mark Hamsher and Patrick O Donovan. Even allowing for the fact that I acted for the successful owner, I certainly do not find the decision as difficult to accept as some commentators. As I have said Flaux J concluded that Clause 5 was a condition as it made time for payment of the essence, irrespective of the anti-technicality clause, for two principal reasons: first cl.5 provides a right of withdrawal whenever it is breached, which is to quote Flaux J a strong indication that it was intended that failure to pay hire promptly would go to the root of the contract and thus that the provision was a condition Secondly, time is normally considered of the essence in a commercial contract requiring something to be done by a certain time. But, it seems to me that the Judge s approach was strongly influenced by his observations about the nature of a time charter itself which he dealt with first. In short, the owners were entitled 3 Tenax Steamship Co v Owners of the m.v. Brimnes [1973] 1 WLR

3 to expect payment of hire in advance to cover the costs of running the ship. They are not a bank lending money. If any pre-conceived notions as to the correct approach to Clause 5 of the NYPE charter are set aside, his analysis of the wider issue of the classification of terms and the factors relevant in determining whether any particular term is a condition, where it is not expressly so described, is interesting. It reflects a natural evolution and application of the seminal decision of Diplock L J in The Hong Kong Fir 4 and subsequent elaborations of the principles enunciated by Lord Diplock and others in The House of Lords. The lengthy and even handed analysis by Flaux J of the principles, as I have said, starts with Diplock L J s judgment in The Hong Kong Fir where he says:- No doubt there are many simple contractual undertakings, sometimes express but more often because of their very simplicity ( It goes without saying ) to be implied, of which it can be predicated that every breach of such an undertaking must give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract and such a stipulation, unless the parties have agreed that breach of it shall not entitle the nondefaulting party to treat the contract as repudiated, is a condition. So too there may be other simple contractual undertakings of which it can be predicated that no breach can give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and such a stipulation, unless the parties have agreed that breach of it shall entitled the non-defaulting part to treat the condition as repudiated, is a warranty. In considering the classification of a term relating to the time for payment the most helpful case of those discussed by Flaux J is Bunge Corporation v Tradax SA 5. That case concerned on FOB contract where the Buyer was required to give 15 days notice of readiness of the vessel. The notice was given 10 days late and the Sellers held the Buyers in repudiation on the ground that the notice was a condition. This was a decision of The House of Lords whose significance as Flaux J suggested lay in the analysis to the effect in general in mercantile contracts, the 4 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] EWCA CIV 7 5 Bunge Corporation v Tradax Export SA [1981] UKHL11-3 -

4 courts required strict compliance and stipulations as to time so that time was of the essence, and this includes provisions as to payment of hire in time charterparties. To quote from the Judgment of Lord Wilberforce in Bunge v Tradax:-... As to such a clause there is only one kind of breach possible, namely, to be late, and the questions which have to be asked are, first, what importance have the parties expressly ascribed to this consequence, and secondly, in the absence of expressed agreement, what consequence ought to be attached to it having regard to the contract as a whole. The submission of the Buyers was that the question of whether breach of a term entitled the innocent party to treat the contract as at end depended on the gravity of the breach. Continuing his speech Lord Wilberforce said:- One may observe in the first place that the introduction of a test of this kind would be commercially most undesirable. It would expose the parties, after a breach of one, two three, seven and other numbers of days to an argument whether this delay would have left time for the seller to provide the goods. It would make it, at the time, at least difficult, and sometimes impossible, for the supplier to know whether he could do so. It would fatally remove from a vital provision in the contract that certainty which is the most indispensable quality of mercantile contracts, and lead to a large increase in arbitrations. It would confine the seller perhaps after arbitration and reference through the courts to a remedy in damages which might be in practice be extremely difficult to give this. These are all serious objections. But I am clear that the submission is unacceptable in law. It remains true, as Lord Roskill has pointed out in Cehave N.V. v. Bremer Handelsgesellschaft m.b.h (The Hansa Nord) [1976] Q.B. 44, that the courts should not be too ready to interpret contractual clauses as conditions. And I have myself commended, and continue to commend, the greater flexibility in the law of contracts to which Hongkong Fir points the way (Reardon Smith Line Ltd v Yngvar Hansen-Tangen (trading as H.E, Hansen-Tangen) [1976] 1 W.L.R. 989, 998). But I do not doubt that, in suitable cases, the courts should not be reluctant, if the intentions of the parties as shown by the contract so indicate, to hold that an obligation has the force of a condition, and that indeed they should usually do so in the case of time clauses in mercantile contracts. To such cases the gravity of the breach - 4 -

5 approach in the Hongkong Fir case [1962] 2 Q.B. 26 would be unsuitable. I need only add on this point that the word expressly used by Diplock L.J. at p. 70 of his judgment in Hongkong Fir should not be read as requiring the actual use of the word condition : any term or terms of the contract, which, fairly read, have the effect indicated, are sufficient. Lord Diplock himself has given recognition to this in this House: Photo Production Ltd v. Securicor Transport Ltd [1980] A.C. 827, 849. In conclusion, the statement of the law in Halsbury s Laws of England, 4 th ed., vol. 9 (1974), paras , including the footnotes to paragraph 482 (generally approved in the House in the United Scientific Holdings case), appears to me to be correct, in particular in asserting (1) that the court will require precise compliance with stipulations as to time wherever the circumstances of the case indicate that this would fulfil the intention of the parties, and (2) that broadly speaking time will be considered of the essence in mercantile contracts with footnote reference to authorities which I have mentioned. In his Judgment Lord Roskill emphasised the role of conditions in producing commercial certainty a point also echoed by Lord Lowry who said:- The second general point which I desire to mention concerns stipulations as to time in mercantile contracts, in regard to which it has been said that, broadly speaking, time will be considered to be of the essence. To treat time limits thus means treating them as conditions, and he who would do so must pay respect to the principle enunciated by Roskill L.J. in Cehave N.V. v. Bremer Handelsgesellschaft m.b.h [1976] Q.B. 44, 71A, that contracts are made to be performed and not to be avoided. This provides the essential jurisprudential basis for the decision in The Astra. The icing on the cake was that even if Clause 5 on its own was not a condition that was, in any event, the outcome of the incorporation of the anti-technicality provision in Clause 31. This made time of the essence by analogy with periods of grace for the payment of instalments under shipbuilding contracts which were treated as conditions in the Latco 6 and Gearbulk 7 cases. 6 Stocznia Gdanska SA v Latvian Shipping Co [2002] 2 Lloyd s Rep Stocznia Gdanska SA v Gearbulk Holdings [2009] 1 Lloyd s Rep

6 Much of the remaining discussion concerns the withdrawal cases themselves. After compiling a score card of judicial obiter dicta on the subject of whether Clause 5 could be a condition, Flaux J fairly reached the conclusion, it seems to me, that the preponderance of judicial opinion was in favour of it being a condition. The most notable comment is that of Lord Diplock in The Afovos 8 where he says:- The second part of clause 5, however, starting with the word otherwise goes on to provide expressly that the rights of the owners are to be in the event of any such breach by the charterers of their primary obligation to make punctual payment of an instalment. The owners are to be at liberty to withdraw the vessel from the service of the charterers; in other words they are entitled to treat the breach when it occurs as a breach of condition and so giving them the right to elect to treat it as putting an end to all their own primary obligations under the charterparty then remaining unperformed. But although failure by the charterers in punctual payment of any instalment, however brief the delay involved may be, is made a breach of condition it is not also thereby converted into a fundamental breach; and it is to fundamental braches alone that the doctrine of anticipatory breach is applicable. This last passage chimes closely with Flaux J s reasoning. However, for those who would prefer the received wisdom of Clause 5 being an innominate term (including perhaps Lord Sumption: see The Kos 9 ) how would Flaux J s reasoning be attacked? 1. Is it heretical for a provision simply have one characteristic of a condition but not be a condition? In Financings Ltd v Baldock [1963] 2 Q.B. 104, a hire purchase case, the Court of Appeal considered whether breach of the hirer s obligation to make timely payments coupled with, a right of termination in respect of any breach, allowed the owner to claim damages. It concluded that, in the absence of a serious breach by the hirer, there was no claim for damages. My recollection is that, although raised in argument, the Court considered that as consumer contract case, it did not assist in construing a mercantile contract. 8 Afovos Shipping Co SA v R Pagnan [1983] 1 Lloyd s Rep ENE Kos v Petroleo Brasileiro SA [2012] UKSC

7 2. Similarly, another argument I have seen arises from the wording of Clause 5. It provides for a liberty to withdraw the vessel. It does not expressly provide for the right to terminate the charter. Of course, both withdrawal and termination will bring the charter to an end, but the language is different. The difference in language supports a distinction between the contractual right of withdrawal and the right to terminate for breach. The obvious analogy is with cancelling clauses. 3. Another argument on the construction of Clause 5 is surplusage. So, it would be said, if punctual payment was a condition, providing for a right of withdrawal would be unnecessary. 4. Flaux J referred to a synonomy between a term making time of the essence and that term being a condition so as to conclude that the presence of the anti-technicality clause as conclusive in this regard. The inference is that it was a condition that hire would be paid before the expiry of the grace period. However, it was not a term of the contract that hire was to be paid before that time. Hire was due to be paid earlier. The anti-technicality notice simply suspended the right of withdrawal. 5. Flaux J attached particular significance to Bunge v Tradax to support the proposition that time is normally considered of the essence in a mercantile contract requiring something to be done by a certain time. The firmness of the foundation of this argument might be challenged. Clarke J. in The Aktor 10 explains Bunge v Tradax as follows: in a mercantile contract where a term has to be performed by one party as a condition precedent to the ability of the other party to perform another term the term as to time performance of the former obligation would in general be treated as a condition. The obligation to pay hire punctually under a time charter does not naturally fall into that category. Andrew Taylor Reed Smith LLP 10 PT Berlian Laja Tanker TBK v Nurse Shipping Ltd [2008] EWHC 1330 (Comm) - 7 -