OW BUNKER TEST CASE: THE RES COGITANS SUPREME COURT JUDGMENT HANDED DOWN TODAY. Shipping. May 2016

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1 Shipping May 2016 OW BUNKER TEST CASE: THE RES COGITANS SUPREME COURT JUDGMENT HANDED DOWN TODAY In the climax of the RES COGITANS dispute, the Supreme Court has today handed down its eagerly awaited judgment, in which it unanimously rejected the appeal of PST Energy 7 Shipping LLC. The three central questions to be determined by the Supreme Court Justices, Lord Neuberger, Lord Mance, Lord Clarke, Lord Hughes and Lord Toulson, were as follows: 1. Is the relevant bunker supply contract a contract of sale of goods within the meaning of s.2(1) of the Sale of Goods Act 1979 (SOGA 1979)? 2. If not, was it an implied condition of the contract that OWB would perform its obligations to its supplier, in particular by paying for the goods timeously? 3. Should the Court of Appeal decision in F G Wilson (Engineering) Ltd v John Holt & Co (Ltd) 1 (The Caterpillar Decision) be overruled? In that decision, the Court of Appeal held that the seller cannot enforce payment under s.49(1) SOGA 1979, in circumstances that title was reserved pending payment. In short, the Supreme Court answered these questions as follows: 1. The relevant bunker sale contract cannot be regarded as a straightforward agreement to transfer the property in bunkers, to which s.2 (1) SOGA 1979 would apply, but is a sui generis, or unique, type agreement to permit consumption of the bunkers prior to payment and to transfer the property in any remaining bunkers at the end of the credit period. 2. OW Bunkers (OWB) only implied undertaking was to obtain permission to allow owners to use the bunkers for propulsion prior to payment. 3. s.49 (1) SOGA is not to be regarded as a complete code for situations in which the price might be recoverable, overruling The Caterpillar Decision on that point, had it been necessary to do so. Lord Mance also clarified that, even if OWB would have been obliged to transfer property in any bunkers remaining at the end of the credit 1 [2014] 1 WLR 2365

2 period, the contract was still not to be regarded as one of sale. In other words, Lord Justice Moore- Bick s suggestion in the Court of Appeal decision, that SOGA 1979 could apply to those bunkers remaining on the expiry of the credit period, was not accepted. As such, OWBs claim is to be regarded as a straightforward debt claim, to the extent that permission to allow consumption of bunkers prior to payment has been obtained by OWB from physical suppliers, significantly strengthening OWB/ING s position. The next fight in the courts may well be over the high amount of interest claimed by ING/OWB on the unpaid bunker supplies. In the meantime, we suspect that many Owners and Charterers will be under significant pressure to settle the claims of ING/ OWB, whilst still potentially facing the risk of double jeopardy for claims by an unpaid physical supplier. In light of the Supreme Court decision, ship operators would be wise to very carefully consider the wording of their future bunker supply contracts, how best to protect their position in case of a similar insolvency of an intermediate bunker supplier and the significant problems that can create. For more information, please contact the authors of this briefing, or your usual contact at HFW. Paul Dean Partner, London T: +44 (0) E: paul.dean@hfw.com Stanislas Lequette Partner, Paris T: E: stanislas.lequette@hfw.com Michael Buisset Partner, Geneva T: +41 (0) E: michael.buisset@hfw.com Dimitri Vassos Partner, Piraeus T: E: dimitri.vassos@hfw.com Yaman Al Hawamdeh Partner, Dubai T: E: yaman.alhawamdeh@hfw.com Nick Poynder Partner, Shanghai T: E: nicholas.poynder@hfw.com Rory Grout Senior Associate, London T: +44 (0) E: rory.grout@hfw.com HFW has over 450 lawyers working in offices across Australia, Asia, the Middle East, Europe and South America. For further information about shipping issues in other jurisdictions, please contact: Paul Apostolis Partner, Singapore T: E: paul.apostolis@hfw.com Gavin Vallely Partner, Melbourne T: +61 (0) E: gavin.vallely@hfw.com Nic van der Reyden Partner, Sydney T: +61 (0) E: nic.vanderreyden@hfw.com Hazel Brewer Partner, Perth T: +61 (0) E: hazel.brewer@hfw.com Jeremy Shebson Partner, São Paulo T: +55 (11) E: jeremy.shebson@hfw.com Paul Hatzer Partner, Hong Kong T: E: paul.hatzer@hfw.com Lawyers for international commerce hfw.com 2016 Holman Fenwick Willan LLP. All rights reserved Whilst every care has been taken to ensure the accuracy of this information at the time of publication, the information is intended as guidance only. It should not be considered as legal advice. Holman Fenwick Willan LLP is the Data Controller for any data that it holds about you. To correct your personal details or change your mailing preferences please contact Craig Martin on +44 (0) or craig.martin@hfw.com

3 Fraud and Insolvency September 2016 BREXIT: THE EFFECT ON CROSS-BORDER INSOLVENCIES At first glance, it seems that cross-border insolvencies between the UK and EU are likely to become more time-consuming, complex and expensive post-brexit. However, the situation may not be as dire as it first appears due to the existence of alternative legislation and the exemptions to the EU legislation. As with other areas of law, when it comes to insolvencies much will depend on what steps are taken to maintain the current arrangements with the EU or whether they fall away altogether. The main risk of Brexit relates to those involved in current, complex insolvencies which cross EU borders, have a British angle and are expected to last until after Brexit happens. However, advice can be taken on how best to limit the adverse effects of Brexit and give insolvency practitioners and creditors the best chance of recovery. Where are we now? Cross-border insolvency in England and Wales is currently governed by four main sources of law. These are discussed below: EU legislation The EC Insolvency Regulation (EUIR) 1 Strengths: This provides for obligatory EU wide recognition (except in the case of Denmark) as to the appropriate forum for proceedings, which is generally the Member State in which the debtor has its centre of main interest (COMI). Subsequent proceedings in other Member States will be recognised as secondary proceedings and relate only to those assets located within the local jurisdiction. The liquidation of entities registered outside of the EU, but with their COMI in a Member State will also be regulated by the EUIR. 1 Council Regulation (EC) 1346/2000

4 Limitations: The EUIR does not harmonise the substantive law of each Member State but encourages cooperation between countries. Individual insolvency regimes still exist across the EU. The EUIR does not apply to members voluntary liquidations, schemes of arrangement, administrative receiverships or receivers appointed under the Law of Property Act It also does not apply to insolvency proceedings in certain sectors (e.g. insurance undertakings). Following Brexit: The EUIR will no longer apply and EU insolvency proceedings will no longer be automatically recognised by the English courts. A recast EUIR comes into effect in June The EUIR is generally reviewed every five years. The UK is unlikely to be involved in this review process going forwards. Beyond the EU legislation The Cross Border Insolvency Regulations 2006 (give force to the Model Law adopted by the UN Commission on International Trade Law) (CBIR) Strengths: The CBIR apply without any need for reciprocity. English Courts can recognise eligible foreign insolvency proceedings even if the foreign jurisdiction would not recognise proceedings commenced in England and Wales. Limitations: The Model Law has only been adopted by 41 jurisdictions worldwide and the only EU Member States which are signatories to it are the UK, Slovenia, Greece, Romania and Poland. Each state that adopts the CBIR is free to modify the standard provisions, meaning that there are inconsistencies in the way states implement the CBIR. Following Brexit: It is likely that Member States will be able to apply to the English Courts who will recognise EU insolvency proceedings without the need for reciprocity under the CBIR, although this recognition will not be automatic. S.426 of the Insolvency Act 1985 Strengths: It is currently possible to apply to the English Court for assistance in relation to insolvencies commenced in designated countries, including many key offshore jurisdictions (e.g. the British Virgin Islands, the Cayman Islands, Guernsey and Hong Kong). Limitations: The reach of this section is limited to those countries designated by the Secretary of State through a statutory instrument. Following Brexit: It remains unclear whether s.426 will be extended to include EU Member States. The common law Strengths: At present, this is often pleaded in the alternative to the CBIR in recognition applications. In principle, the common law recognises the concept of universalism; namely that there should be one insolvency proceeding based in the country where the entity has its COMI and this proceeding should be recognised worldwide. The common law encourages co-operation between competent courts in which the foreign main proceedings have been commenced. Limitations: Due to the three key legal frameworks mentioned above, the precise scope of the common law is unclear. Following Brexit: It remains to be seen what role the common law will have post-brexit. What can IPs do now to limit the adverse effects of Brexit? Obtain legal advice as to whether you can rely on the local laws of the EU Member State in question pertaining to recognition or comity with other jurisdictions. If the COMI is in another EU Member State and there are assets located in the UK then you are likely to be able to apply to the English courts for recognition under the CBIR (as currently drafted) following Brexit, even if the EU Member State is not a signatory to the CBIR. Remember that members voluntary liquidations, schemes of arrangement and receiverships fall outside of the EC Regulation, as do insolvency proceedings concerning certain subject matters. These areas will continue to be governed by UK domestic law post- Brexit. 02 Fraud and Insolvency

5 For more information, please contact the authors of this briefing: Rick Brown Partner, London T: +44 (0) E: Noel Campbell Partner, London T: +44 (0) E: David Harby Senior Associate, London T: +44 (0) E: As the new legal landscape begins to take shape we can help you to steer your business through the challenges and new opportunities that these changes will inevitably bring. Please contact our team of sector specialists for further information and support: Aerospace Sue Barham Partner, London T: +44 (0) E: Commodities Robert Finney Partner, London T: +44 (0) E: Logistics and Customs Craig Neame Partner, London T: +44 (0) E: Shipping Toby Stephens Partner, London T: +44 (0) E: Brian Perrott Partner, London T: +44 (0) E: Dispute Resolution Damian Honey Partner, London T: +44 (0) E: Insurance & Reinsurance Richard Spiller Partner, London T: +44 (0) E: Fraud and Insolvency 03

6 Lawyers for international commerce hfw.com 2016 Holman Fenwick Willan LLP. All rights reserved Whilst every care has been taken to ensure the accuracy of this information at the time of publication, the information is intended as guidance only. It should not be considered as legal advice. Holman Fenwick Willan LLP is the Data Controller for any data that it holds about you. To correct your personal details or change your mailing preferences please contact Craig Martin on +44 (0) or

7 Shipping October 2016 ATLANTIK CONFIDENCE: CARGO INSURERS BREAK LIMITS IN UNPRECEDENTED JUDGMENT Executive summary Following the fire and sinking of the bulk carrier ATLANTIK CONFIDENCE off the coast of Oman in April 2013, the owners of the vessel sought to constitute a limitation fund pursuant to the Convention on Limitation of Liability for Maritime Claims 1976 (as amended, the Convention) in the Admiralty Court and obtain a declaration that they were entitled to limit their liability in accordance with the Convention due to the size of potential claims advanced against the owners. Cargo Insurers sought to break limits by defending the application on the basis that the loss of the vessel along with her cargo was caused by the personal act or omission of the owners. Therefore the exception in Article 4 of the Convention applied. Cargo Insurers argued that the only credible explanation for the sinking of the vessel which was consistent with all of the evidence was that she was deliberately sunk by her crew on the direction of her owners. They argued that the innocent explanation for the vessel sinking put forward by the owners required a series of improbable fortuities which when viewed in the context of the other evidence such as the change of routing of the vessel into deeper water, the Master and Chief Engineer s behaviour and response to the fire and the difficult financial circumstances of the owners principal meant that the only credible conclusion could be that the loss was caused by a deliberate act. Legal test Article 4 of the Convention provides as follows: A person liable shall not be entitled to limit his liability if it is proved that the loss resulted from his personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result. This provision is the only basis upon which the limits afforded by the Convention will not apply. Burden of proof It was common ground in the case that Cargo Insurers had to prove its case on the balance of probabilities and that in determining whether Cargo Insurers had discharged that burden the Court s approach should be the same as where a shipowner makes a claim on the hull policy and the insurer alleges the ship was scuttled.

8 In this regard Mr Justice Teare cited with approval the decision in Brownsville Holdings Ltd v Adamjee Insurance Co. (The Milasan) [2000] 2 Lloyd s Reports 458 where Mr Justice Aikens made clear that scuttling is a serious charge and the standard of proof will not fall far short of the criminal standard and that by the nature of these cases it will not normally be possible for insurers to obtain any direct evidence so the Court can consider all relevant indirect and circumstantial evidence. Further that the insurers do not have to prove a motive if the facts are unambiguous. The Judge also had in mind the possibility that where the evidence is limited then it may simply not be possible to reach a finding on the cause of the loss citing the POPI M [1985] 2 Lloyds Law Reports 1. In conclusion on the burden of proof issue Mr Justice Teare said: The court will only be able to draw such inference when the case is established on the balance of probabilities. Shipowners do not generally resort to scuttling and an allegation that a shipowner has done so is a grave charge to make. In Strive Shipping v Hellenic Mutual War Risks Association (the GRECIA EXPRESS) [2002] 2 Lloyd s Rep. 88 at pp Colman J. concluded that it must be highly improbable that the vessel was lost accidentally and that there must be derived from the whole of the evidence a high level of confidence that the allegation is true. As Aikens J. said in The Milasan, the facts proved against the owner must be sufficiently unambiguous to establish that the owner was complicit in the casting away of his vessel. Factual background During February and March 2013 the ATLANTIK CONFIDENCE (vessel) loaded various project cargos in Oktyabrsk, Ukraine, Odessa, Ukraine and Gemlik, Turkey for discharge in various ports in Oman, UAE, Saudi Arabia and Pakistan. On completion of loading she progressed via the Suez Canal to the Gulf of Aden. Shortly before dawn on 30 March 2013, a fire broke out in the engine room of the vessel on the starboard side of the second deck by the generators and the store room. At the time the vessel was 138NM off Masirah Island. Less than three hours later the Master had taken the decision to abandon the vessel. For four hours the crew remained in lifeboats in the vicinity of the vessel during which time the Master and Chief Engineer returned to the vessel twice. They were then picked up by a passing vessel and eventually repatriated to Turkey. By this time it was clear that the fire had been out for some time. The weather was relatively calm and the vessel remained in the vicinity for some time. She adopted a port list and a stern trim which gradually increased until the early hours of 3 April 2016 when she finally sank. Following the sinking, the owners of the vessel sought to establish a limitation fund in accordance with the Convention (see previous update 1 ). Thereafter they applied for a declaration that the owners were entitled to limit their liability. The Cargo Insurers objected to this application. They contended that the vessel had been deliberately scuttled by the crew on the instruction of the owners. Owners case The owners argued that the vessel s loss was accidental. Their case was that the fire was accidental and caused water ingress to the engine room and ballast tanks. Their case was predicated on there having been an accidental fuel oil leak on no.2 generator which sprayed from the generator to the generator flat to the store room and then changed direction back to port to ignite on a hot turbo charger casing which would need to have been unlagged. The judge held that the aggregation of such unlikelihoods, coupled with the lack of support for a fire on the no.2 generator from the observations of the engineers, suggests that the possibility that the cause of the fire in the store room was a fire at the no.2 generator caused by an oil leak is no more than a remote possibility. This fire was then said to have developed substantially in the store room to such an extent that it caused a crack in the shell platting of the vessel below the water line in or around the vicinity of the store room which allowed water ingress to the store room. At the same time the fire caused the hot-wiring of the vessel s ballast system in such a way that it operated automatically to open certain ballast valves, but not others. For the hot wiring theory to be correct, the judge said a number of conditions had to be satisfied and a number of events had to occur. Lastly, flooding the engine room and the ballast tanks would not sink the vessel. It was agreed between the experts that it was necessary for another compartment to be flooded. As a result the owners argued that there had been unrelated corrosion or damage to the sounding pipe and/ or ballast pipe between the top and bottom side tanks in Hold no. 5. Cargo Insurer s case Cargo Insurers argued that the Master and the Chief Engineer, on the instruction of the principal deliberately opened the sea chests in the engine room and the valves to the ballast system to allow an ingress of water to the vessel. On Cargo Insurer s case, the fire was deliberately started in the store room by the Chief Engineer or 02 Shipping 1 July-2014

9 Master to hide the deliberate ingress of water. Cargo Insurers case was that owners sequence of events was wholly implausible and could not be the reason why the vessel sank. Cargo Insurers also sought to rely on other evidence which they said pointed to a scuttling. These were described by the judge as matters of cumulative suspicion which individually, might not justify a finding of a deliberate loss but, when looked at collectively, suggest a deliberate loss. 1. The change of course A few days before the fire, the vessel changed her course to take her further away from the Coast of Oman and into the Indian Ocean. This took her further from assistance and into much deeper water. The owners were unable to give any credible reason for this change of course despite trying to argue that the change of route arose as a result of the risk of piracy. 2. The HEATHER The owners directed another vessel in their fleet, the HEATHER to attend the vessel once the crew had abandoned. The HEATHER was diverted from her duties to collect two super-intendents from the owners office in Turkey who would rendezvous with her in Oman before steaming to the vessel. Crucially the HEATHER called in Muscat at the same time the appointed salvors were mobilising yet did not assist them in any way or even make them aware of their presence. The HEATHER arrived significantly before the salvors. Whilst their evidence was that the super-intendents wanted to get on board neither was able, when crossexamined, to identify what precisely they intended to do. 3. The conduct of the Master and Chief Engineer The response of the Master and Chief Engineer in the aftermath of the fire was suspicious. The Chief Engineer prevented other crew members from entering the engine room to fight the fire. There was no investigation into the cause of the list. No distress message was sent until nearly two hours after the fire had broken out, just before the vessel was abandoned. The Master did not inform the office of the decision to abandon ship. The Master and the Chief Engineer returned to the vessel twice, and at no time was the working chart retained. No written report of the casualty was ever produced by the Master. 4. The financial circumstances of the principal The vessel was part of a wider fleet of vessels all of which were significantly over-insured including the vessel. It was demonstrated that all of the companies in the group structure were balance sheet insolvent and had no prospect of trading their way out of their debt. They were in real financial difficulty and it was likely that the principal was under pressure from his bank. The sinking of the vessel meant that the borrowings to the mortgagee bank not only in relation to the vessel but to four other vessels in the fleet were substantially reduced. Judgment In a very detailed and considered judgment which followed extensive expert evidence and argument on both sides during a six week hearing, Teare J agreed with Cargo Insurers and concluded that the sinking was a deliberate scuttling: Having considered the totality of the evidence in this case and the opposing arguments I have concluded that the chief engineer, with the knowledge and agreement of the master, deliberately set a fire in the store room and deliberately caused ATLANTIK CONFIDENCE to sink. They denied that they did so but I cannot accept their evidence. When their evidence is placed in the context of the case as a whole it cannot be true. Moreover he found that it was undertaken at the instruction of the principal: The vessel was deliberately sunk by the master and chief engineer at the request of Mr. Agaoglu, the alter ego of the Owners. In those circumstances the loss of the cargo resulted from his personal act committed with the intent to cause such loss. The loss of the cargo was the natural consequence of his act as he must have appreciated. There can be no doubt that he intended the cargo to be lost just as much as he intended the vessel to be lost. It follows that the Owners claim for a limitation decree must be dismissed. The judge considered that whilst the improbable can happen it is difficult to accept that three improbable events (an accidental fire, an accidental flooding of the engine room caused by the fire and an accidental flooding of two double bottom tanks on the portside caused by the fire) may have occurred in rapid succession to each other. As a result the owners application for a limitation decree was refused. It is not yet known whether any of the parties will seek to appeal. Commentary This was an exceptionally technical and detailed dispute with many strands of expert and factual evidence for the judge to consider. As far as we are aware, this is the only time in the UK limits have successfully been broken under the Convention in 40 years. In our view this is a decision which turns on its own unique facts. Therefore we do not see that this decision changes the interpretation or application of Article 4 or in any way lowers the Shipping 03

10 threshold for breaking limits. It should not open the floodgates to parties seeking to break limits as the facts of this case as found by the Court are thankfully, highly unusual. We suggest that all this case demonstrates is that in the correct factual scenario the Admiralty Court will be willing to take a decision to break limits. We do not consider the judgment breaks any new ground in relation to the legal test or burden of proof. The HFW team was led by Partner James Gosling (recently retired and now a consultant with the firm) and included Senior Associates Alex Kemp and Jenny Salmon and latterly Rory Butler (Partner). Counsel were Nigel Jacobs QC and Ruth Hosking both of Quadrant Chambers. For more information concerning this issue, please contact: Rory Butler Partner, London T: +44 (0) E: rory.butler@hfw.com Jenny Salmon Senior Associate, London T: +44 (0) E: jenny.salmon@hfw.com Stanislas Lequette Partner, Paris T: E: stanislas.lequette@hfw.com Pierre Frühling Partner, Brussels T: +32 (0) E: pierre.fruhling@hfw.com Alex Kemp Senior Associate, London T: +44 (0) E: alex.kemp@hfw.com HFW has over 450 lawyers working in offices across Australia, Asia, the Middle East, Europe and South America. For further information about shipping issues in other jurisdictions, please contact: Christopher Chan Partner, Hong Kong T: E: christopher.chan@hfw.com Nick Poynder Partner, Shanghai T: E: nicholas.poynder@hfw.com Michael Buisset Partner, Geneva T: +41 (0) E: michael.buisset@hfw.com Dimitri Vassos Partner, Piraeus T: E: dimitri.vassos@hfw.com Yaman Al Hawamdeh Partner, Dubai T: E: yaman.alhawamdeh@hfw.com Paul Apostolis Partner, Singapore T: E: paul.apostolis@hfw.com Hazel Brewer Partner, Perth T: +61 (0) E: hazel.brewer@hfw.com Gavin Vallely Partner, Melbourne T: +61 (0) E: gavin.vallely@hfw.com Nic van der Reyden Partner, Sydney T: +61 (0) E: nic.vanderreyden@hfw.com Jeremy Shebson Partner, São Paulo T: +55 (11) E: jeremy.shebson@hfw.com Lawyers for international commerce hfw.com 2016 Holman Fenwick Willan LLP. All rights reserved Whilst every care has been taken to ensure the accuracy of this information at the time of publication, the information is intended as guidance only. It should not be considered as legal advice. Holman Fenwick Willan LLP is the Data Controller for any data that it holds about you. To correct your personal details or change your mailing preferences please contact Craig Martin on +44 (0) or craig.martin@hfw.com

11 Shipping October 2016 CONFIRMATION RECEIVED FROM THE COURT OF APPEAL: THE ASTRA WAS WRONGLY DECIDED In 2013, the Commercial Court in the ASTRA 1 held controversially that the obligation to make punctual payment of hire by the charterers was a condition, thus entitling the owners to withdraw the vessel and claim a loss of bargain for the remaining period of the charter albeit the delay in payment of hire may only be a few minutes late. In 2015, the Commercial Court in Spar Shipping AS v Grand China Logistics Holding (Group) Co. Ltd 2 (Spar v GCL), declined to follow the decision in the ASTRA and resumed back to the orthodox approach established since the BRIMNES 3 that punctual payment of hire by the charterers was not a condition but an innominate term. The Court of Appeal has earlier today handed down its judgment from an appeal of the decision in Spar v GCL and which has resolved the two conflicting first instance decisions. The Court of Appeal unanimously rejected the owners arguments that punctual payment of hire by the charterers was a condition and held that the ASTRA was wrongly decided on this issue 4. In other words, a breach of the hire payment clause would not, absent express provision, entitle the owners to claim a loss of bargain, unless the breach is so substantial that it goes to the root of the charters. Issues in dispute By way of three time charters on the amended NYPE 1993 form, the owners chartered three Supramax bulk carriers to the charterers in However, from April 2011 onwards, the charterers were in arrears in payment of hire and the situation worsened in the next few months. Pursuant to various anti-technicality notices, the owners withdrew the vessels in September 2011 and claimed the balance of hire due under the charters plus damages for loss of bargain in respect of the unexpired period of the charters respectively. There was no dispute that the owners were entitled to the balance of hire due under the charters prior to termination. The point in dispute was whether the owners were entitled to 1 [2013] EWHC 865 (Comm) 2 [2015] EWHC 718 (Comm) 3 [1973] 1 WLR Lord Justice Gross at [65] and Lord Justice Hamblen at [94]

12 damages for a loss of bargain as well (namely the loss of hire/earnings for the remainder of the charter period) which amounted to approximately US$25 million. Since a loss of bargain could only be recovered if there was a breach of a condition, alternatively a repudiatory breach of an innominate term, the issues before the Court of Appeal were: 1. Whether the obligation to make punctual payment of hire is a condition (the Condition Issue). 2. If not, whether the charterers had renounced the charters by repeated failures in paying hire on time (the Renunciation Issue). The decision The Condition Issue Following a detailed review of the judgment in Spar v GCL and the ASTRA, the Court of Appeal accepted that this issue has attracted much market interest and long generated conflicting observations from Judges of the highest standing 5. Nevertheless, the Court of Appeal affirmed the Commercial Court decision in Spar v GCL and concluded that punctual payment of hire is not a condition based on the following reasoning 6 : 1. The withdrawal clause The inclusion of an express right for the owners to withdraw the vessel does not indicate that the obligation to pay punctual hire is a condition, but only provides the owners with an option to cancel the charter should the charterers fail to pay hire on time. 2. Whether a clause is a condition As a matter of contractual construction, the hire payment clause will be a condition only if there are express wordings to that effect. 3. General presumptions as to time being of the essence In mercantile contracts, time is presumed to be of essence but such a presumption does not generally apply to the time of payment unless expressly stated. The hire payment clause in the charters did not make it clear that it was to be classified as a condition. 4. Anti-technicality clause The clause does no more and no less than stating where failure to make punctual hire is due to one of the specified reasons, the charterers are entitled to a three day grace period to remedy the failure. As such, anti-technicality clause is devised to protect the charterers from the serious consequences of a withdrawal, as opposed to making time for payment of the essence. 5. Certainty Certainty is essential in commercial contracts but it is equally important to strike the right balance. Since breaches of the obligation of punctual hire payment may have consequences ranging from the trivial to the serious, the downside of the certainty achieved by classifying an obligation as a condition is that trivial breaches will have disproportionate consequences. 6. Market reaction The general market view has been that the obligation to make timely payment of hire is not a condition, nor does the shipping market require it to be since the parties could have achieved it by appropriate express wordings if they so wish to. The Renunciation Issue While accepting that punctual payment of hire is an innominate term, the Court of Appeal concluded that the charterers nevertheless renounced the charters by their repeated failure of punctual payment of hire, thus entitling the owners to claim loss of bargain. The test for renunciation, which was not in dispute, is essentially similar to that for repudiation, namely whether the owners have been deprived substantially the whole benefit of what they are intended to receive as consideration in the contract. In arriving the conclusion, three questions had been addressed by the Court of Appeal 7 : 1. What was the contractual benefit that the owners intended to obtain from the charters? The Court of Appeal emphasised that the essence of the bargain under a time charter is the entitlement of the owners to receive regular, periodical advance payment of hire so as to meet the expenses of rendering the services they have undertaken to provide under the charter. 2. What was the prospective nonperformance foreshadowed by the charterers? Given the history of the charterers repeated late payments, the amounts and delays involved and the absence of any concrete or reliable reassurance from the charterers as to their future payment, it was reasonable for the owners to conclude that they could 5 Lord Justice Gross at [1] 6 Lord Justice Gross at [41] to [64] 7 Lord Justice Gross at [82] to [87] 02 Shipping

13 have no expectation to receive future punctual hire payment in advance. The best that could be hoped for was that the charterers were willing to pay hire, but in arrears. 3. Was the prospective nonperformance such as to go to the root of the contract? The charterers prospective nonperformance would convert a contract for payment in advance into a transaction for unsecured credit without payment of interest. Following the answer to question one, the Court of Appeal had no doubt to conclude that the charterers evinced intention not to pay hire punctually in the future went to the root of the charters, thus entitling the owners to claim loss of bargain damages. HFW perspective The Court of Appeal has now affirmed the Commercial Court s decision in Spar v GCL that punctual payment of hire is not a condition but an innominate term. Therefore, in order to recover a loss of bargain, the owners must be able to prove renunciation by demonstrating that they have been deprived of substantially the whole benefit of the charters. Whether there is a further appeal on this issue remains to be seen. However, at least for the time being, it is now certain that owners do not have an automatic entitlement to damages for a loss of bargain where the charterers are in breach of the hire payment clause. The Court of Appeal judgment has also repeated the general classification of contractual terms, which is a term is innominate unless a contrary clear intention is made. For more information, please contact the authors of this briefing: Christopher Chan Partner, Hong Kong T: E: christopher.chan@hfw.com Craig Neame Partner, London T: +44 (0) E: craig.neame@hfw.com Stanislas Lequette Partner, Paris T: E: stanislas.lequette@hfw.com Pierre Frühling Partner, Brussels T: +32 (0) E: pierre.fruhling@hfw.com Michael Buisset Partner, Geneva T: +41 (0) E: michael.buisset@hfw.com Dimitri Vassos Partner, Piraeus T: E: dimitri.vassos@hfw.com Ziad El-Khoury Partner, Beirut/Riyadh T: / E: ziad.elkhoury@hfw.com Rula Dajani Abuljebain Partner, Kuwait T: E: rula.dajaniabuljebain@hfw.com Joyce Wong Associate, Hong Kong T: E: joyce.wong@hfw.com HFW has over 450 lawyers working in offices across Australia, Asia, the Middle East, Europe and South America. For further information about shipping issues in other jurisdictions, please contact: Yaman Al Hawamdeh Partner, Dubai T: E: yaman.alhawamdeh@hfw.com Paul Apostolis Partner, Singapore T: E: paul.apostolis@hfw.com Nick Poynder Partner, Shanghai T: E: nicholas.poynder@hfw.com Hazel Brewer Partner, Perth T: +61 (0) E: hazel.brewer@hfw.com Gavin Vallely Partner, Melbourne T: +61 (0) E: gavin.vallely@hfw.com Nic van der Reyden Partner, Sydney T: +61 (0) E: nic.vanderreyden@hfw.com Jeremy Shebson Partner, São Paulo T: +55 (11) E: jeremy.shebson@hfw.com Shipping 03

14 Lawyers for international commerce hfw.com 2016 Holman Fenwick Willan LLP. All rights reserved Whilst every care has been taken to ensure the accuracy of this information at the time of publication, the information is intended as guidance only. It should not be considered as legal advice. Holman Fenwick Willan LLP is the Data Controller for any data that it holds about you. To correct your personal details or change your mailing preferences please contact Craig Martin on +44 (0) or

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