Challenging the Legal and Commercial Justification for Reclassifying Payment of Hire as a Condition

Author:Mathieu Kissin
Position:Canadian lawyer qualified in civil and common law jurisdictions and recent LL.M (Maritime Law) graduate from the University of Southampton. The author would like to acknowledge the valuable assistance of Professor Paul Todd in the completion of this paper
Pages:69-89
 
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(2013) 27 ANZ Mar LJ
CHALLENGING THE LEGAL AND COMMERCIAL JUSTIFICATION FOR
RECLASSIFYING PAYMENT OF HIRE AS A CONDITION
Mathieu Kissin
1. Introduction
The Astra, a recent first instance decision rendered by Flaux J, marks a departure from the previously accepted view,
articulated by Brandon J in The Brimnes, that the obligation to pay hire was not a condition of the contract.1 This
paper examines the legal merits of this reclassification and aspires to contribute to the deb ate by challenging its legal
and practical justification.
The first section considers the different categories of contractual terms under English law and their application to
time stipulations in charterparties. The second section argues that Flaux J’s departure from The Brimnes is
unsupported by binding legal authority. No higher court had criticized Brandon J’s reasoning that hire was not a
condition and, until recently, it was generally accepted by practitioners as representing English law. The judicial
trend to the contrary cited by Flaux J consists of obiter statements from the House of Lords delivered in decisions
interpreting sales and shipbuilding contracts rather than charterparties.
The third section explains the allure of post-withdrawal loss of bargain damages following the 2008 credit crisis.
Elevating payment of hire to a condition grants shipowners a right to such damages for any breach. This paper
argues that the change is legally unfounded and unnecessary. Automatic post-withdrawal damages following the
charterers’ breach of their payment obligation were refused in Italian State Railways, an implicit rejection of the
‘condition’ analysis. Conversely, nothing prevents shipowners from obtaining damages for loss of bargain by
proving breach of an intermediate term going to the root of the contract or by satisfying the contractual remoteness
rule established in Hadley v Baxendale, later refined in The Achilleas.2
The decision to elevate payment of hire to a condition has potentially wide ramifications for shipowners and
charterers. It establishes a troubling precedent of judicial interference in shipping transactions, altering traditional
market dynamics by correcting inequalities generally accepted within the industry as risks of doing business. While
this intervention provides judicial relief to shipowners in low hire markets, charterers now bear a disproportionate
share of the risks of market fluctuations. Treating hire as a condition also risks imposing excessive liability for
trivial breaches resulting in minimal prejudice. Intermediate terms were created in order to prevent such unfair
outcomes. Lastly, hire as a condition renders withdrawal clauses redundant and further complicates decisions by
shipowners and charterers regarding deductions. The paper concludes that the obligation to pay hire should be
characterized as an intermediate term, providing remedies commensurate with the gravity of the breach and the
prejudice suffered by shipowners.
2. Construing Charterparty Clauses: Conditio ns, Warra ntie s and Inte rmediate Te rms
Historically, contractual obligations were either warrantiesor conditions. Warranties are collateral terms whose
breach cannot frustrate the intended purpose of the contract.3 Conversely, conditions are mutually dependent terms
implicitly recognized as crucial within the context of the contract or explicitly designated as such by the parties. 4
Any breach of a condition, however slight, deprives the party not in default of substantially the whole benefit which
Canadian lawyer qualified in civil and common law jurisdictions and recent LL.M (Maritime Law) graduate from the University
of Southampton. The author would like to acknowledge the valuable assistance of Professor Paul Todd in the completion of this
paper.
1 Kuwait Rocks Co v AMN Bulkcarriers Inc; (The Astra) [2013] 2 Lloyd’s Rep. 69 (‘The Astra’); Tenax Steamship Co Ltd v The Brimnes
(Owners); (The Brimnes) [1972] 2 Lloyd’s Rep 465 (‘The Brimnes’).
2 Hadley v Baxendale (1854) 9 Ex 341, 354 (‘Hadley v Baxendale’); Transfield Shipping Inc v Mercator Shipping Inc; (The Achilleas) [2008]
UKHL 48 [69] (Lord Walker) (‘The Achilleas’).
3 Hongkong Fir Shipping Company Ltd. v Kawasaki Kisen Kaisha Ltd; (The H ongkong Fir) [1961] 2 Lloyd’s Rep 478, 493 (‘Hongkong Fir’).
4 Use of the word conditionis not necessary or conclusive: L. Schuler A.G. v. Wickman Machine Tool Sales Ltd. [1973] 2 Lloyd’s Rep 53, 57
(Lord Reid).
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Cha lleng ing Re c lassific a tion o f Payme nt o f Hire as a Co nd itio n
(2013) 27 ANZ Mar LJ
it was intended.5 Default therefore relieves the innocent party, if he so elects, of his remaining contractual
obligations. Rigorous enforcement is viewed as an acceptable trade-off for the commercial certainty it provides to
both parties.6
2.1 Inte rmediate Te rms
Classifying obligations into two categories proved simplistic and inconsistent with practical realities. Individual
contractual terms often serve multiple purposes and premature classification of obligations as conditions can
produce unfair results where the breach is not severe.7 In Hongkong Fir, Diplock LJ established a third category of
obligations, known today asintermediateterms, for which the consequences of their non-performance could not be
established a priori;
Of such undertakings all that can be predicated is that some breach will and others will not 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 the legal consequences of a breach of such an undertaking,
unless provided for expressly in the contract, depend upon the nature of the event to which the breach gives
rise and do not follow automatically from a prior classification of the undertaking as a ‘condition’ or a
‘warranty’.8
Using the obligation of seaworthiness to underscore his point, Diplock LJ explained how a default of one obligation
could be trivial and easily remedied, such as a few loose screws, or more significant, such as a threat to the physical
integrity of the vessel.9 Classifying an obligation as an intermediate term enables the courts to provide a remedy
commensurate with the consequences of the impugned breach. Serious breaches of intermediate terms entitle the
innocent party to termination whereas minor breaches only provide pecuniary damages.10
2.2 Distinguishing betwee n Conditions and Interme diate Terms
The House of Lords in Bunge v Tradax affirmed Honkong Fir’s intermediate term analysis and cautioned that courts
should not be too ready to interpret contractual clauses as conditions’.11 However, Lord Scarman clarified that
classification required ascertaining the significance attributed to the term when the contract was concluded through
express words or necessary implication’.12 If the parties’ intended to grant the innocent party a right of termination
for any breach of a particular obligation, the Court should uphold their desire and treat the term as a condition.13
Otherwise, the Court should qualify the stipulation as an intermediate term and, only then, proceed to an assessment
of the nature and consequences of the breach to determine the appropriate remedy.14 The appropriateness of
allowing rescission must be balanced against the need for certainty. In other words, while the actual breach should
have no bearing on the characterization of an obligation, the consequences of hypothetical breaches contemplated by
the parties at the conclusion of the contract are relevant.15
2.2.1 The Waller Test
While classification of particular contractual terms is context-dependent, Waller LJ identified different scenarios in
The Seaflower where a particular term should be treated as a condition:16
1) Where expressly provided by statute;
5 Hongkong Fir [1961] 2 Lloyd’s Rep 478, 493.
6 Bunge Corporation v Tradax Export S.A. [1980] 1 Lloyd’s Rep 294, 307 (Court of Appeal) (Megaw LJ)(‘Bunge v Tradax’).
7 Beale, H (ed), Chitty on Contracts, (31st Ed, 2012), [12-034].
8 Hongkong Fir [1961] 2 Lloyd’s Rep 478, 494.
9 Ibid.
10 Ibid.
11Bunge Corporation v Tradax Export S.A. [1981] 2 Lloyd’s Rep1, 6 (Lord Wilberforce) (‘Bunge v Tradax H.L.’).
12 Ibid, 8 (Lord Lowry); 7 (Lord Scarman); 12 (Lord Roskill).
13 Ibid, 13 (Lord Roskill).
14 Ibid, 7 (Lord Scarman); 8 (Lord Lowry).
15 Bunge v Tradax H.L. [1981] 2 Lloyd’s Rep1, 14 (Lord R oskill).
16 B.S. & N. Ltd v Micado Shipping Ltd; (The Seaflower) [2001] 1 Lloyd’s Rep 341, 348.
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