Compensation for The Damage Resulting From The Failure to Pay Freight: Back to Uncertainty Again

In March 2015 the Commercial Court, deciding the case Spar Shipping AS v. Grand China Logistics Holding has changed the view in English case law.

M/v “ASTRA” was chartered for five years in accordance with a NYPE 1946 form, but due to the sudden collapse of the market, the charterers were unable to afford the payment of the freight, which at that time was far higher than the market one.So, pursuant to Clause 5 of the charterparty, which entitled the shipowners to terminate the contract in the event the charterers failed to timely pay the freight, the shipowners withdrew the vessel and started an arbitration against the charterers in order to obtain compensation for the loss of profit calculated from the date on which the vessel was withdrew until the end of the remaining charter period. The shipowners based their action on two fundamental points:

  • (i) the charterers were in “repudiatory breach”,
  • (ii) the date of payment of the freight was an essential element of the contract, whose breach entitled the shipowners to terminate the contract and to claim compensation for damages.

The Court –‐ and then the High Court –‐ acknowledging the charterers’ conduct as “repudiatory breach”, accepted the shipowners’ claim for compensation for the damages suffered. In both proceedings, it was established that clause 5 of the charterparty provided an essential term for the payment of the freight, whose breach gave shipowners the right to claim compensation for the damages corresponding to the loss of profit resulting from the earlier termination of the contract, which could be calculated as the difference between the freight under the contract and the possible freight on the market until the original date of effect of the charter.Such principle is extremely significant because in case of non–‐ and/or delayed payment of a freight instalment by the charterers, it entitles shipowners to obtain compensation for the damages suffered with no need to prove the charterers’ “repudiatory breach”, that is their unequivocal intention not to perform the charterparty. The decision rendered by the Commercial Court in the case Spar Shipping AS v. Grand China Logistics Holding. Indeed, the recent decision in the case Spar Shipping has completely reversed the conclusion reached by the English Court in the Astra case, restoring the traditional guidance as it was “pre–‐ ASTRA”. The case in question concerned three NYPE 1993 charterparties, according to which the charterers, Grand China Shipping, always duly and timely paid the hire until 11 April 2011. From that date the charterers were no longer able to pay the fright, and, as a consequence, the shipowners, Spar, withdrew the vessels, reserving the right to bring an arbitration claim for damages suffered. In accordance with the mentioned Astra case law, shipowners based their claim on the fact that the charterers, failing to pay the freight, had breached a “condition” of the contract and had not complied with the essential payment term provided for by the contract.Along the lines of the decision rendered in the previous similar Astra case, the shipowners claimed also the payment of the loss of profit, given that at the time of the withdrawal of the vessels, the market did not offer the chance to charter them on the same conditions as the terminated contracts.The issue concerned the legal classification of the obligation to pay the freight, that is whether it was to be considered as

  • (i) a “condition” – essential clause of the contract,
  • (ii) a “warranty” – non–‐essential clause of the contract, or
  • (iii) an “innominate term”–‐ third residual category of English law, which, depending on the case, assumes the characteristics of a condition or of a warranty.

Only in case the obligation to pay the freight had been considered a “condition”, as in the Astra case, the charterers’ breach of the same would have automatically amounted to a “repudiatory breach” hence entitling the shipowners to withdraw the vessel as well as to obtain compensation for damages suffered, including damages for loss of future profits.In the specific case, the Commercial Court found that the obligation to pay the freight was not a “condition” of the contract, but rather an “innominate or intermediate term”. As a consequence, the failure to pay a single freight instalment did not automatically entitled the shipowners to terminate the contract and to obtain compensation also for the loss of profit. The failure to pay the freight, considered as breach of an “innominate term”, entitles the shipowner to withdraw the vessel only if the contract provides for the express withdrawal right but it does not entitle the same to automatically claim compensation for damages for future losses. The shipowner would be entitled to compensation for loss of profit only if it is able to establish that the charterers’ breach amounted to a “repudiatory breach”, that is a breach proving that the charterers are not able or willing to perform the charter.This decision restores the traditional position as it was pre–‐Astra, according to which in case of failure to pay the freight, the shipowner was entitled to withdraw the vessel but not to automatically obtain compensation for suffered damages.In light of this change in case law, the shipowner, in order to avoid dramatic consequences as a result of the early withdrawal of the vessels, shall have the burden to ensure that the contract expressly provides the right of withdrawal as well as the right to compensation for loss of profit.We shall keep you updated on this matter, given that this judgement is most likely to be challenged by the shipowners before the Court of Appeal.

Source: “NCTM Studio Legale Associato” through DAILY COLLECTION OF MARITIME PRESS CLIPPINGS 2015 – 168,