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If you want a term to be a condition, do not rely on an assumption – state it

21 October 2016 #Commercial

The case of Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS recently heard in the Court of Appeal has demonstrated the importance of parties to a contract specifying where a term should have the status of a ‘condition’.

A ship owner of three ships had hired his vessels out under 3, 5-year Charter Party agreements.  The charterers were late in paying hire chargers under all three contracts between April and the summer of 2011, a default in this period of roughly $2 million. In September of that year, the owners withdrew the ships and terminated the Charter Parties, claiming over $25 million in arrear of fees up to the point of termination and in damages for the remainder of the 5-year term.

In each of the contracts, the owner had been given the right to withdraw the ship on grounds of late payment, “failing the punctual and regular payment of the hire, or on any fundamental breach whatsoever of the Charter Party”. In the first instance the judge ruled that this term was an ‘innominate’ term meaning that it would only justify termination where breach of it deprived the aggrieved party all or a substantial proportion of the benefit of the contract. As such this term was not considered a ‘condition’ of the contract and therefore breach of the term in even the smallest of ways could not have justified termination and damages for loss of the contract. The judge did consider however the persistent late payments of the Charter party and concluded these amounted to the owners right to terminate and be awarded damages for loss of the contract.

With both parties appealing the decision, the case was taken to the Court of Appeal, where it was confirmed that payment obligations arising under the contract was an ‘innominate’ term rather than a ‘condition’. In formulating their conclusion, the CA considered that most terms in a contract unless otherwise specified, are ‘innominate’ terms. The CA further considered that even if a time of the essence clause is presumed in a commercial contract, when detailed specialist contracts are involved such as time charters; such a presumption would have little weight. It was decided that the charterers delayed payment would therefore not necessarily give rise to the right of termination at common law.

The CA turned then to consider whether the charterers late payments were repudiatory breaches as the payment terms were not considered to be a ‘condition’. In doing so the CA were required to consider whether the charterers breach was sufficient enough as to deprive the aggrieved party of a substantial amount of the 5-year total. Although the delays only affected a few instalments and related to only a small proportion of the overall 5-year benefit, the CA reflected on the charterers apparent unwillingness and inability to pay promptly in the future and so resolved that the ship owner was able to terminate at common law.

Contracting parties should be cautious in drafting and agreeing termination clauses, and consider whether any breach giving the right to terminate should be a ‘condition’ or ‘remain an ‘innominate’ clause, and also whether termination is to be the only available remedy to the aggrieved party. It is also worth remembering that the right to terminate can be both express (as a condition in the contract) and a common law right; clarification on whether both rights should be available is also advisable. 

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Ashan Arif

Ashan Arif

T: 0118 960 4651
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Commercial team
+44 (0)118 958 5321