Lansat Shipping v. Glencore Grain (CofA)

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Lansat Shipping Co Ltd v Glencore Grain BV (The "Paragon") 
English Court of Appeal: Lord Clarke MR, Goldring and Patten LJJ: [2009] EWHC 551 (Comm): 31 July 2009
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Andrew Baker QC (instructed by Ince & Co) for the Appellant, Lansat ("the Owners")
Jonathan Hirst QC and Simon Birt (instructed by Birketts LLP) for the Respondent, Glencore ("the Charterers")

In upholding the judgment of the Commercial Court,
the Court of Appeal held that a clause in a time-charter which provided that, in the event of late redelivery, the rate of hire for the 30 days prior to the commencement of the period of the overrun was to be increased to the higher prevailing market rate, was a penalty clause and, therefore, unenforceable in English law. 

Note contributed by Jim Leighton, BSc (Hons), LLB (Hons), LLM (Maritime Law), Solicitor (England & Wales) of Singapore law firm T S Oon & Bazul and International Contributor to DMC’s CaseNotes

The background is more fully stated in the note of the decision in the Commercial Court.

The Charterers agreed to hire the vessel from the Owners "from the time of delivery, for about minimum 3 to about 5 months (about means +/- 15 days)". In relation to redelivery, clause 101 of the charter stated:

"The Charterers hereby undertake the obligation/responsibility to make thorough investigations and every arrangement in order to ensure that the last voyage of this Charter will in no way exceed the maximum period under this Charter Party. If, however, Charterers fail to comply with this obligation and the last voyage will exceed the maximum period, should the market rise above the Charter Party rate in the meantime, it is hereby agreed the charter hire will be adjusted to reflect the prevailing market level from the 30th day prior to the maximum period date until actual redelivery of the vessel to the Owners."

The vessel was delivered on 29 November 2006. Allowing for the plus 15 days margin, the last possible day for lawful redelivery ("the final terminal date") was 14 May 2007. The last voyage under the charter took 77 days, with redelivery on 20 May 2007. This was over 6 days beyond the final terminal date. 

The Charterers paid hire at the charter rate for the duration of the charter up until the last redelivery date on 14 May 2007 and at the market rate for the 6 days or so the vessel was overdue. The Owners also claimed hire, based on the market rate, for thirty days before the latest date for redelivery, in reliance on clause 101 of the charter. At this time, hire rates were rising, so the additional claim was at a market rate of some US$46,100 per day, as opposed to the charter rate of US$29,500 per day. On this basis, the Owners claimed US$471,600 approx. over and above what the Charterers had already paid.

The question that arose for decision was whether or not clause 101 of the charter was a penalty. The LMAA tribunal and the Commercial Court had found, in favour of the Charterers, that it was and was therefore unenforceable.

The opinion of the Court of Appeal was delivered by the Master of the Rolls, with whom the other Justices agreed.

Late Redelivery – The Principles

The Master of the Rolls first reviewed the case law considered by the Commercial Court judge on redelivery of vessels under time charters, without consideration of the effect of clause 101 of the charter. The Master of the Rolls upheld the interpretation of the law given by the Commercial Court judge. This was to the effect that there was no distinction to be made in the measure of damages to be paid for late redelivery, whether the re-delivery followed a legitimate or an illegitimate final voyage orders by charterers. The correct measure of damages was to compensate at the market rate (when higher than the charter rate) for the number of days by which the final voyage overran the final terminal date of the charter.

The Master of the Rolls stated:
"Taken together, the cases and the textbooks represent a considerable body of opinion from judges and others with extensive knowledge and experience of the maritime law. As I read them, the principles apply to the position in the case of an illegitimate last voyage which is performed. Whether or not all the principles stated form part of the ratio decidendi of the cases, left to my own devices I would have reached the same conclusions [as the Commercial Court judge]."

The Owners’ position was, however, that – by giving an order for an illegitimate last voyage - the Charterers had ordered the Owners to carry out a voyage which was not a contractual one. As the order was given outside the contract, it was a voyage for which, if the Owners performed it, they were entitled to appropriate remuneration. It followed that the Owners’ claim for remuneration was not a claim for damages but a quasi-contractual or quantum meruit claim for hire, which, absent express agreement, would be at the relevant market rate at the time the voyage was carried out. While the Master of the Rolls considered this to be an "ingenious submission" it was in his opinion "ill-founded".

The Master of the Rolls stated:
"There are of course cases in which non-contractual arrangements are made in which it has been held that payment must be made for a service rendered outside the contract… However, in the present context, the correct position is in my judgment that, absent a without prejudice agreement …, where the owners choose to perform a last voyage order, they are doing so under the contract, whether the voyage is a legitimate … or an illegitimate last voyage and, in the latter case, whether they knew or suspected that the order was for an illegitimate last voyage or not. Moreover, the same is true whether the order to carry out the voyage was a repudiatory breach of the charterparty or not. In each of these cases, the owners are performing the voyage under the contract, although, (absent waiver) if they suffer loss, they can of course recover damages for the charterers’ breach of contract in giving the illegitimate order. This seems to me to be consistent with the general principle that, where an innocent party chooses to perform the contract after a repudiatory breach… by the other party, he continues to be bound by the terms of the contract but is entitled to damages for any loss caused by the breach."

The Master of the Rolls considered that the true position, absent clause 101, was that if the final voyage order was an illegitimate order (thus a breach of contract) and the Owners had performed the voyage, they would have been entitled to recover hire at the contractual rate until the contractual date for redelivery and damages at the market rate thereafter until actual redelivery. He was of the opinion that the cases cited by the Owners did not lead to any other conclusion; in the ordinary case in which charterers give orders for an illegitimate last voyage, there is no basis for implying a request by the charterers that the owners should perform such a voyage outside the charterparty and on terms that they will pay for the voyage at the market rate. This would also be inconsistent with the case law cited.

The Master of the Rolls concluded that, absent clause 101, the measure of damages would have been that accepted by the Charterers and held by the Commercial Court judge, namely some 6 days at the market rate.

Clause 101

In considering the effect of clause 101 of the charter on the basis of the case law, the Master of the Rolls again agreed with the Commercial Court judge. The issue revolved around the interpretation of the second sentence of clause 101.

The Owners’ position was that:
1. An illegitimate last voyage is a request to perform services which the Owners have not committed the vessel to perform and that, since the owners can reject the order, so they can name their price to perform it (if aware that it is illegitimate) or claim remuneration at a market rate if the services are performed without agreement as to price – the second sentence of clause 101 is an agreement in advance as to the price payable where an illegitimate last voyage has been performed.

2. Clause 101 is not penal because it is not penal to provide that, if an illegitimate last voyage is performed, the Owners are to be put in the position they would have been in if they had declined to perform it and the Charterers had persisted in it so as to repudiate the charter; and

3. The first sentence of clause 101 is a condition of the charter, any breach of which brings the charter to an end.

The Master of the Rolls rejected the first submission essentially for the reasons stated above. He stated: "The second sentence [of clause 101] applies on the premise that there is a breach of the obligation in the first sentence, since it begins ‘if, however charterers fail to comply with this obligation’. It is thus an agreement as to what should happen in the case of breach and is thus a classic provision to which the law of penalties applies… It is therefore unenforceable unless the payment stipulated for is a genuine pre-estimate of the amount of loss caused by the breach."

The Master of the Rolls also rejected the second submission essentially for the same reasons as in relation to the first submission. He stated: "Unless it is a condition of the charterparty…, a breach of the first sentence of the clause is not a repudiatory breach of the charterparty and I can see no reason to construe the second sentence of clause 101 as if it was. Yet that is what the owners seek to do because their argument that it contains a pre-estimate of the loss assumes that, but for the breach, the vessel would have been delivered to them before the redelivery date, which in its turn assumes that they accepted the breach as a repudiation of the charterparty. Further, for the reasons I have already given, I do not think that the clause has the effect of treating the charterers as having persisted in the breach so as to repudiate the charter."

The Master of the Rolls further rejected the third submission. He stated: "… the test for the construction of a term as a condition is a very difficult one to satisfy but, whether that is so or not, the first sentence of clause 101 is not a condition. For the reasons I have already given, I would hold that a breach of the clause, at most, gives the owners the option not to perform the last voyage. I see no reason not to treat the first sentence as a similar provision to the ordinary case where it is a breach of the charterparty to give an order for an illegitimate last voyage …"

The comment made in relation to the Commercial Court judgment is repeated. The Court of Appeal opinion has created a binding decision (effectively) only subject to reconsideration by the (now) Supreme Court. While it is suggested that there may be ways in which to circumvent this decision as a matter of redrafting redelivery clauses, it would, however, be for the courts to fully test the legitimacy of such mechanisms.

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