DMC/S&T/17/01
Orange Maritime Pte. Ltd. v. O.N.E. Shipping Inc
Arbitration Award of the Society of Maritime Arbitrators, New York: July 2001
TIME CHARTERPARTY: WITHDRAWAL CLAUSE: WHETHER OWNERS ENTITLED TO CLAIM DAMAGES IN ADDITION TO WITHDRAWAL: REPUDIATORY BREACH: TIME OF THE ESSENCE AS REGARDS PAYMENT OF CHARTER HIRE : EFFECT OF DELETED CLAUSE: MEASURE OF DAMAGES: DAMAGES TO BE ASSESSED BY MARKET AT TIME OF BREACH

Summary
This award decided that, under general principles of American law, an owner who withdraws his ship from a time charterparty by reason of the charterers’ failure to pay hire on time and in full in accordance with the terms of the charterparty, is also entitled to claim damages, unless the charterparty provides to the contrary. Damages are to be assessed by reference to the market prevailing at the time of the breach.

Facts
Orange Maritime were the owners of a new-build chemical tanker, the Opal Sun. They fixed her to O.N.E. Shipping as charterers under an amended Shelltime 4 form of charterparty for a period of five years, with an option for a further three years. The rate of hire for the first year was US$12,125 per day, rising by annual increments of US$150 to US$12,725 per day in the fifth year. The charterparty called for arbitration in New York. Clause 81 of the charterparty, the ‘Withdrawal’ clause, provided:

"If the hire is not received in Owners’ account within five banking days of due date, the Owners shall have the right to withdraw the vessel from service giving charterers five banking days notice of such intention, enabling charterers to correct and ensure that payment is received by Owners within such notice period. If the hire is not received in Owners’ account by such time, Owners shall have the right to withdraw the vessel……"

The ship was delivered by owners to charterers on February 9 1999 . In early July 1999, in consequence of poor market conditions, the charterers requested a reduction in the rate of hire. This was agreed. Hire was paid on time from July to December that year. In December 1999, charterers requested a further reduction, but the owners did not agree to it. The hire due in January 2000 was paid two days late. The February hire was paid 11 days late, but within the extended period provided by clause 81. Charterers paid the March hire late, and only in part. This was unacceptable to owners, who withdrew the ship from the charterers’ service.

Owners claimed from charterers US$4.938 million, as damages for breach of clause 81 of the charterparty. Charterers argued that owners had no right to claim damages, on the grounds that owners’ only remedy for non-payment was their right to withdraw the ship from the charterers’ service.

The Arguments
The owners argued that the charterers were liable for damages, since they were in breach of their obligation to pay full hire in a timely manner. United States law, they maintained, gives owners the right to claim damages in addition to withdrawal, irrespective whether such a right is expressly provided in the charterparty. A party’s right to sue for damages resulting from a breach of contract does not derive from any specific provision in the contract granting that right, but rather from the law of contracts, which seeks to preserve to contracting parties the benefit of their bargain.

Charterers argued that the negotiated withdrawal provision, clause 81, provided a complete defence to owners’ claim for damages. They relied on the fact that clause 9(a) of the Shelltime form had been deleted. This clause contained language which allowed the owners to withdraw the ship ‘without prejudice to any other rights owners may have under this charter or otherwise’ if hire was not timely paid.. Clause 81, which had taken its place, did not preserve a claim for damages by owners after withdrawal. In order to make good their claim for damages, owners had to establish a separate repudiatory breach of charter. Charterers’ late partial payment was not sufficient to meet this burden.

On the question of damages, the owners argued that the established measure of damages in charter cancellation situations is the difference between the charterparty rate of hire and the market rate at the time of cancellation, measured over the unexpired term (emphasis added). The charterers, on the other hand, argued that the measure of damages is the net amount that would have been earned by the ship under the charter sued on, less the net amount earned, or which might with reasonable diligence have been earned, by the ship during the remaining period of the charter. On this basis, the charterers argued that the market was rising and that therefore, the owners stood to gain, rather than lose, from the charterers’ breach. The charterers claimed, in consequence, that no damages were due.

Award
The arbitrators found that owners’ withdrawal was proper and that the charterers were liable for damages amounting to US$2.825 million.

In determining the position under US law, the panel quoted from the judgment of Judge Cardozo in the 1918 case of Helgar Corporation v. Warner’s Features. "Whether a late payment of hire is a repudiation of the contract entitling the owners to damages in addition to the right to withdraw the ship, ‘depends upon the question whether the default is so substantial and important as in truth and fairness to defeat the essential purpose of the parties. … The failure to make punctual payment may be material or trivial according to the circumstances… If the default is the result of accident or misfortune, if there is a reasonable assurance that it will be promptly repaired, and if immediate payment is not necessary to enable the vendor to proceed with performance, there may be one conclusion. If the breach is wilful, if there is no just ground to look for prompt reparation, if the delay has been substantial, or performance is imperilled…. there may be another conclusion.

The panel found that ‘in this case the breach was wilful, there was no just ground to look for prompt reparation, the delay was repeated, substantial and directly contrary to specific charterparty terms, and the owners’ needs were urgent… so that continued performance was imperilled, all crying for equitable relief in the form of damages. Charterers’ failure to make a full hire payment when due is a fundamental breach of contract and such a breach gives rise to a claim for damages. That time is of the essence regarding charter hire payment is a sacrosanct principle in American maritime commercial practice. Given the specific terminology in this agreement, there can be no breach more fundamental than charterers’ failure to make hire payments in full and on time.’

The panel was not prepared to give any weight to the deletion of clause 9(a) from the charterparty, saying that the clause ‘is not and never was a constituent of the parties’ agreement… and is irrelevant to this contract.’ It considered that Clause 81 was ‘clear and unambiguous, leaving no doubt as to the parties’ intent.’

The panel concurred with the owners’ view that ‘US law recognises both the withdrawal right and the right to seek damages as necessary to protect fully owners’ expectation interests. These rights … exist independently of any explicit provision in the contract. Inasmuch as owners were already entitled as a matter of law to withdraw the vessel and claim for damages, a contract clause providing those rights is superfluous….. Nothing in clause 81 provides a basis to conclude that the parties intended withdrawal to be an exclusive remedy, notwithstanding that this could easily have been accomplished with specific language if this had, in fact, been what the parties intended. The contract is silent as to owners having surrendered their right to a damages claim upon withdrawal, thus leaving the matter to ordinary principles of American charterparty law, which fully supports owners’ position.’

On the issue of damages, the panel noted that the charterers had ‘cited no decision contradicting the widely established principle that damages are properly measured in the time frame of the breach and contract cancellation.’ The panel accordingly concluded that ‘the market at the time of the breach is the controlling factor in quantifying damages’ and accepted that the applicable market rate was US$9000 per day. It then calculated its damages award on this basis.

Comment
The panel noted that there may be a difference in approach between American and English law on the question of owners’ right to claim damages in addition to exercising the right of withdrawal. They quoted the following passage from Wilford, Coghlin and Kimball on Time Charters:

"The English approach is probably to treat the right of withdrawal as an ‘option to cancel’, exercisable upon the happening of an event, namely, late payment of hire…. Under this view the owner may withdraw but may not recover damages for repudiation unless the charterer’s conduct with regard to the payment itself amounts to a repudiation even without a withdrawal clause. Hence, as a practical matter, withdrawal will only happen in a rising charter market.

The American view, however, is that mere late payment of hire entitles the owner to treat the charter as repudiated. The ‘withdrawal’ clause is thus construed as the equivalent of a ‘time is of the essence’ provision, any breach of which is sufficient to be treated as grounds for termination. Hence, in New York, the charterer would risk being held liable for damages if the owner were to withdraw in a falling market after a late payment.’