DMC Category Rating: Confirmed

This case note is based on an Article in the May 2004 Edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers, DLA. DLA is an International Contributor to this website.

Facts
The Bareboat Charterparty
The claimant owners chartered the Jotunheim to the defendants under a bareboat charter for forty-eight months on an amended Barecon 89 Form, including Part IV, which provided for a hire purchase agreement. On expiry of the charter (and provided the charterers had fulfilled their obligations), payment of the last month's hire instalment was to constitute the final part of the purchase price, so the vessel would then belong to the charterers.

The ordinary form of hire clause in the Barecon 89 Form was replaced by clause 31. This stated that the sale price was US$950,000, and provided for payment of an initial deposit of US$25,000, a monthly bareboat hire rate of US$15,104.17 in advance to be paid "discountless" and additional deposits to be paid at six months, twelve months and sixteen months. In addition, the standard provision in Barecon 89 allowing a seven days' period of grace for payment was deleted and replaced by clause 32, which provided:

"It is hereby agreed between seller and buyers that in case of buyers' default for non-payment of hire monies due to owner or non-performance of any of the agreed terms within the realm of this agreement the vessel will return back to the sellers free of all expense incurred, if any

Should buyers default seller will not be obliged to pay back any money paid down during the bareboat period. If the hire paid down during the bareboat period does not cover the sellers' losses, they shall be entitled to claim further compensation for their losses and for all expenses".

Payment problems
The vessel was delivered on 16 or 17 December 2003 but problems soon arose over payment of the hire. The first and second month's payments were made five days late. The first was short by 17 cents, the second by US$41.17. The owners complained and asked for the shortfall to be made up by the February payment, due on 16 or 17 February 2004. On 18 and again on 24 February, they chased for payment by fax, on the second occasion threatening that, unless hire was paid that day, they would take the vessel back. The demise charterers, however, could only promise payment "next week". On 25 February, the owners' brokers informed the charterers that the owners proposed to withdraw from the charter, which they did later that day. The February payment was, nevertheless, made on 26 February (short by US$142.67) and a further payment was made on 2 March of US$88.50.

The effect of default
The owners argued that, under clause 32, they were entitled to the immediate return of the vessel on the charterers' default. No notice was required. Alternatively, if notice was required, it was given in the fax of 24 February.

The demise charterers argued that this was a conditional sale agreement rather than a hire purchase agreement because, at the end of the period, they were bound to proceed with the purchase (rather than merely having an option to purchase). The payments referred to as hire were really instalments of the purchase price. Consequently, section 10 of the Sale of Goods Act 1979 applied, which provided that stipulations as to time of payment are not of the essence to the contract of sale, unless a contrary intention appears. Alternatively, the demise charterers maintained that owners had waived their right to withdraw for non-payment of hire by failing to do so within a reasonable time after the failure to make payment.

Relief from forfeiture
The charterers' last-ditch argument was that they should be entitled to relief from forfeiture. Such relief is not available when the owner exercises a right of withdrawal under a time charter because a time charter is a contract for services, does not transfer any right to possession and is not a contract susceptible to an order for specific performance (The Scaptrade [1988] 2 Lloyd's Rep 253). But the same did not apply to this bareboat charter, under which the demise charterers had been given contractual and possessory rights in the vessel and had the right to have ownership transferred to them at the end of the charter period.

In Shiloh Spinners Limited -v- Harding [1973] AC 69, the House of Lords identified situations in which the court could grant relief from forfeiture. The first was where it was possible to state that the object of the transaction and the inclusion of the right to forfeit were essentially to secure the payment of monies. The second was in cases of fraud, accident, mistake or surprise. The third was a debateable area which included obligations in leases such as to repair, covenant to insure, and so on.

The charterers argued that this situation fell into the first category. The purpose of including the right to withdraw the vessel under clause 32 was to secure the hire payments and the deposits.

Judgment
As regards the argument based on s.10 of the Sale of Goods Act, the Judge disagreed with the demise charterers’ contentions. The problem with this argument was that clause 32 of the charter expressly set out the consequences of non-payment and the parties had deleted the standard Barecon clause allowing 7 days' grace. In any event, the owners by their ultimatum of 24 February effectively made time of the essence for the purpose of the clause.

As for the waiver argument, there could be no serious suggestion that anything said or done by the owners led the demise charterers to believe the owners would not exercise their right to withdraw. The owners had consistently insisted on prompt payment. The charterers had been fully aware of the risks that they deliberately chose to run and the effect this would have. In this context, the length of time between the due date for payment and the withdrawal could not constitute a waiver.

However, as regards forfeiture, the judge agreed that the nature of this transaction was such that the court had power to grant relief from forfeiture.

But should the court grant relief? Following Shiloh, it had to take into account such things as the conduct of the defaulting party, the gravity of the breach and the disparity between the value of the property and the damage caused by the breach. Here, the conduct of the demise charterers had not been meritorious. They had deliberately flouted their obligations to pay on time and pay in full despite protests from the owners. Although the shortfalls were small, they demonstrated a cavalier disregard for the strict obligations of the contract. This was not a case where a significant part of the charter period had passed. The first three months showed that the charterers were unsatisfactory payers. Although the direct effects of late payment and underpayment were small, it was the attitude that underlied it that gave cause for concern.

Taking all this into account, the judge found that this was one of those cases where granting relief from forfeiture was not appropriate.