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Lloyd's Maritime Law Newsletter   12 March 2004  
 
Relief from forfeiture in bareboat charters

The Commercial Court resolves the issue of relief from forfeiture in relation to bareboat charters.

In a Judgment dated 12.03.04 Cooke J. decided that relief from forfeiture was available in bareboat charter cases where the purpose of the withdrawal clause was "in terrorem". This contrasts with the position in time charters, where the House of Lords had decided in "The Scaptrade" in 1988 that relief from forfeiture was not available - but purposely left open the position in relation to bareboat charters, which has now been resolved.

More OG Romsdal Fylkesbatar AS v The demise charterers of the Ship "Jotunheim" - QBD (Com Ct) (Cooke J)

The claimants chartered the vessel Jotunheim to the defendants under a bareboat charter on an amended Barecon 89 form, including Part IV which provided for a Hire/Purchase Agreement, with additional typed clauses. The ordinary form of hire clause in the Barecon 89 form, clause 10, was replaced by typed clause 31, which stated that the charterparty was concluded in anticipation of the eventual sale of the vessel by owners to charterers, that the sale price had been agreed as US$950,000, that a deposit of US$25,000 was payable on signing the charter, that for the purpose of the bareboat calculation US$725,000 was to be paid over a period of 48 months at a monthly bareboat hire rate of US$15,104.17 in advance to owners' nominated bank "discountless and non-refundable", and that lump sum deposits of US$50,000 or US$75,000 were to be paid with the 6 months, 12 months and 16 months hire payments. The final part of the clause provided that on completion of the 48th payment the charterers "shall have purchased the vessel and owners shall take all necessary steps immediately to transfer ownership of the vessel to the company nominated by the charterers."

Clause 32 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, such as crew wages, port expenses, fuel invoices and with the remaining fuel on board free of costs to the seller. 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 seller's losses, they shall be entitled to claim further compensation for their loss and for all expenses.”

The vessel was delivered under the charter on 16 or 17 December 2003. The first payment of hire (less a small amount) was made about 5 days late. The second payment (less a small amount) was also made about 5 days late. The small reductions in the payments were explained by the deduction of bank charges.

The third instalment was due on 16 or 17 February 2004 but was not paid on that date. On 24 February the owners threatened to take the vessel back unless the instalment was paid that day. On 25 February the owners informed the charterers that they were proposing to use their right to withdraw from or terminate the charter with immediate effect, and a short time later advised the charterers that they had done so. It was not until 26 February 2004 that the owners received the third instalment, which was again reduced by a small amount.

The owners contended that clause 32 provided for an automatic return of the vessel to the owners upon default for non-payment of monies due; alternatively, that clause 32 gave them a right to withdraw the vessel, exercisable by serving notice of withdrawal or making it plain to the charterers that the charter was at an end. The charterers argued that the agreement was more akin to a contract of sale than a time charter, and that payments referred to as hire were in reality instalments of the purchase price of the vessel. They relied on section 10 of the Sale of Goods Act 1979 and its provision that "unless a different intention appears from the terms of the contract, stipulations as to time of payment are not of essence to the contract of sale". The matter came before the Court by way of cross applications for summary judgment.

Held, that although the wording of clause 32 might suggest an automatic return of the vessel on default for non-payment of hire, that was in practice unworkable. In the case of a demise charter business necessity required some withdrawal by notice or some other act exercising that right which showed that the demise charter had been brought to an end. The problem with the charterers' argument was the express terms of clause 32. There was no doubt that a failure to pay hire on time was "default for non-payment of hire monies due to owner". The consequence of such a default was then spelt out in clause 32 with possession of the ship to revert to the owners and that applied to any failure to make timely payment of hire, whether or not it was a repudiatory failure (see The Laconia [1977] 1 Lloyd's Rep 315). There was no need for the charter to say that time for payment was "of the essence" since the clause itself set out the specific consequences of failure to make any payments due. The parties had specifically agreed in a commercial contract what was to occur in those circumstances.

Accordingly, the owners had the right to retake possession of the vessel and to withdraw the vessel from the service of the charterers. An alternative argument by the charterers that the owners had waived their right to withdraw for non-payment of hire because they failed to withdraw the vessel within a reasonable time after the failure to make payment would be rejected. On the facts, a reasonable time had not passed before the owners withdrew the vessel.

The charterers had also claimed relief from forfeiture. In The Scaptrade [1988] 2 Lloyd's Rep 253 the House of Lords held that relief from forfeiture was not available where an owner exercised a right of withdrawal under a time charter. The position so far as demise charterers concerned was not determined. The House of Lords held that because a time charter was a contract for services and transferred no right to possession and because it was not a contract susceptible to an order for specific performance, equitable relief against forfeiture was not available.

The owners had accepted that the Court was in principle entitled to grant relief from forfeiture of a contract provided that the object of the transaction and of the insertion of the right to forfeit for non-payment of money was essentially to secure the payment of that money or was security for the attainment of a specific result which could be attained through the courts (On Demand Plc v Gerson Plc [2000] 4 All ER 734 and Shiloh Spinners Ltd v Harding [1973] AC 691), but they had submitted that there was no difference between the position under a time charter and a demise charter since it was not possible to say that the insertion of the withdrawal clause, let alone the transaction itself, was to secure the payment of money.

The owners' submission on this point would be rejected. The key was the provision of services in a time charter whereas in a bareboat charter the owners provided the ship in anticipation that they would do nothing further after delivery. The essential purpose of the provision for the right to withdraw under clause 32 was to secure the payment of the hire for which the agreement provided, and also payment of the deposits.

As to discretion, this was not an appropriate case for granting relief from forfeiture.

Accordingly, the charterers had no realistic prospect of success in showing that the charter was not validly terminated on the ground of breach of clauses 31 and 32. The charterers also had no realistic prospect of success in showing that they should be entitled to relief from forfeiture. In consequence, the owners were entitled to possession of the vessel. The owners were therefore entitled to summary judgment.

Michael Collett (More Fisher Brown) for the owners; Geraldine Clark (E.G. Arghyrakis & Co) for the charterers.

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