Isabella Shipowner SA v Shagang Shipping Co Ltd [2012] EWHC 1077 (Comm)

Case No FOLIO 1156 OF 2011[2012] EWHC 1077 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 26/04/2012
Before
THE HONOURABLE MR JUSTICE COOKE
Between
Isabella Shipowner SAClaimantShagang Shipping Co LtdDefendant
Timothy Hill QC and James Shirley (instructed by Ince & Co LLP) for ClaimantTimothy Young QC and Simon Milnes (instructed by Holman Fenwick Willan LLP) for DefendantHearing Hearing dates: 18 April 2012
JudgmentMr Justice Cooke :Introduction
[1]The claimant ship owners challenge an award made by Mr William Robertson dated 6 September 2011 on two grounds. First, with permission, the owners appeal under section 69 of the Arbitration Act 1996 on the following question of law:
“Whether, as a matter of law, owners were entitled to refuse early re-delivery of the Aquafaith (the vessel) at Jintang on 9 August 2011 and affirm the charter, or whether they were bound in law to accept early re-delivery and merely entitled to sue for damages”
. Secondly, the owners contend that there was serious irregularity affecting the proceedings and/or the Award, within the meaning of s68 of the Arbitration Act, inasmuch as the arbitrator failed to give any, or any sufficient, weight to the owners’ submissions dated 22 August 2011 when deciding the issues which arose between the parties. In so doing, he failed to comply with section 33 of the same Act.[2]Under a charterparty on amended NYPE form dated 19 September 2006 (the charter), the vessel was chartered by the owners to the defendant charterers for a duration of 59-61 months. The charter also included an express warranty “that the vessel will not be re-delivered before the minimum period of 59 months”.[3]In admitted anticipatory breach of the charter, on 6 July 2011, the charterers stated that they would re-deliver the vessel on dropping the last outward sea pilot after discharge in China under the then current voyage. The charterers made it plain that they had no further use for the vessel for the balance of the minimum period of charter, which expired (at the earliest permissible date) on 10 November 2011.[4]The owners commenced arbitration on 25 July 2011, before re-delivery occurred, seeking a partial final award declaring that the owners were entitled to refuse such re-delivery, as they had done, and to affirm the charterparty, holding the charterers liable for hire for the balance of the minimum period. Submissions were made in writing to the arbitrator both before and after the re-delivery of the vessel on 9 August and in his award of 6 September 2011 the arbitrator held that the owners were required to take re-delivery of the vessel, trade the vessel on the spot market by way of mitigation and claim damages in respect of their loss.

The Question of Law

[5]The issue of law turns on the principles enunciated in the decision of the House of Lords in White and Carter (Councils) Limited v McGregor [1962] AC 413 and a series of authorities following on from that decision. There were two major areas of controversy between the parties, arising from the speech of Lord Reid, but not from the speeches of the other two Law Lords who arrived at the same conclusion without reference to these two points. All three of their Lordships, whose majority decision carried the day, reiterated the basic principle that, if one party to a contract repudiates it, in the sense of making it clear to the other party that he refuses or will refuse to carry out his part of the contract, the innocent party has the option of either accepting that repudiation and suing for damages for breach of contract, or refusing to accept the repudiation and affirming the continuation of the contract. If then the innocent party can complete the contract himself, without the need for any action on the part of the contract breaker, he will be in a position to sue for the agreed price. The following key passages appear in the speech of Lord Reid:- “.. The respondent points out that in most cases the innocent party cannot complete the contract himself without the other party doing, allowing or accepting something, and that it is purely fortuitous that the appellants can do so in this case. In most cases by refusing co-operation, the party in breach can compel the innocent party to restrict his claim to damages.” .. [Having referred to an earlier decision, he went on as follows:-] “If it had been necessary for the defender to do or accept anything before the contract could be completed by the pursuers, the pursuers could not and the court would not have compelled the defendant to act, the contract would not have been completed and the pursuers’ only remedy would have been damages. But the peculiarity in that case, as in the present case, was that the pursuers could completely fulfil the contract without any co-operation of the defender.” .. “It might be but it never has been the law that a person is only entitled to enforce his contractual rights in a reasonable way, and that a court will not support an attempt to enforce them in an unreasonable way. One reason why that is not the law is, no doubt, because it was thought that it would create too much uncertainty to require the court to decide whether it is reasonable or equitable to allow a party to enforce his full rights under a contract.”[6]In dealing with the argument that there was some general equitable principle or element of public policy which required there to be a limitation on the exercise of contractual rights by the innocent party, Lord Reid said this:- “It may well be that, if it can be shown that a person has no legitimate interest, financial or otherwise, in performing the contract rather than claiming damages, he ought not to be allowed to saddle the other party with an additional burden with no benefit to himself. If a party has no interest to enforce a stipulation, he cannot in general enforce it: so it might be said that, if a party has no interest to insist on a particular remedy, he ought not to be allowed to insist on it. And, just as a party is not allowed to enforce a penalty so he ought not to be allowed to penalise the other party by taking one course when another is equally advantageous to him. If I may revert to the example which I gave of a company engaging an expert to prepare an elaborate report and then repudiating before anything was done, it might be that the company could show that the expert had no substantial or legitimate interest in carrying out the work rather than accepting damages: I would think that the de minimis principle would apply in determining whether his interest was substantial, and that he might have a legitimate interest other than an immediate financial interest. But if the expert had no such interest then that might be regarded as a proper case for the exercise of the general equitable jurisdiction of the court. But that is not this case. … It is in my judgment impossible to say that the appellant should be deprived of their right to claim the contract price merely because the benefit to them, as against claiming damages and re-letting their advertising space, might be small in comparison with the loss to the respondent: that is the most that could be said in favour of the respondent.”[7]The charterers submitted to the arbitrator that, on the facts here, the owners could not complete the charter without the charterers doing something and that the charter involved co-operation between them so that the principle set out by the House of Lords was of no application. Additionally, it was said that, in any event, the owners had no legitimate interest, financial or otherwise in performing the contract rather than claiming damages and ought not to be allowed to saddle the charterers with an additional burden without benefit to themselves. The arbitrator accepted both of the charterers’ arguments, holding that a time charter was not a contract that could be performed without the charterers needing “to do or accept anything”. He held that co-operation in that limited sense was necessary for the running of a time charter, stating by way of example the obligation of the charterers to provide fuel for the vessel to enable it to conduct its required operations. This he held took the present case outside the ratio of the House of Lords decision. Further, he held that the limitation on the general principle of freedom to elect to hold a party to performance of its obligations, where there was no legitimate interest on the party of the innocent party to do so, was potentially applicable to a time charter and expressly found that the owners had no legitimate interest in insisting that the charter remained alive.[8]The owners, on appeal to this court, submitted that the arbitrator was wrong in law both to hold that time charters fell outside the scope of the rule in White and Carter and to hold that the owners had no legitimate interest in refusing early re-delivery, whilst wrongly holding that owners could only avoid the limitation on the White and Carter principle if they could show that the facts here constituted an exceptional case.

The Subsequent Authorities

[9]Both parties relied on the decision of the Court of Appeal in Attica Sea Carriers Corporation v Ferrostaal Poseidon Bulk Reederei Gmbh (The Puerto Buitrago) [1976] 1 Lloyds Rep 250, the decision of Mr Justice Kerr (as he then was) in The Odenfeld [1978] 2 Lloyds Rep 357, the decision of Lloyd J (as he then was) in The Alaskan Trader [1984] 1 AER 129 and the decision of Simon J in The Dynamic [2003] 2 Lloyds Rep 693. My attention was also drawn to the decisions of Clarke J (as he then was) [1995] 2 Lloyds Rep 592 and the Court of Appeal in Stocznia Gdanska SA v Latvian Shipping Co [1996] 2 Lloyds Rep 132 and to the Court of Appeal decision in Reichman v Beveridge [2007] Bus LR 412. I refer to these in the course of this judgment in chronological order, conscious of those where the relevant passage is part of the ratio and where it is obiter.[10]The parties differed in their submissions as to the effect of these authorities, it being the charterers’ case that Kerr J had mistakenly added additional requirements for Lord Reid’s exception to operate, above and beyond what had been said in the House of Lord and the Court of Appeal in White and Carter and The Puerto Buitrago. Since then, it was submitted, the mistake had been repeated, mostly in first instance decisions, whilst the Court of Appeal had usually gone back to White and Carter and not fallen into the same error. The parties also differed on the application of the White and Carter rule to time charters generally and to the situation here, where the charterers re-delivered the vessel prematurely by 94 days.[11]In The Puerto Buitrago, the Court of Appeal considered the White and Carter decision on an obiter basis, in relation to the fourth question which there arose, in relation to a bare-boat charter, as opposed to a time charter. Lord Denning said he would not follow the majority decision of the House in any case which was not “precisely on all fours” with it and stated that the principle had no application whatever in a case where the plaintiff ought, “in all reason, to accept the repudiation and sue for damages provided that damages would provide an adequate remedy for any loss suffered by him”. He stated that the reason was that, by suing for the money the plaintiff was seeking to enforce specific performance of the contract which he would not be allowed to do if damages was an adequate remedy. He drew an analogy with an employee on a fixed term contract who was dismissed but could not claim salary for the rest of the fixed term, but only damages. Orr LJ held that the demise charter of The Puerto Buitrago could not be fulfilled without the co-operation of the charterers and that the owners had no legitimate interest in claiming charterhire rather than damages on the facts of that case, without any further elaboration. Browne LJ agreed with both Lord Denning and Orr LJ on this issue.[12]In The Odenfeld, Kerr J (as he then was), when grappling with the principles of White and Carter, in the context of a time charter where early redelivery had taken place, referred to The Puerto Buitrago as a case arising out of “facts which were extreme in their nature” and stated that “on the extreme facts of that case, it was wholly unreasonable for the owners to seek to hold the charterers to the charter instead of claiming such damages as they could establish. He did not regard the case as any authority for a general proposition to the effect that whenever a charterer repudiated a time charter or demise charter for whatever reason and in whatever circumstances, the owners were always bound to take the vessel back, because a refusal to do so would be equivalent to seeking an order for specific performance. He accepted that the generality of the White and Carter principle was qualified but that any fetter on the innocent party’s right of election whether or not to accept a repudiation would only apply in extreme cases, viz . “where damages would be an adequate remedy and where an election to keep the contract alive would be wholly unreasonable.”[13]He stated that he was not impressed by arguments to the effect that a time or demise charter required a degree of co-operation between the parties so as to make such charters analogous to contracts for personal services, pointing out that, when the freight market was at one extremity or the other, there were often disputes between charters and owners which came before the courts but did not prevent the operation of the vessels under the charters.[14]On the facts of the case before him, he did not consider that damages were an adequate remedy because it would be difficult to assess damages for a prospective six and a half year period following repudiation, as compared with a claim for hire and in that respect the case was very different from The Puerto Buitrago where there were probably no damages at all. He also attributed significance to the fact that the plaintiffs were assignees of the owners (being lenders) and an acceptance of the repudiation as terminating the charter would have put the owners in breach of their covenants with them. He attributed significance also to the charterers’ liberty to sublet, and to lay up the vessel which meant that they had options as to what to do with the vessel and later said that it was equally open to owners or charterers to employ the vessel on the market.[15]He accepted however that although nothing had happened in the nine months following the repudiation which required the owners to accept the defendant’s repudiation as terminating the charter, the passage of time might in itself alter the position in the future, because an insistence on treating the contract as still alive might in time become unrealistic, unreasonable and untenable.[16]In The Alaskan Trader, Lloyd J (as he then was) also had to consider early re-delivery by 8 months under a 2 year time charterparty, in the context of an appeal from an arbitration award made by an experienced commercial arbitrator. He referred to White and Carter and to Lord Reid’s qualification of the general principle where the innocent party had “no legitimate interest, financial or otherwise, in performing the contract rather than claiming damages”, noting that Lord Reid did not explain what he meant by legitimate interest, save to say that the de minimis principle would apply. The judge went on to state that it would obviously not be sufficient to establish that the innocent party was acting unreasonably in the light of what Lord Reid had specifically said at page 430 (cited above). After referring to two other authorities he then cited The Puerto Buitrago and the obiter decision of the three Lords Justices in that case on the issue in question. The judge saw it as, at the very least, strong persuasive authority of the majority of that court, (being Orr and Browne LJJ) in support of what Lord Reid had said in White and Carter, namely that the absence of a legitimate interest was a ground upon which owners might be compelled to accept damages in lieu of hire. He then went on to refer to The Odenfeld where Kerr J, having taken the view that The Puerto Buitrago was an extreme case on the facts, nevertheless accepted the importance of the case as limiting or qualifying the generality of the principle of a virtually unfettered right of election in favour of the innocent party.[17]Lloyd J referred to paragraph 30 of the Arbitration Award which he had to consider, where the arbitrator had referred to the “commercial absurdity” of perpetuating the charter for an 8 month period. There the arbitrator had stated that he considered that the analogy of a contract between master and servant applied more closely to a time charter than the analogy of a simple debt because the owners supplied the vessel and the crew, whilst the charterer supplied fuel oil, paid disbursements and gave orders. The arbitrator went on to say that the charterers had satisfied him that at that stage, the owners had no legitimate interest in pursuing their claim for hire rather than a claim for damages and that, in these respects, the instant case differed materially from White and Carter and was more closely analogous to The Puerto Buitrago.[18]The essence of Lloyd J’s decision appears at pages 136-138. He was not able to accept the submission that Lord Reid was wrong, stating it was difficult for him to take that view in the light of what was said by all three members of the Court of Appeal in The Puerto Buitrago. He then said this:- “Whether one takes Lord Reid’s language, which was adopted by Orr and Browne LJJ in The Puerto Buitrago, or Lord Denning MR’s language in that case (“in all reason”) or Kerr J’s language in The Odenfeld (“wholly unreasonable .. quite unrealistic, unreasonable and untenable”), there comes a point at which the court will cease, on general equitable principles to allow the innocent party to enforce his contract according to its strict legal terms. How one defines that point is obviously a matter of some difficulty, for it involves drawing a line between conduct which is merely unreasonable (see per Lord Reid in White and Carter at pages 429-430) and conduct which is wholly unreasonable (see per Kerr J in The Odenfeld at page 374). But however difficult it may be to define the point, that there is such a point seems to me to have been accepted both by the Court of Appeal in The Puerto Buitrago and by Kerr J in The Odenfeld.”[19]Whilst referring to the need for certainty as the basis put forward by Lord Hodson in White and Carter in upholding the innocent party’s unfettered right to elect, the judge then went on to say:- “It seems to me that this court is bound to hold that there is some fetter, if only in extreme cases; and for want of a better way of describing that fetter, it is safest for this court to use the language of Lord Reid, which, as I have already said, was adopted by a majority of the Court of Appeal in The Puerto Buitrago.”[20]He pointed out that Kerr J in The Odenfeld had not used the language of “legitimate interest” but must be taken to have found that the charterers had failed to prove the absence of such a legitimate interest in claiming hire for the period at issue in that case. By contrast, he said he found the arbitrator had found in The Alaskan Trader that the owners had no legitimate interest in pursuing their claim for hire, having analysed in detail the main grounds upon which it could be said that the owners were justified in continuing to claim hire, rather than damages, namely the requirements of the bank, the difficulty in assessing damages and the difficulty in obtaining alternative employment. He pointed out that counsel had been unable to extract any error of law or any mistake in the approach of the arbitrator and, although it was submitted that the arbitrator must have misunderstood what was said by Lord Reid to reach the conclusion he did, Lloyd J said he could only accept that submission if the conclusion reached by the arbitrator was one which no reasonable arbitrator could have reached if he had applied the right test. He was not satisfied that the arbitrator’s decision fell into that category.[21]Having disposed of the appeal on the basis that the arbitrator’s finding of “no legitimate interest” was conclusive of the appeal, he did not then determine the alternative ground upon which the arbitrator had based his decision, namely that the time charter was a contract which called for co-operation between the parties and therefore fell outside the scope of the general principle of White and Carter. He referred however to the charterers’ submissions that a time charter was a contract for services to be performed by the owners through the master and crew and the use of the vessel and that it was the very prototype of a contract of which the court would never grant specific performance. He said that “at first blush” there seemed to be much to be said for that argument whilst drawing attention to Kerr J’s holding to the contrary in The Odenfeld.[22]In Stocznia v Latvian Shipping, Clarke J at first instance referred to all these authorities and referred to the principle as being:- “that an innocent party is entitled to continue to perform a commercial contract which has been repudiated by the other party unless he has “no legitimate interest, financial or otherwise in performing the contract” (per Lord Reid) or he should “in all reason” accept the repudiation (per Lord Denning) or where it would be “wholly unreasonable” to keep the contract alive (per Mr Justice Kerr) or where it would be “not merely unreasonable but wholly unreasonable” to do so (per Mr Justice Lloyd).” The judge then said that he did not think there was any real difference between those differing ways of putting the principle, a conclusion with which I agree. It was the submission of the charterers that Kerr J and others had added extra requirements to Lord Reid’s test, but all the courts which have considered the matter since, have taken the view that Lord Reid’s test has merely been expressed in other language in the later succession of authorities. When the matter went to the Court of Appeal, Staughton LJ, in holding that there was a legitimate interest on the part of the innocent party in that case, stated that “to be a legitimate interest, the innocent party must have reasonable grounds for keeping the contract open, bearing in mind also the interests of the wrongdoer” but descended into no further details about the test, save by making a passing reference to the earlier authorities (with the exception of TheOdenfeld).[23]Simon J in The Dynamic, after summarising the authorities in much the same way as I have, referred to The Alaskan Trader, agreeing with the dictum of Lloyd J about the fetter, if only in extreme cases on the principle of election by reference to the language of Lord Reid. In his view, the use of the qualifying word “wholly” in the expression “wholly unreasonable” by Kerr J in The Odenfeld, properly emphasised that the rule was general and the exception only applied in extreme cases but added nothing to the test. Simon J then stated that the authorities established an exception to the general rule that the innocent party has an option whether or not to accept a repudiation, with the following characteristics:- “1. The burden is on the contract breaker to show that the innocent party has no legitimate interest in performing the contract rather than claiming damages. 2. This burden is not discharged merely by showing that the benefit to the other party is small in comparison to the loss to the contract breaker. 3. The exception to the general rule applies only in extreme cases: where damages would be an adequate remedy and where an election to keep the contract alive would be unreasonable.”[24]In his view the principles which he had summarised were well established and binding on an arbitrator. The Dynamic, like the present case, involved an issue of premature re-delivery under a time charter. He too saw no conflict between the various formulations of the test by Lord Reid and those who followed on in the authorities to which I have referred.[25]The last of the authorities on the exception, to which I was referred, was a decision of the Court of Appeal in 2006 in Reichman v Beveridge [2006] EWCA Civ 1659. This concerned a claim by landlords for rent arrears where the tenant had quit the premises, having no further use for them and maintained that the landlord had a duty to mitigate its loss, rather than hold the tenant to the terms of the lease and require payment of rent. The tenant’s submission failed but the court made reference to a “very limited category of cases where the court would not allow the innocent party to enforce its full contractual right to maintain the contract in force and sue for the contract price”. Timothy Lloyd LJ in a judgment with which the other Lords Justices agreed, stated that “the characteristics of such cases are that an election to keep the contract alive would be wholly unreasonable and that damages would be an adequate remedy, or that the landlord ought have no legitimate interest in making such an election”. Whilst Mr Timothy Young QC, on behalf of the charterers submitted that the Court of Appeal was here enunciating a disjunctive test, Lloyd LJ referred to most of the prior authorities, including The Odenfeld, The Alaskan Trader and The Dynamic, without disapproval and was clearly attempting to summarise the different ways in which the test has been put in those authorities. He drew no distinction between the different ways of putting the test. It is also noteworthy that he continued to use the language “wholly unreasonable”.[26]In the most recent edition of Time Charters (6th Edition, 2008) the authors refer to White and Carter (and its reference to “no legitimate interest in continuing to perform”) and to The Puerto Buitrago, stating that the Court of Appeal there held that the exception applied where damages were an adequate remedy and it would be “wholly unreasonable” to refuse to accept the re-delivery. Attention is then drawn to the distinction made by Lloyd J in TheAlaskan Trader between conduct which is unreasonable and conduct which is wholly unreasonable. Having referred to Lloyd J’s refusal to interfere with the arbitrator’s findings there, because the arbitrator’s approach in law was unchallengeable, the authors state that the principle recognised in The Puerto Buitrago and The Alaskan Trader is applicable only in very clear cases and then refer to the summary of principles set out by Simon J in The Dynamic. It is significant that this passage in the book differs from those in the previous five editions of the work which, after referring to White and Carter, The Puerto Buitrago and The Odenfeld (the fifth edition being in 2003, prior to The Dynamic) concluded that “it seems that once it becomes clear that there is no room for a change of mind by the charterers, the courts are likely to insist that the owners accept the re-delivery and sue for damages – assuming that damages will be an adequate remedy”. Reference was then made in the fifth edition to the judgment of Clarke J in Stocznia where nothing of the kind was said at all. Because of the terms of the award, this passage in the earlier editions of the book assumes some importance, since it is, to my mind, clear that the arbitrator must have relied upon it.

The Award

[27]In the Reasons forming part of the Award, the arbitrator set out, in 38 pages, the arguments put forward by the parties in their written submissions. He found, as was admitted, that the charterers’ purported premature re-delivery of the vessel was a repudiation of the charter, in which they had persisted, maintaining regularly that they would be giving no further orders to the vessel. The arbitrator then referred to the general rule set forth in White and Carter under which the innocent party has the choice, in the event of a repudiatory breach, to accept repudiation and claim damages or to reject it and hold the other party to the contract. He then referred to The Odenfeld where Kerr J had found that the owners were entitled to hold the ship at the charterers’ disposal and claim hire for a certain period but indicated that this right could be lost by the passage of time thereafter, depending upon events. In four separate paragraphs in his Conclusions (numbered 11, 22, 27 and 30 by the parties), the arbitrator stressed the persistent, clear and emphatic nature of the charterers’ repudiation in re-delivering the vessel and refusing to make any further use of it.[28]The arbitrator then accepted the charterers’ argument that, in a time charter, there had to be co-operation between the owners and charterers in the sense that the charter could not be performed without the charterer needing “to do or accept anything”, in the words of Lord Reid. He referred to the dictum of Orr LJ in The Puerto Buitrago and to the example given by the charterers of necessary co-operation on their part, namely their obligation to provide fuel for the vessel to enable it to conduct its required operations. In his view that was sufficient to take the case outside the White and Carter principle, and he considered that he was confirmed in his view by the comments of Lloyd J in The Alaskan Trader (at first blush).[29]When he came to consider the case of “no legitimate interest” he referred to that part of Lord Reid’s speech which referred to “no legitimate interest, financial or otherwise” but did not refer to the part of that speech in which he said that there was no requirement on an innocent party to exercise his rights reasonably. He referred to Lloyd J in The Alaskan Trader and the passage in which that judge said that it was a matter of some difficulty to define the point at which it might cease to be open to a ship owner to claim the full contractual hire under a time charter on the basis that the contract remained alive.[30]In accordance with the charterers’ submissions he described Kerr J, in The Odenfeld, as putting a gloss on the limitation expressed by Lord Reid when he had said that the limitation would only be applied in extreme cases where damages would be an inadequate (sic) remedy and where an election to keep the contract alive would be wholly unreasonable. After referring to Lloyd J’s comment that the safest language for the court to adopt was that of Lord Reid, and stating that this had been adopted by the majority in the Court of Appeal in The Puerto Buitrago, he then, in two paragraphs dealt with the question of “legitimate interest”.[31]At paragraph 21 of his conclusions, the arbitrator appeared to ask himself the question, in the context of a legitimate financial interest, whether the owners would be worse off by mitigating their loss by trading the vessel in the market and claiming damages than they would be by maintaining the charter and claiming hire. He asked whether “an adequate remedy was to keep the vessel at the charterers’ service for the remaining three and a half months”, presumably meaning whether the only adequate remedy was to do so. At paragraph 22 he referred to “the only other aspect of legitimate interest discussed between the parties”, which he identified as the liberty given to the charterers in the charter to sublet, which he considered irrelevant. In that context he referred to the charterers’ emphatic maintenance of their repudiation of the charter and their regularly expressed intention not to use the vessel.[32]The arbitrator then concluded that there were close similarities between the instant case and The Alaskan Trader where the charterers had emphatically stated that they had no further need for the ship (paragraph 27).[33]He also contrasted the instant case with the position in The Dynamic where the owners would not have been able to claim damages for the early re-delivery of the ship by the charterers, because the ship remained under arrest by the charterers for a subsequent period, where mala fides would have to be shown to recover damages for wrongful arrest. The difference, as expressed in paragraphs 28, 29, 31, 32 and 34 was that, in the instant case, the owners were in a position to accept the repudiation of the contract and mitigate their losses by fixing the vessel on the spot market (but not the time charter market) for the remaining 94 days of the charter and to claim damages for the resulting loss, being the differential between actual earnings and charter party hire. At paragraphs 30 and 32, the arbitrator relied upon the distinction between The Dynamic case on the one hand where the owners had no means of mitigation and the situation in The Alaskan Trader and the case before him, where the owners were able to mitigate their loss and claim damages. In consequence he concluded that the owners had no legitimate interest in insisting that the charter remained alive.[34]He went on, in paragraph 33, to say that there was nothing extraordinary or unusual about the case nor any potential difficulties in establishing damages suffered and for that reason too, at paragraph 34 said that there was no legitimate interest in keeping the charterparty alive.

Is a time charter subject to the rule in White and Carter?

[35]Lloyd J, as he then was, at first blush (obiter), considered that a time charter party required the degree of co-operation referred to by Lord Reid which would make the application of the White and Carter general rule impossible. Kerr J, in a considered judgment, considered that this was not the case. Orr LJ, with whom Browne LJ agreed, in The Puerto Buitrago stated that it could not be said that the owners could fulfil the demise charter without any co-operation from the charterers. This was obiter and contained no explanation for that conclusion. Lord Denning MR, as earlier set out, put forward a different basis for the limit to the rule, although he made reference to the premature dismissal of an employee on a fixed term contract, which is a situation sui generis as the decision in Ministry of Sound (Ireland) Limited v World Online Limited [2003] 2 AER (Comm) 823 demonstrates at paragraph 58.[36]In The Dynamic, the applicability of the rule in White and Carter was accepted on all sides without argument. Equally, the standard text books, Time Charters, and Scrutton on Charterparties have always accepted the applicability of the principle.[37]The question, to my mind, is very simple. Could the owners claim hire from the charterers under this time charter without the need for the charterers to do anything under the charter? The answer is yes. If the charterers failed to give any orders, the vessel would simply stay where it was, awaiting orders but earning hire. Although the master is under the orders of the charterer, the master and crew are the servants of the owners and the ship is available to the charterers for any order they wish to give. Hire continues to be earned. Although the charterers are obliged under the terms of the charter to provide and pay for fuel, should the bunkers run out whilst awaiting orders, it is open to the owners to stem the vessel and to charge that to the charterers’ account. In order to complete their side of the bargain, the owners do not need the charterers to do anything in order for them to earn the hire in question. The earning of hire after purported redelivery was not dependent on any performance by the charterers of their obligations.[38]That, it seems to me, is the essential question in the present case, regardless of the fact that a charterparty is a contract for services (see The Scaptrade [1983] 2 AC 694 (HL)), though the relationship between owner and charterer is not anything like those which exist in the entertainment or sporting worlds where “the services are so linked to some special skill or talent whose continued display is essential to the psychological material or physical well being of the servant” so as to make negative injunctions restraining breach of the contracts of service impossible (see LauritzenCool v Lady Navigation [2005] 1 WLR 3686 (CA)).[39]Nicholas Strauss QC (sitting as a Deputy Judge), set out the ambit of the co-operation exception in the Ministry of Sound decision at paragraphs 49 onwards. At paragraph 61, he set out his view that Lord Reid’s reference to circumstances in which there is “anything” left to do under the contract which requires co-operation indicated that he had in mind only contracts in which the right to payment depended upon full prior performance. There, as here, the court must focus upon dependent obligations and whether the contract breaker has to do something before the innocent party can do what is required of him to earn the contract sum. Here, hire is payable in advance and the owner can hold the ship available to the charterer without any need for the charterer to do anything in order to maintain his claim for hire.[40]There is a material difference between a demise charter and a time charter. In the case of a demise charter, the charterer takes possession of the vessel, provides the crew and typically pays all outgoings on the vessel. Thus, in The Puerto Buitrago, when the demise charterers repudiated the charter by premature re-delivery, they abandoned the vessel, leaving only a ship repairer’s watchman on board. In practice therefore the owners had to put their own personnel on board, thus regaining possession of the vessel. The very essence of the demise charter is that possession of the vessel is given to the demise charterer so that, as soon as possession is retaken by the owner, the latter can no longer be entitled to hire under the demise charter. The position is much the same as the situation in landlord and tenant cases, as exemplified in Reichman (ibid) where, if the landlord had terminated the tenancy and taken steps to re-let in mitigation, he could not have recovered damages for loss of future rent from the original tenant who had abandoned the premises. This may explain the obiter dictum of Orr LJ in The Puerto Buitrago in relation to the demise charter which was there being considered. It is another thing entirely to take that dictum and apply it to a time charter, as the arbitrator did. When Kerr J explored the point in relation to a time charter, he concluded that the principle in White and Carter applied and I, in common with Simon J and the authors of the standard text books agree with that view.[41]There was therefore in my judgment, a clear error of law on the part of the arbitrator in finding that the White and Carter principle was of no application to the time charter in issue. Did the arbitrator err in law in finding that the exception to the White and Carter principle applied?[42]In my judgment it is clear that the arbitrator applied the wrong test when considering whether or not the owners had a legitimate interest in maintaining the charter for the balance of 94 days and claiming hire, as opposed to accepting the repudiatory breach of the charterers as bringing the charter to an end, trading on the spot market in mitigation of loss and claiming damages for the difference. The arbitrator concluded that because the owners could accept the repudiation, mitigate loss by trading on the spot market and claim damages representing the difference, the owners had no legitimate interest in keeping the charterparty alive. The arbitrator never directed his mind to the principles set out in The Puerto Buitrago, The Odenfeld, The Alaskan Trader, Stocznia, or The Dynamic. He never asked himself the question whether the owners should “in all reason” accept the repudiation (or to put the point the other way, whether the owners’ refusal to accept the repudiation was “beyond all reason”): he never asked the question whether it would be “wholly unreasonable” to keep the contract alive; he never asked whether it would be more than “unreasonable” and “wholly unreasonable” to do so, by reference to the language of the Court of Appeal in the various cases. If he had applied the principles set out by Simon J in The Dynamic, he would have asked himself whether the charterers had discharged the burden of showing that the owners had no legitimate interest in maintaining the charter and had done so by showing that this was an extreme case where damages would be an adequate remedy and where an election to keep the contract alive would be so unreasonable that the owners should not be allowed to do so. He should have explored whether there was any benefit to the owners, whether or not small in comparison to the loss to the charterers.[43]The arbitrator was wrong to regard the comments of Kerr J (and all the subsequent references in the authorities to the need for an extreme case of unreasonableness on the part of the owners to bring in the exception) as a “gloss” on Lord Reid’s dictum in White and Carter and to treat Lloyd J’s dictum as entitling him to focus on “no legitimate interest”, without reference to the degree of unreasonableness. When Lord Reid’s speech is read in its entirety, it is clear that the innocent party’s right to elect is not trammelled by the need to act reasonably. It requires something beyond that before the courts will interfere and prevent the innocent party insisting on performance of the contract. Whereas Simon J thought the word “wholly” in the expression “wholly unreasonable” added nothing to the test, this was because he said that it was only in extreme cases that the limitation would operate.[44]The effect of the authorities is that an innocent party will have no legitimate interest in maintaining the contract if damages are an adequate remedy and his insistence on maintaining the contract can be described as “wholly unreasonable”, “extremely unreasonable” or, perhaps, in my words, “perverse”. The Puerto Buitrago was plainly such a case since the cost of repair was double the value of the ship when repaired and four times as much as its scrap value. To refuse to accept a premature re-delivery of the vessel in order for such repairs to be done would therefore be truly perverse. Repair in such circumstances would be an exercise in futility. So far as The Alaskan Trader is concerned, Lloyd J found it impossible to interfere with the decision of the experienced commercial arbitrator who could not be shown to have applied the wrong test when finding that the owners’ election to maintain the time charter (which had included 10 months of service, followed by 6 months of off-hire repairs) for a balance of eight months following premature re-delivery was a commercial absurdity.[45]The arbitrator found in terms that there was “nothing extraordinary or indeed unusual in respect of this case” (paragraph 33 of his conclusions) and that The Alaskan Trader was not “an extreme case”, despite Lloyd J’s dictum about the fetter operating only in extreme cases. Likewise, Simon J’s dictum about the exception only operating in extreme cases, was ignored. It appears that the arbitrator thought that it was necessary for the owners to show that it was an extreme case to justify maintaining the charter in existence, thus reversing the burden of proof and confusing the general principle with the exception. He misunderstood what was meant by “no legitimate interest” in White and Carter and ignored all the succeeding authorities in relation to it.[46]The only two factors which he appears to have taken into account were those set out in paragraphs 21 and 22 of his Reasons. The only financial interest to which he had regard was whether the owners would be “worse off” by mitigating and claiming damages, as compared with maintaining the charter and claiming hire whilst the only other legitimate interest he considered was the ability of charterers to sub-let the vessel, which he considered an irrelevance because the charterers had been clear and emphatic in maintaining their repudiatory stance. Whilst on a very generous reading of the Award it might just be possible to read into it a decision that damages were an adequate remedy, because of the possibility of mitigating loss and claiming the balance in damages, he never looked at the degree of unreasonableness of the owners’ conduct nor saw the need for it to be an extreme case before the exception could apply. He considered that the ability to accept the termination, to trade the vessel on the spot market and to claim the balance of actual loss, as against hire, was conclusive of the issue, when seen in the light of the charterers’ emphatic insistent repudiatory stance.[47]It is plain from the arbitrator’s recitation of the submissions made by the parties that the owners had submitted that damages were an inadequate remedy because the charterers were in financial difficulty. The owners were therefore at risk of the charterers directing their limited funds to meet obligations to other parties, whilst delaying payment of any sums owing to the owners until the end of the charterparty and the assessment of what was due in damages. Instead of paying hire up front, semi-monthly in advance, with all the cashflow implications of that, the charterers wished to compel the owners to trade the vessel in mitigation of loss and leave themselves liberty to argue about the quantum of damages at the end of the relevant period and pay whatever they could at that stage. The existence of expert reports produced by the parties, as recorded in the Reasons, showed that the views of the parties about the state of the market were not identical, giving rise to the possibility of significant argument as to proper mitigation of loss and the extent of damages recoverable. Should the charterers choose to do so, payment of any liability could be postponed until the conclusion of an arbitration, months away, by which time the charterers could conceivably have become insolvent or arguments used to secure a settlement discount on any loss claimed. The owners wished to guard against that by maintaining the charter with the ability to claim hire and sue/proceed in arbitration for it on any default, without the propensity for argument as to failure to mitigate damages. The arbitrator never appears to have grappled with this point at all.[48]Nor did he grapple with the argument that the contract breaker was seeking to foist upon the innocent party the burden of seeking to trade in a difficult spot market, where a substitute time charter was impossible, with all the management issues involved. The ability to sub-let the charter was, contrary to the arbitrator’s view, a matter of relevance in this context. As pointed out by Kerr J in The Odenfeld at page 374, it was equally open to the owners or the charterers to employ the vessel, there, as here, on the market in what had become very difficult market conditions following the large drop in rates. The Reasons give no information as to the previous course of employment of the vessel, nor whether the charterers’ prior use the vessel was for their own cargoes or for the cargoes of others, but the ability to sub-let plainly provided an additional facility to the charterers to make use of the ship. The charterers had the same opportunities, therefore, to use the vessel as the owners, subject only to their relative abilities to trade the vessel in the market in question, about which the arbitrator made no finding. The contract breaker was therefore seeking to be shot of the difficulties in trading the vessel by imposing that burden on the innocent party, as well as depriving him of the assured income of advance hire.[49]On his findings, the arbitrator was right to conclude that there was nothing exceptional, extreme or unusual about this case of repudiation by a charterer but this factor operated in favour of the owners and not against them, as he appears to have held. The arbitrator should have been asking himself whether or not this was an extreme case of the kind where damages were an adequate remedy and the owners’ conduct was so beyond the pale that they should not be allowed to keep the contract alive. That he did not do.[50]Moreover, the arbitrator focused upon the vehemence and persistence of the charterers’ repudiatory stance, in the paragraphs to which I have already made reference in his conclusions. The only basis upon which he could have placed that reliance appears to be the passage which existed in the five previous editions of “Time Charters” published between 1978 and 2003, all of which stated, without reference to authority, (save for Kerr J’s dictum in The Odenfeld that the passage of time might alter the legal position of the parties, because an insistence to treat the contract as still in being might in time become quite unrealistic, unreasonable and untenable) that “once it becomes clear that there is no room for a change of mind by the charterers, the courts are likely to insist that the owners accept the re-delivery and sue for damages – assuming that damages will be an adequate remedy”. This in itself was a further error of law. .[51]In such circumstances, a finding of no legitimate interest is not simply a finding of fact with which this court cannot interfere. It is a conclusion based upon a misunderstanding of the test, a failure to take into account relevant factors and the taking into account of irrelevant matters.[52]He misunderstood the nature of the test when eliminating from his consideration anything other than that part of the speech of Lord Reid which referred to “no legitimate interest”. He ignored what was said by Lord Reid about the irrelevance of reasonableness in itself, and he ignored all the subsequent explanations of the meaning of “no legitimate interest”, by reference to the need for the contract breaker to show that damages were an entirely adequate remedy and that the conduct on the part of the innocent party was beyond all reason, wholly unreasonable or, to use my expression perverse.[53]In these circumstances the Award cannot stand.

Variation or Remission

[54]The charterers submitted that the matter should be remitted to the arbitrator if I accepted the owners’ submissions about the arbitrator’s failure to apply the right test. It was submitted that I should only vary the Award if the answer to the fundamental question was inevitable once the right test was applied. If there was scope for any different outcome, I should remit the award because it would be open to the arbitrator to find, on the facts, that there was no legitimate interest on the part of the owners in maintaining the charter. The owners submitted that the matter was effectively concluded by the arbitrator’s own finding that this was not in any way an unusual case, since the authorities established that it had to be an extreme case where owners acted so unreasonably before the exception could operate. It was clear from the arbitrator’s findings that once the correct test and burden of proof was applied, there was only one possible answer. The charterers could not show that the owners had no legitimate interest in maintaining the charter and could not show that the owners’ conduct was so unreasonable that the court ought not to allow it to rely upon an election to do so.[55]The arbitrator identified the factors upon which the parties relied and I have referred to the parties’ submissions to show what additional factors there were which were put before him. The arbitrator set out, in extenso, the submissions of the parties in the Award, so it is possible to see what was argued before him. Neither party had any additional matters to put before the court either.[56]In those circumstances it is possible for the court to assess the inevitable outcome of applying the right test to the facts of the case, as found by the arbitrator. With only 94 days left of a 5 year time charter in a difficult market where a substitute time charter was impossible, and trading on the spot market very difficult, it would be impossible to characterise the owners’ stance in wishing to maintain the charter and a right to hire as unreasonable, let alone beyond all reason, wholly unreasonable or perverse. As the arbitrator said, this is not an extreme or unusual case and in such circumstances the exception to the White and Carter principle cannot apply.[57]The Award should therefore be varied to declare that(i) the owners were entitled to refuse the purported re-delivery by the charterers on 9 August 2011 and were entitled to hire in accordance with the terms of the charterparty and(ii) the charterers were not entitled to insist on re-delivery on 9 August 2011.

The Section 68 Challenge

[58]The owners did not press this application beyond what appeared in their skeleton argument in which they maintained that the arbitrator had failed to give any, or any sufficient, weight to their submissions dated 22 August 2011, because he made no express reference to them in the Reasons, although he did make express reference to all prior submissions of the parties.[59]The point is met entirely by the evidence of the charterers that, when refusing the charterers any right of reply to those submissions of 22August, the arbitrator wrote to the parties to say that those submission raised no new issues and that he would proceed to an award. It is clear on the evidence that the arbitrator was saying that he had studied those submissions in detail, though he made no express reference to them in the Award, which he was not in any way bound to do.[60]As appears from a study of the prior written submissions which the arbitrator regurgitated in the Reasons, those submissions were, as sequential written submissions in arbitration often are, repetitive. It cannot be said that there was any substantial argument raised in the owners’ submission of 22 August 2011 which had not already been made. As the charterers submitted, the owners’ complaints about the arbitrator in this respect are unfair and do not come close to making out the kind of irregularity to which parliament intended section 68 to apply, as expounded in Lesotho Highlands v Impregilo [2006] 1 AC 221.[61]The section 68 application therefore fails.

Conclusions

[62]For the reasons set out above, the owners succeed and I vary the Award to make the declaration set out above and I dismiss the owners’ application under section 68.[63]As far as costs are concerned, the owners must be entitled to their costs, subject only to a very small discount in respect of the section 68 application on which they failed. Should the parties be unable to agree on this element, they can address me and I will make any necessary ruling.

Cited in 5 later judgments