Charter party renegotiations cause problems

Jan 01 2014


Occasionally charterparties will contain provisions such as ‘hardship’, or ‘renegotiation’ clauses that seek to provide an opportunity to review and, perhaps, amend the contract to reflect the realities of the market.*

Often the parties will agree to explore such possibilities, even in the absence of a clause requiring them to do so, in an attempt to protect their commercial relationship.

However, even where renegotiation proves to be possible, the task of agreeing revised terms is often far from straightforward and can lead to problems of interpretation.

It is against this background that late last year, the High Court issued it’s decision in DS-Rendite-Fonds Nr.106 VLCC Titan Glory GmbH & Co Tankschiff KG v Titan Maritime SA [2013] EWHC 3492 (Comm) in which the effect of a charter restructuring agreement (CRA) was considered.

The decision is of particular interest because the Court opted to rectify the CRA to reflect the agreement reached by the parties. The successful shipowners were represented by Clyde & Co.

The facts

The claimant owners had entered into a series of long term time charterparties in relation to a fleet of eight vessels. When the markets collapsed at the end of 2008, all the contracts (which were based on the Shelltime 4 form) had several years to run.

The charterers said that they were facing great difficulty in meeting the hire payments and in early 2009 stopped  paying the full amount of hire.

Commercial discussions directly between the parties took place in an attempt to restructure the hire payments in a way that would preserve the commercial relationship and enable the charterparties to continue. The result of those discussions was the CRA that formed the basis of subsequent dispute.

The CRA addressed both the position of outstanding unpaid hire and how hire was to be paid in the future.

A new rate of hire was agreed as being payable during a ‘restructuring period’ of 1st January, 2010 to 31st December, 2014.

The full charter rate of hire would still be earned during that period but with paymentdeferred until the end of the  restructuring period. For the hire payments that fell due during this period, the CRA set out a formula that referred to a ‘market rate’ derived from a Clarkson Index - a ‘floor rate’ of $22,000 per day and six-monthly adjustments.

Early in 2011, a dispute arose between the parties concerning the meaning and effect of the floor rate and how it was to be taken into account in the six-monthly adjustments. The spot market (on which the relevant Clarkson Index was based) had for a sustained period of time fallen below the floor rate of $22,000 per day.

The charterers had argued that when calculating the six-monthly adjustments, the Clarkson Index rate should be relied on even on those occasions where it had fallen below the $22,000 floor rate.

The owners contended that only the higher of the two rates should be used for this calculation. Owners sought a declaration from the Court concerning the proper construction of the CRA. In the event that charterer’s construction was held to be correct, in the alternative the owners sought rectification of the agreement on the grounds of common mistake.

Construction

When construing the CRA the Judge held (relying on Chartbrook Ltd v. Persimmon Homes Ltd [2009]) that the general approach is to consider what a reasonable person having the background knowledge available to the contracting parties would have understood themselves to be agreeing by using the language they used in their contract.

The owners argued that a key consideration was that a right to be paid at least $X (the floor rate) could have no real meaning, or effect if it was held to be attached to an obligation to refund some or all of what had been paid via the six-monthly adjustment.

However, the owners accepted – and the Judge recognised – that there was a problem with the language that the parties had actually used in the CRA given that it referred to a comparison between “the average of the market rates for the previous period of six months …” and “the average rate actually paid in respect of those months”.

The Judge held that: “[t]he Owners’ construction involves rewriting the clause in a manner inconsistent with the words used and the agreed contract terminology.” Accordingly he held against the owners on the construction point.

Rectification

The Judge set out the requirements to establish rectification for common mistake (as approved by the House of Lords in Chartbrook v Persimmon) as follows: “The party seeking rectification must show that: (1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the instrument sought to be rectified; (4) by mistake, the instrument did not reflect that common intention.”

This test places a significant burden on the party seeking to invoke the remedy but the Judge was persuaded on the facts of this case that the owners had been able to meet the requirements.

Charterers had placed reliance on the entire agreement clause in the CRA but the Judge held that such a clause is not a bar to rectification, noting: “The entire agreement clause defines where alone the terms by which the parties agree to be bound are to be found. However, the remedy of  rectification does not seek to find contractual terms outside the four corners of the document, but rather to ensure that the document contains what it was supposed to contain.”

Following an extensive review of the evidence it was held that the parties had a common continuing intention that  minimum hire rate of $22,000 per day per vessel would always be payable and not deferred.

In addition, there had been an outward expression of this intention and this had continued at the time of the  execution of the CRA. In circumstances where, by mistake, the CRA had not reflected this common intention, the Judge felt able to allow owners’ rectification claim and to amend the CRA accordingly.

Comment

The facts of this case provide an interesting illustration that even in those cases where there is a strong  commercial will on both sides to renegotiate the terms of a charterparty, the uncertainty caused by a prolonged bad market can create considerable difficulties in reaching a workable solution.

The decision produces an outcome that makes commercial sense in the context of the situation in which the   parties had found themselves, but it is notable that the Court rectified the contract – a difficult remedy to establish in practice – in order to achieve this.

*A reference to this case first appeared in Maritime Advocate last November. Tanker Operator is indebted to Clyde’s legal team for this case - Bethan Bradley (legal director) and Lucinda Roberts (associate) - for permission to reproduce this article.



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