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August 23, 2013updated 12 Apr 2017 4:01pm

When time is of the essence for contracts

Sam Yardley considers the implications of a shipping charter ruling on equipment lease agreements.

By Samantha Yardley

Sam Yardley considers the implications of a shipping charter ruling on equipment lease agreements.

Briefly, this case involved the charter of a vessel, The Fortune Plum, under which the charterers continually paid late and eventually stopped paying altogether.

The vessel owners decided to terminate the charter party and withdraw the vessel on the grounds that the charterers were not going to pay and had either renounced the agreement or were in anticipatory breach of it.

The owners permitted the vessel to remain in the charterers’ possession for a short period prior to withdrawal to allow the cargo to be discharged.

The charterers counterclaimed that the owners had themselves repudiated the charter by withdrawing the vessel. The case went to arbitration.

The tribunal found that the charterers had renounced the charter party and the owners had a reasonable period in which to decide whether or not to accept the renunciation.

However, by permitting the vessel to remain in the charterers’ possession, the owners had unwittingly affirmed the contract, with the result that their subsequent withdrawal of the vessel was a repudiatory breach. The case was appealed.

The commercial court hearing the appeal was reluctant to overturn the tribunal’s decision as it found that the issue of affirmation was a question of fact to which "there is a choice of answers".

The court did, however, hold that, notwithstanding the affirmation, in this case the charterers continued to renounce the charter party and, therefore, the withdrawal of the vessel did not amount to repudiation by the owners and was lawful.

It will be noted that the case involved a charter party and not an equipment lease and, therefore, the contract did not contain terminology which an equipment lessor would expect to see. In particular there was no wording that would ensure that payment was "of the essence" of the contract.

It is frequently not appreciated by lessors (or is forgotten) that failure to pay rental is not, by itself, an event which entitles a lessor to terminate a lease and to demand "future" rentals by way of a termination sum.

However, in Lombard North Central v Butterworth (1987) the inclusion of "time of the essence" or similar wording was accepted by the court as ensuring that non-payment was a breach of a fundamental condition of the lease, permitting the lessor to treat the lease as repudiated.

Also, as shown in The Fortune Plum, actions by a lessor following repudiation by the lessee may mean that the lessor has affirmed the lease and has lost its right to terminate.

It’s also possible that a lessor may lose termination rights if it fails to exercise them within a reasonable period of time following the occurrence of the relevant event of default.

Well-drafted lease agreements will contain provisions to the effect that the acceptance of rent or other "affirmative" action by the lessor will not prejudice the lessor’s right to terminate. It’s all too easy to omit such a clause and, even, nearly 30 years after Lombard v Butterworth, for appropriate "time of the essence" wording not be included or to be deleted.

The Fortune Plum case demonstrates the pitfalls which await the careless.

Sam Yardley is a partner in the asset finance group at Watson, Farley &Williams

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