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When is prompt payment in a contract a condition?

19 October 2016

​The Court of Appeal has recently looked at when prompt payment is a condition of a contract in the context of shipping law and charterparties. It had to consider competing High Court authority on the question of whether a charterer’s failure to pay instalments under a time charterparty is a breach of a condition.  Lord Justice Gross noted that the question had “long generated conflicting observations from Judges of the highest standing”: Grand China Logistics Holding (Group) Co v Spar Shipping AS [2016] EWCA Civ 982.

At first instance, Mr Justice Popplewell held that the answer was “no”.  However, Flaux J had previously held, in The Astra,1 that the answer was “yes”.

Grand China Shipping had built up substantial arrears under a charterparty.  In response, Spar had brought an arbitral claim against it seeking the balance of the hire due, and damages for loss of bargain in respect of the remaining term of the charter.  Grand China then went into insolvency, and Spar claimed against Grand China Logistics as guarantor.

If punctual payment was a condition, Spar was entitled to terminate the contract and, crucially, claim for loss of bargain for the remainder of the charterparty.

In favour of treating prompt payment as a condition, Flaux J had noted in The Astra that this promoted certainty (which was particularly important in falling markets) and that time was typically of the essence in commercial contracts.  However, in Grand China Logistics, there was no clear language suggesting any remedy was available apart from damages.  Grossman LJ agreed with Popplewell J that “where … breaches of a term may have consequences ranging from the trivial to the serious, that is a strong indication that it is to be treated as an innominate term” (and so not a condition which would give rise to a right to claim for loss of bargain).

Further, Spar’s argument could result in termination where a payment had been only a few minutes late – clear contractual language would be needed to support such a result.  A mere right to terminate for breach of an obligation was not enough to make that obligation a condition in terms of the available remedies following breach (here, the right to claim for loss of bargain).  Commercial certainty had to make way for business common sense and late payments must be judged according to contractual terms and the significance of the breach.

If you want to be a term to be a condition (and everything that entails) you need to spell that out

This article first appeared on Compact Contract, an Allen & Overy blog which covers topical issues in contract law.

Footnote:

1 [2013] EWHC 865 (Comm).

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Amy Edwards amy.edwards@allenovery.com, or tel +44 20 3088 3710.