Lansat Shipping Co Ltd v Glencore Grain BV

An owner who performs an illegitimate final-voyage order under a time charter does so under the charterparty, not under a separate quantum meruit arrangement. Subject to waiver, the owner receives charterparty hire until the contractual redelivery date and market-rate damages for the period of overrun.

A contractual provision triggered by breach and requiring enhanced payment is subject to the rule against penalties. It is unenforceable unless it is a genuine pre-estimate of loss. A provision which retrospectively applies market hire for a substantial pre-redelivery period, although the owner’s loss is confined to the overrun, is penal where its predominant function is deterrence.

The charterers took the vessel under a time charter for about three to five months. Clause 101 required them to investigate and arrange matters so that the final voyage would not exceed the maximum charter period. If they failed and the market rose above the charter rate, its second sentence retrospectively adjusted hire to the market rate from 30 days before the maximum period until actual redelivery.

The vessel was redelivered 6.166 days late. The charterers paid market-rate damages for that overrun, but the owners claimed a further US$471,603.32 under clause 101. An arbitral tribunal held the clause to be an unenforceable penalty. Blair J dismissed the owners’ appeal from that interim award. The owners appealed to the Court of Appeal, contending that an illegitimate final voyage was performed outside the charterparty or that clause 101 was a valid agreed price or a condition.

1. Appeal dismissed. Lord Clarke MR, with whom Goldring and Patten LJJ agreed, upheld the arbitrators’ award and Blair J’s decision. The owners were entitled only to the ordinary remedy for late redelivery, namely the market-rate measure for the 6.166-day overrun.

2. A final-voyage order is legitimate if the voyage can reasonably be expected to finish by the contractual redelivery date: Hyundai Merchant Marine Co Ltd v Gesuri Chartering Co Ltd (The Peonia), [1991] 1 Lloyd’s Rep 101. An illegitimate order is a breach, but if the owner performs it, the service remains performed under the charterparty. There is no implied new agreement for market-rate remuneration for the whole voyage. In the absence of a separate agreement such as that in The Gregos, the owner receives contractual hire up to the contractual redelivery date and damages at the market rate thereafter.

3. The court followed the consistent approach in The Dione, The Black Falcon and the House of Lords decision in The Achilleas. The owner’s protected expectation is to have the vessel at its disposal from the redelivery date. It is not an expectation of market hire during the unexpired part of the contractual period. Awarding market hire before that date would create a windfall.

4. The first sentence of clause 101 was not a condition. Its breach at most entitled the owners to refuse the final-voyage order and require compliant orders. It neither automatically ended the charterparty nor converted the breach into a repudiation.

5. The second sentence was a classic secondary payment provision because it stipulated the consequence of breach. Applying the penalty analysis in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd, [1915] AC 79, the relevant loss was the loss from the overrun. A payment calculated by reference to the preceding 30 days was extravagant in comparison. It would have produced the full additional claim even if redelivery were only an hour late. The arbitrators and judge were entitled to find that its predominant purpose was deterrence, not compensation. It was therefore an unenforceable penalty.

6. The owners were ordered to pay the charterers’ costs, subject to a short period for submissions to the contrary.

• Court of Appeal (Civil Division): The owners’ appeal was dismissed. The court upheld the conclusion that the second sentence of clause 101 was an unenforceable penalty.
• High Court, Queen’s Bench Division, Commercial Court: Blair J dismissed the owners’ appeal from the arbitral award and confirmed it. No citation for that decision is stated in the judgment.
• Arbitration: By an interim award dated 7 May 2008, three arbitrators held that the relevant provision of the charterparty was a penalty.