Lansat Shipping Co Ltd v Glencore Grain BV

A contractual provision is a penalty where its predominant function, assessed when the contract was made, is deterrence rather than compensation. The comparison must be with the genuine pre-estimate of recoverable loss for the particular breach, having regard to the range of loss reasonably foreseeable at that time. A shipowner accepting an illegitimate last voyage ordinarily recovers the market rate only for the period by which redelivery overruns the contractual maximum. The owner cannot claim loss based on an earlier market opportunity which it never had, because it chose to accept the voyage. A substantial payment triggered by even minimal lateness may be extravagant and unconscionable, and therefore unenforceable.

The owners appealed under section 69 of the Arbitration Act 1996 against a preliminary award by a London Maritime Arbitrators Association tribunal. The tribunal had held that the second sentence of clause 101 of a time charter was a penalty.

The clause required the charterers to investigate and arrange matters so that the final voyage did not exceed the maximum charter period. If the market rose and the maximum period was exceeded, hire was to be adjusted to the prevailing market level from 30 days before the maximum date until actual redelivery. The central issue was whether that adjustment was a genuine pre-estimate of recoverable loss or an unenforceable penalty.

1. Appeal dismissed. The tribunal’s award was confirmed.
2. The established distinction between a legitimate and an illegitimate last voyage applied. If an owner accepts an illegitimate last voyage and the vessel is redelivered late, the recoverable loss is ordinarily the difference between the charter rate and the market rate during the overrun period. The owner cannot recover market-rate loss for the balance of the charter period on the basis of an earlier opportunity to trade the vessel, because that was not an opportunity the owner had contractually secured.
3. The distinction between damages for giving an illegitimate last-voyage order and damages for late redelivery may exist in formulation, but in practice the losses are likely to be indistinguishable. The relevant question is the recoverable loss caused by the breach in issue.
4. For penalty purposes, the court must construe the clause by reference to its predominant contractual function when made. It must compare the stipulated payment with the range of recoverable loss reasonably anticipated for the relevant breach. Commercial certainty and the parties’ bargain are important, but they do not displace the requirement of a genuine pre-estimate.
5. Clause 101 was linked to the possibility of an illegitimate last voyage and its effect on redelivery. Its primary purpose was deterrence. The stipulated adjustment could produce the whole 30-day market-rate claim even where redelivery was only one hour late. That was an unconscionable sum compared with the recoverable loss and was not a genuine pre-estimate of damage. The clause was therefore penal and unenforceable.

• London Maritime Arbitrators Association tribunal: by an interim declaratory award dated 7 May 2008, held the second sentence of clause 101 to be a penalty.
• High Court (Commercial Court): permission to appeal was granted by Andrew Smith J under Arbitration Act 1996, section 69(3)(c)(ii). Blair J dismissed the appeal and confirmed the award.