Isabella Shipowner SA v Shagang Shipping Co Ltd

An innocent party may affirm a repudiated contract and claim the contractual price where it can perform its obligations without further performance by the contract-breaker. The exception is narrow. It arises only where damages are an adequate remedy and maintaining the contract would be wholly, extremely or perversely unreasonable. The burden lies on the contract-breaker. That principle applies to a time charter where hire continues to accrue without further orders or other action by the charterer. An arbitrator misdirects himself by treating the availability of damages as conclusive, or by treating persistent repudiation as sufficient. The arbitrator’s award was therefore varied under section 69 of the Arbitration Act 1996.

Under a 59–61 month amended NYPE time charter, the charterers admitted that their proposed early re-delivery of the vessel constituted an anticipatory repudiation. The owners refused re-delivery, affirmed the charter and sought hire for the remaining minimum period. The arbitrator held that the owners had to accept re-delivery, mitigate by trading the vessel on the spot market and claim damages.

The owners challenged the award under section 69 of the Arbitration Act 1996 on a question of law concerning the application of White and Carter (Councils) Ltd v McGregor. They also brought a section 68 challenge, alleging serious irregularity because the arbitrator had not expressly referred to later written submissions.

1. Section 69 appeal allowed. The arbitrator’s award was varied to declare that the owners were entitled to refuse the purported re-delivery on 9 August 2011 and claim hire under the charter, and that the charterers were not entitled to insist on re-delivery.
2. The governing principle from White and Carter (Councils) Ltd v McGregor is that an innocent party may reject repudiation and affirm the contract where it can complete its performance without action by the contract-breaker. The relevant question for a time charter was whether the owners could earn hire without the charterers doing anything. They could: the vessel could remain available awaiting orders while hire accrued, and the owners could replenish bunkers and charge the cost to the charterers.
3. The arbitrator therefore erred in treating the time charter as outside the principle because the charterers had contractual obligations, such as providing fuel. The distinction between a time charter and a demise charter was material. In a demise charter, possession and operational control pass to the charterer, whereas a time charter may continue to earn hire without further charterer performance.
4. The arbitrator also applied the wrong test to the legitimate-interest exception. The contract-breaker bears the burden of showing both that damages are an adequate remedy and that maintaining the contract would be wholly, extremely or perversely unreasonable. It is insufficient merely to show that the innocent party can mitigate and recover damages, or that its financial benefit is small compared with the contract-breaker’s loss.
5. The arbitrator failed to consider relevant matters, including the assured advance payment of hire, the charterers’ financial difficulties, uncertainty over mitigation and damages, and the burden of placing the vessel in a difficult market. The case was not exceptional or extreme. The exception could not apply.
6. The section 68 application failed. The arbitrator had considered the owners’ later submissions, although he did not refer to them expressly. Their complaint did not establish the serious irregularity contemplated by section 68, as explained in Lesotho Highlands v Impregilo. The owners were awarded their costs, subject to a small discount for the unsuccessful section 68 application.

The judgment arose from an arbitration award dated 6 September 2011. The High Court, exercising its jurisdiction under section 69 of the Arbitration Act 1996, varied the award. The separate section 68 challenge was dismissed.