Economic Hardship But No Right to Renegotiate or Terminate?

A recent London Arbitration (21/17) is a salutary reminder of the English law position on economic hardship.  The award decided that charterers had wrongfully sought to redeliver the vessel before the end of the charter as a result of a change in market conditions which led to charterers claiming economic hardship in continuing the charter.

There was no clause in the charterparty allowing for this and, therefore, charterers were in breach of the charter party and the owners could recover damages from charterers for early redelivery.

The Facts

In this case the vessel was chartered at a higher rate than the market rate for Arabian Gulf to China trade. Vessel availability was limited at the time for such trade and the charterers relied on western sanctions continuing against Iran to keep freight rates high. However, after the charter party was entered into the EU and US suspended a number of the sanctions introduced in response to Iran’s nuclear programme which resulted in the freight rates for this trade collapsing. After only one voyage the charterers were unable to find profitable employment for the vessel and with a considerable amount of hire owing to owners, sought to renegotiate the charter. Unable to renegotiate the charter, the charterers sought to cancel the charter party.

There was no right under the charter party for the charterers to renegotiate or cancel it as a result of the collapse in freight rates. As such, owners held the charterers in repudiatory breach of the charter party for cancelling, and accepted that breach as bringing an end to the charter. The owners then brought arbitration proceedings against the charterers claiming the balance of hire and damages for early redelivery.

The Decision

The Tribunal held that the charterers had evinced a clear intention not to continue to perform the charter and that therefore amounted to a repudiation of the charter, which owners accepted as bringing the charter to an end. As such, the Tribunal  awarded the owners losses based on what the vessel should have earned through to the earliest date for redelivery under the charter, plus the cost of bunkers used by the vessel between early redelivery and when it should have been redelivered. Deducted from that figure was the amount that the vessel earned (net of port costs) giving the net loss suffered by the owners.

Events Which Change the Profitability of a Charter

As can be seen from this case the lifting of Iranian sanctions after the charter party was entered into, which led to the collapse in freight rates,  did not give charterers a right to renegotiate or terminate the charter party. If a charterer (or indeed an owner) wants to be able to renegotiate a charter, or get out of a charter, as a result of a change in circumstances which causes them an economic hardship, then a specific clause would need to be included in the charter party (often referred to as a “hardship” clause). However, such clauses need to be clearly defined and sufficiently certain to be enforceable as a matter of English law. For example, there must be careful drafting to ensure clear definition of the events which oblige the parties to renegotiate and/or give the right to terminate, as well as clear guidelines as to how the result to be achieved by the renegotiation can be objectively assessed.  

If Members are considering including a hardship clause to apply when economic conditions radically change, because of the difficulty with drafting enforceable hardship clauses we would advise Members to contact their usual FD&D contact who will be able to assist with a review of the clause and its enforceability as a matter of English law.