Cancelling Clause and Its Connection to Breach of Contract

Both charterers and shippers would like to know the exact date of the vessel’s arrival at the port of loading. They need to understand in advance when it is necessary to have cargo ready for loading and how much time the vessel can spend waiting for loading. At the same time, in voyage charters, it is almost impossible to find a term on a specific date or period during which the shipowners undertake to provide the vessel to the port of loading. Shipowners usually avoid including such terms, as the vessel may be delayed due to various circumstances, both on the way to the port of loading and in the course of previous shipments. As a compromise, the charter parties include terms, including the obligation of the shipowners to proceed to the port of loading with reasonable dispatch, the estimated time of arrival (ETA) of the vessel at the port of loading or when she is expected to be ready to load, and cancelling clauses, giving the charterers the right to cancel the charter party if the vessel does not arrive at the loading port by the cancelling date or within a certain period – laycan.

Within the framework of this article, the consequences of the inclusion of a cancelling clause in charter parties in conjunction with other accompanying terms will be considered from the point of view of English law as the most frequently used by the parties to contracts of international carriage.

In particular, the issue of the relationship between a cancelling clause and a breach of contract will be considered.

The opinion that the failure of a vessel to arrive before the cancelling date is a breach of contract, giving the right to recover damages from the shipowners, often exists among freight brokers and managers. At first glance, this opinion may seem reasonable. If the parties agreed on the right of the charterers to cancel the charter party if the vessel did not arrive before the cancelling date, they probably assumed that the vessel should arrive before that date. And if this did not happen, then it is probably a breach of contract, giving the charterers the right to cancel the charter party and recover its damages. However, English law has developed a slightly different approach.

By itself, the cancelling clause in its usual form does not give the charterers the right to recover damages from the shipowners in connection with missed laycan. Within the meaning of this clause, the shipowners do not guarantee that the vessel will arrive at the loading port at the agreed time but only agree to cancel the charter party if this does not happen¹. For example, Clause 9 of the GENCON 1994 states the following:

“(A) Should the Vessel not be ready to load (whether in berth or not) on the cancelling date indicated in Box 21, the Charterers shall have the option to cancel this Charter Party.”

In the first paragraph of Clause 5 of the AMWELSH 93, similar wording is indicated:

“Should the Vessel’s notice of readiness not have been tendered in accordance with Clause 6, before 1700 on the … day of …, the Charterers shall have the option to cancel this Charter Party ...”.

Provisions similar in meaning can be found in paragraph (a) of Clause 6 of the FERTIVOY 88, paragraph (b) of Clause 4 of the GRAINCON and others.

These clauses do not expressly indicate any obligation of the shipowners, but only contain the right of the charterers to cancel the charter party upon the occurrence of a certain condition. In this regard, the vessel’s delay in itself is not a breach of contract (although it may be an indicator of it), and, therefore, the charterers do not automatically have the right to compensation for losses.

This does not mean, however, that the charterers are completely deprived of the opportunity to restore justice in such a situation. To do this, the charterers will need to prove that the vessel did not manage to arrive at the port due to the violation by the shipowners of other terms of the charter party. Let’s consider some of them in more detail.

Expected ready to load / ETA. If the charter party indicates the date when the vessel is expected to be ready to load, or the estimated date of arrival (ETA), then if such date is indicated deliberately without reasonable grounds to believe that the vessel will be in time to arrive at the port of loading by the specified date, the charterers may claim damages. Moreover, since this term is considered a condition, the charterers have the right to terminate the contract².

Reasonable dispatch. One should also highlight the obligation of the shipowners to ensure the passage to the port of loading with all due, (all) reasonable, (all) convenient, utmost speed/dispatch etc.³ This obligation, in itself, without specifying any other date, was interpreted by the courts as an obligation to begin the passage to the port of loading immediately (forthwith) or within a reasonable time after the conclusion of the charter party⁴. Also, the shipowners should proceed with an appropriate speed and route⁵. A delay in departure or during the passage due to the non-fulfillment of the above obligation by the shipowners will constitute a breach of contract. The question of whether such a term is a condition giving the charterers the right to terminate the charter party is clearly not resolved in the courts⁶. This point should be taken into account by both parties when deciding what to do in case of breach of this obligation by the shipowners. The exact severity of the effort required from the shipowners depends on the interpretation of the specific terms of the contract, but the use of the words “utmost” is likely to create more stringent requirements for the shipowners. At the same time, it is noted that the obligation of the shipowners to proceed to the port with a reasonable dispatch is implied and will apply even in the absence of this term in the charter party⁷.

The combination of the above two terms means that the vessel must start the transition so that, following with a reasonable dispatch, arrive at the port of loading by the expected date⁸. It is important that the shipowners do not have an obligation to provide the vessel to the loading port by a certain date, but only to start moving to the loading port in such a way that the vessel has time to arrive there.

In the absence of expected ready to load or ETA dates in the charter party, the date of the vessel’s nomination can be used to determine the date when the vessel should start moving to the port of loading⁹, if the shipowner is required to nominate the vessel a certain number of days before the ETA at the port of loading, or even the ETA at the port of discharging in the framework of the previous carriage¹⁰.

The cancelling clause and the above terms are not directly related and create separate rights and obligations of the parties. However, they can influence each other. So, in the case of a deliberately incorrect date when the vessel is expected to be ready for loading, the charterers have the right to terminate the contract even if the cancelling date has not yet come (probably, provided that the vessel cannot arrive before the cancelling date in any case)¹¹. In the authorities, however, it is noted that if the parties agreed on the cancelling date in the charter party, then the term ‘expected ready to load’, as well as the obligation to proceed to the port with a reasonable dispatch, should not be conditions, i.e. the charterers should not have the right to terminate the contract before the cancelling date, but, of course, will be able to claim damages for breach of contract, regardless of whether they cancel the charter party or not¹².

Cancelling date may be more important for establishing the fact of breach of contract by the shipowners if the charter party does not contain the term ‘expected ready to load’ or ETA to the port of loading / discharging, or another similar term. In such a case, the question arises whether it is possible to use the cancelling date to calculate a reasonable departure date for the vessel at the port of loading. The courts did not address this issue directly, but in The Pacific Voyager, the Court of Appeal confirmed this possibility or rather did not reject it¹³. A similar position was confirmed in one London arbitration¹⁴. Some cancelling clauses in the standard proformas contain a direct indication of the obligation of the shipowners to proceed to the port of loading taking into account laycan. Thus, for example, § 2 of Clause 5 of the AMWELSH 93 states that the shipowners must apply due diligence for the vessel to tender a notice of readiness before the cancelling date. The existence of the obligation of the shipowners in one form or another to take into account the agreed laycan is not disputed in the textbooks either¹⁵. However, there is debate about the nature of the obligation, whether it is absolute, following the current legal rule from The Pacific Voyager, or only due diligence is required based on The Democritos¹⁶¹⁷. Thus, the correctness of the frequently encountered position of shipowners that in the absence of the ‘expected ready to load’ term or its analogs, the charterers do not have the right to recover damages, but only the right to cancel the charter party, can be questioned.

Finally, we should consider the situation that may arise during the performance of contracts of affreightment (COA). Such contracts are concluded for the carriage of goods within a certain period, during which the charterers usually declare laycan to the shipowners within a certain period prior to its commencement, and the shipowners must, in response, nominate the vessel. Usually, when nominating, the shipowners also have the obligation to indicate the estimated date of arrival of the vessel at the port of loading.

In practice, situations occur when shipowners nominate a vessel whose estimated date of arrival at the port of loading is later than the cancelling date. If the COA does not stipulate that the shipowners must nominate a vessel whose estimated time of arrival at the port of loading will be based on the cancelling date, then the question arises – are the shipowners entitled to nominate a vessel with the estimated arrival date after the cancelling date? The shipowners can do this, for example, if they are not interested in the performance of the carriage and would like the charterers to cancel the charter party without filing a claim for damages.

This issue was not directly considered by the courts, but it seems that the shipowners should not have such a right due to the following:

1. The shipowners have at least an implied obligation to send the vessel to the port of loading with a reasonable dispatch. It is only necessary to establish the moment when the vessel should go to the port of loading. Either it is immediately after the nomination if there is no date in the contract for reference, or later, but taking into account any date specified in the contract.

2. The Court of Appeal in The Pacific Voyager did not explicitly reject the possibility of using the cancelling date as a guideline for calculating the date when the vessel should leave for the port of loading.

3. If only the cancelling date can be used as a reference in the contract, then the nomination of a vessel that cannot reach the port of loading by this date makes the term with the obligation of the shipowners to send the vessel with a reasonable dispatch unfeasible.

4. In such contracts, it is reasonable to assume that the shipowners nominate such a vessel that can reasonably be able to arrive at the loading port, taking into account laycan. Otherwise, the entire agreement may be unfeasible, allowing the shipowners to nominate a vessel that will arrive a month or a year after the cancelling date.

In The Myrtos, the court considered the content of the shipowners’ obligation to nominate a vessel if such nomination should be made 20 days before the estimated date of arrival. The court, in particular, indicated that the shipowners must have a vessel ready, which can arrive at the port of loading within 20 days from the date of nomination, while the charterers, even before the nomination, can expect the vessel to arrive on the date specified by the shipowners¹⁸. Assuming that the cancelling date should be taken into account by the shipowners when nominating the vessel, then the conclusions from The Myrtos can be transferred to the situation under consideration here. So, taking into account that the COA usually contains the obligation of the charterers to declare the laycan in advance, for example, 20 days before the first day of the five-day laycan, the shipowner should probably have a vessel ready or employ such a vessel that can arrive at the loading port within 25 days. from the date of the declaration of laycan.

As a result, it seems that in such COA, for the purpose of business efficacy, there should be an implied obligation of the shipowners to nominate a vessel that can reasonably arrive at the port of loading taking into account the laycan.

Conclusion

In summary, we note that the cancelling clause is an important part of charter parties and both parties should bear in mind that the cancelling date may affect not only the charterers right to cancel the charter party. In certain cases, other terms of the charter parties may be interpreted, taking into account the cancelling date, in particular, those relating to the obligation of the shipowners to send the vessel to the port of loading with a reasonable dispatch. Given, however, the lack of a uniform approach to the interpretation of such terms in English law, the importance of using clear and detailed language regarding the rights and obligations of the parties in a given situation related to the time of arrival at the port of loading should be emphasized. ■

Notes