This appeal arises out of the dismissal by Blair J (‘the judge’) of an appeal by the appellant (‘the owners’) from an interim award dated 7 May 2008 made by three arbitrators, namely Michael Baker–Harber, Alan Burbridge and Robert Gaisford, in which they decided that a provision in a charterparty is unenforceable on the ground that it is a penalty. The charterparty is dated 23 November 2006 and is on an amended New York Produce Exchange form under which the respondent (‘the charterers’) chartered the vessel Paragon for “about minimum 3 to about 5 months (about means +/- 15 days)”. By clauses 4 and 36, the rate of hire was US$29,500 “per day or pro rata”.

The critical clause is clause 101 which is in these terms:

The owners appealed to the High Court with the permission of Andrew Smith J but the decision was upheld by Blair J who gave permission to appeal to this court. His order was dated 25 March 2009.

For present purposes it is convenient to consider first the correct approach to late redelivery and to do so by reference to the terms of the charterparty but without reference to clause 101 and on two alternative assumptions. The first is that the last voyage was a legitimate last voyage and the second is that it was not a legitimate last voyage. The reason that this seems to me to be a relevant exercise in this appeal is that to my mind it throws considerable light on the correct approach to the construction of the instant charterparty.

The exercise first raises the question what is a legitimate last voyage. At [7] of his judgment the judge correctly described it by reference to the judgment of Bingham LJ in this court in Hyundai Merchant Marine Co Ltd v Gesuri Chartering Co Ltd (“The Peonia”) [1991] 1 Lloyd’s Rep 101 at 107-8. An order given by charterers for a ‘legitimate last voyage’ is an order for the employment of the vessel on a voyage which can reasonably be expected to be performed by the time for redelivery under the charterparty. By contrast, an order for an illegitimate last voyage is an order for the employment of the vessel on a voyage which cannot reasonably be expected to be performed by the time for redelivery.

In the case of a legitimate last voyage, as the judge correctly stated at [7], The Peonia established that the charterers are nevertheless liable in damages if the vessel is not redelivered within the contractual period. In such a case, the charterers are of course liable to pay hire until the contractual date of redelivery and it is not in dispute that the measure of damages is the market rate of hire for the period between the contractual date of redelivery and the actual date of redelivery. In this case, as I have already stated, the contractual time and date of redelivery was at the latest 16.45 GMT on 14 May 2007. It follows that, if the order was for a legitimate last voyage, the vessel was delivered 6.166 days late in breach of the charterparty and the measure of damages would be 6.166 times the market rate per day.

In the case of an illegitimate last voyage Bingham LJ described the position in this way in The Peonia:

At [9] the judge correctly stated that, in the case of an illegitimate last voyage, the owners are entitled to damages if any harm has been suffered. The relevant principles were stated by Lord Denning MR in The Alma Shipping Corporation of Monrovia v Mantovani (The Dione) [1975] 1 Lloyds Rep 115 at 118 as follows:

As the judge observed at [11], that principle was applied by Steyn J in Shipping Corporation of India Ltd v NSB Niederelbe Schiffahrtsgesellschaft mbH & Co (The Black Falcon) [1991] 1 Lloyd’s Rep 77. In that case, the last date for redelivery was 31 March 1988, whereas the vessel was in fact redelivered on 23 May 1988. The arbitrators held that the vessel would have been redelivered on 15 March 1988 had she not been sent on an illegitimate last voyage. They therefore awarded damages at the market rate from 16 March. Steyn J reversed their decision on the basis that the owners’ “expectation” was to receive the charter rate, and not the market rate, up to the last permissible date for redelivery which (taking account of the optional tolerance of 15 days more or less) was 14 April 1988. The owners therefore only recovered the market rate from 14 April onwards, i.e. for the “overrun” period.

Steyn J held that the arbitrators’ approach was inconsistent with the approach of the majority in The Dione. Although Mr Baker submitted that the views of Lord Denning, with whom Browne LJ agreed, in that case were obiter dicta, and it may be that strictly he was right, I note that Steyn J did not think so. In any event he set out the statements of Lord Denning to which I have referred and said that he would have reached the same conclusion himself in the absence of authority. He put his conclusions thus at pages 80 to 81 (quoted by the judge at [12]):

The three cases to which I have referred, The Dione, The Peonia and The Black Falcon, provide a consistent body of judicial opinion all to the same effect. As the judge observed at [14], Steyn J’s conclusion was cited by Rix LJ without disapproval in this court in Transfield Shipping Inc v Mercator Shipping Inc (“The Achilleas”) [2007] EWCA Civ 901, [2007] 2 Lloyd’s Rep 555 at 562. The Achilleas was a case in which the question was whether the owners could recover damages for the loss of a following fixture. In the House of Lords in that case, reported at [2008] UKHL 48, [2009] 1 AC 61, after citing the cases to which I have referred, Lord Hoffmann stated the principle in the same way as follows at [23]:

Taken together the cases and the textbooks represent a considerable body of opinion from judges and others with extensive knowledge and experience of the maritime law. As I read them, the principles apply to the position in the case of an illegitimate last voyage which is performed. Whether or not all the principles stated form part of the ratio decidendi of the cases, left to my own devices I would have reached the same conclusions.

Mr Baker however submitted that the true position was different. He submitted that the giving of an illegitimate last order by charterers was to order the owners to carry out a voyage which was not a contractual voyage. The order, he submitted, was therefore given outside the contract and was a voyage for which, if the owners performed it, they were entitled to appropriate remuneration and that it followed that the owners’ claim for remuneration was not a claim for damages but a quasi-contractual or quantum meruit claim for hire, which, absent express agreement, would be at the relevant market rate at the time the voyage was carried out.

He relied on the approach of Lord Mustill in The Gregos and, by analogy, in particular on the decisions in this court in Steven v Bromley & Son [1919] 2 KB 722 and Rederi Sverre Hansen A/S v Phs Van Ommeren (1921) 6 Ll Rep 193, per Bankes LJ at 194. This was an ingenious submission, which had not been advanced on behalf of the owners before the arbitrators or the judge but in my opinion is ill-founded.

In The Gregos, after the problem whether the last voyage would be legitimate or not arose, the parties reached a compromise, the voyage was performed and the vessel was redelivered eight days late. The issue was whether the last voyage orders were legitimate or not, the essential question being at what time that question should be determined. It was held that they were not legitimate. This had the effect provided for in the compromise agreement, which nobody suggested was in any way invalid or unenforceable. In the course of his speech on the question in issue, Lord Mustill said at page 1472G that too much attention had been paid to the order for the last voyage and too little to the shipowners’ promise to furnish the services of the vessel, which was what the contract was about. He then said at page 1473A:

Mr Baker submitted that it follows from that reasoning that, if the charterers give an illegitimate last order, they are asking the owners to perform a non-contractual voyage and, if the owners choose to perform it, they are not performing a service under the charterparty but outside it for which they are not liable to pay charterparty hire but a market rate outside the contract.

I would not however accept that analysis because I do not think that it is sound in principle. There are of course cases in which non-contractual arrangements are made in which it has been held that payment must be made for a service rendered outside the contract. Examples are the cases relied upon by Mr Baker, to which I will refer in a moment. However, in the present context, the correct position is in my judgment that, absent a without prejudice agreement of the kind made in The Gregos, where the owners choose to perform a last voyage order they are doing so under the contract, whether the voyage is a legitimate last voyage or an illegitimate last voyage and, in the latter case, whether they knew or suspected that the order was for an illegitimate last voyage or not. Moreover, the same is true whether the order to carry out the voyage was a repudiatory breach of the charterparty or not. In each of these cases, the owners are performing the voyage under the contract, although, (absent waiver) if they suffer loss, they can of course recover damages for the charterers’ breach of contract in giving the illegitimate order. This seems to me to be consistent with the general principle that, where an innocent party chooses to perform the contract after a repudiatory breach of a contract by the other party, he continues to be bound by the terms of the contract but is entitled to damages for any loss caused by the breach.

I do not read the speech of Lord Mustill in The Gregos as expressing any different view. On the contrary, he approached the problem in just that way. Thus he noted at page 1477G that, if (absent the without prejudice agreement) performance had gone ahead after the anticipatory repudiation the owners would have simply have recovered damages. There is no suggestion in Lord Mustill’s speech that the correct approach was to treat the voyage in fact performed as carried out outside the terms of the charterparty. As I see it, in such a case the position is simply that the voyage is performed under the contract.

For these reasons, the true position is that, in the absence of clause 101, if the final voyage order was an illegitimate order, and thus a breach of contract, and the owners had performed the voyage they would have been entitled to recover hire at the contractual rate until the contractual date for redelivery and damages at the market rate thereafter until actual redelivery.

The cases relied upon by Mr Baker do not, in my judgment, lead to any other conclusion. In Steven v Bromley & Son charterers agreed to load a vessel with a cargo of steel billets at a specified rate of freight. A cargo was loaded which consisted in part of general merchandise, the current rate of freight of which was higher than the specified rate. In an action by the shipowners for breach of the charterparty in not loading the vessel in accordance with the terms of the charterparty, the charterers contended that the shipowners were only entitled to nominal damages beyond the amount of the charterparty freight. It was held that the facts implied an offer by the charterers to load general cargo at the current market rate of freight and an acceptance by the shipowners of that offer. Thus a new contract was inferred between the parties: see per Bankes LJ at pages 725-6, Scrutton LJ at page 727 and Atkin LJ at page 728.

The position can perhaps be seen most clearly from the judgment of Atkin LJ at page 728:

In my opinion, in the ordinary case in which charterers give orders for an illegitimate last voyage there is no basis for implying a request by the charterers that the owners should perform such a voyage outside the charterparty and on terms that they will pay for the voyage at the market rate. There is no case, so far as I am aware, in which that has been suggested, let alone held to be the case. On the contrary the charterers are instructing the owners to perform a voyage under the charterparty. If it is a non-contractual order because the voyage would be illegitimate, the owners can refuse to perform it but, as explained above, if they do perform it, they do so under the charterparty but are entitled to damages at the market rate if redelivery takes place after the end of the charterparty period.

Any other view would be inconsistent with the cases to which I have referred. Most tellingly, it would be inconsistent with the approach of Steyn J in The Black Falcon in this passage which I have already quoted:

It follows from the above that, in my judgment, if this charter party had not contained clause 101 the measure of damages would have been that accepted by the charterers and held by the judge, namely 6.166 days at the market rate. I therefore turn to clause 101.

The question is what, if any, difference clause 101 makes to that analysis. There was some argument as to the precise meaning of the first sentence of clause 101. It is not necessary to discuss its precise meaning in detail for the purposes of resolving the issues in this appeal. It is I think sufficient to say that it imposes an obligation on the charterers that is similar to but, as I see it, somewhat more onerous than the ordinary obligation on a charterer to give orders for a legitimate last voyage. This appeal turns on the legal effect of the second sentence. The arbitrators and the judge held that it was a penalty.

Mr Baker made essentially three submissions. He first submitted that an illegitimate last voyage is a request to perform services which the owners have not committed the vessel to perform and that, since the owners can reject the order, so they can name their price to perform it (if aware that it is illegitimate) or claim remuneration at a market rate if the services are performed without agreement as to price. The second sentence of clause 101 is an agreement in advance as to the price payable where an illegitimate last voyage has been performed.

I am unable to accept that submission, essentially for the reasons already given. As I see it the first sentence is indeed a provision similar to the ordinary obligation to give legitimate orders. The principles applicable are therefore in principle those discussed above. The second sentence applies on the premise that there is a breach of the obligation in the first sentence, since it begins “if, however charterers fail to comply with this obligation”. It is thus an agreement as to what should happen in the case of breach and is thus a classic provision to which the law of penalties applies.

It is therefore unenforceable unless the payment stipulated for is a genuine pre-estimate of the amount of loss caused by the breach. The judge correctly set out the relevant principles, which were not in dispute before him, at [17] to [19] of his judgment. Thus at [17] he quoted this passage from the speech of Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 86-87:

At [18] the judge referred to a passage in Lordsvale Finance Plc v Bank of Zambia [1996] QB 752 at 762H, where, as Mance LJ put it in Cine Bes Filmcilik v United International Pictures [2003] EWCA Civ 1669 at [13], a more accessible paraphrase of the concept of penalty than the use of the expression in terrorem was stated by Colman J thus:

The judge noted at [19] the well-known warning given by Lord Woolf in Philips Hong Kong Ltd v The AG of Hong Kong (1993) 61 BLR 49 at 59, that the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld. Any other approach, he said, would lead to undesirable uncertainty especially in commercial contracts. See also Murray v Leisureplay Plc [2005] IRLR 946 per Arden LJ at [48] and Alfred McAlpine Capital Projects Limited v Tilebox Ltd (2005) BLR 271 per Jackson J at [48]. On the other hand, as the judge noted (also at [19]), the circumspection that the courts show before striking down a clause when the parties are of equal bargaining power does not displace the rule that the clause must be a genuine pre-estimate of damage: Jeancharm Ltd v Barnet Football Club Ltd [2003] EWCA Civ 58 per Jacob J at [15] and General Trading Company v Richmond Corporation Ltd [2008] 2 Lloyd’s Rep 475 per Beatson J at 498.

Mr Baker placed some reliance upon this further statement by Mance LJ in the Cine Bes case at [15]:

I entirely accept the point being made by Mance LJ but each case depends upon the true construction of the particular contract. In this case, unless the first sentence of clause 101 is a condition of the contract (as to which see below), the breach of the clause simply entitles the owners to damages. It does not, as Mr Baker submitted, have the effect of treating the charterers as having persisted in the breach so as to repudiate the charterparty. Nor does it entitle the owners to treat the contract at an end. I note in passing that they did not do so. If there was a breach of the first sentence of the clause, it seems to me that the position would be the same as in the ordinary case of an illegitimate order discussed above, namely that the owners would be entitled to refuse to perform the voyage and to require voyage orders which complied with it.

In short clause 101 is concerned with the consequences of a clause that, unless it is a condition, does not entitle the owners to treat the contract as at an end. If there is a breach of the clause, for the reasons given earlier, the owners are in principle entitled to damages assessed on the basis which, as Lord Hoffmann put it, was well known to the parties, namely payment at the market rate after the contractual date of redelivery.

Mr Baker’s second submission was that clause 101 is not penal because it is not penal to provide that, if an illegitimate last voyage is performed, the owners are to be put in the position they would have been in if they had declined to perform it and the charterers had persisted in it so as to repudiate the charterparty. He submitted that so to provide is to entitle the owners to recover the loss caused by the performance of the illegitimate last voyage and that the second sentence of clause 101 contains a fair pre-estimate of the amount of that loss caused by the performance of the illegitimate last voyage. It is not unconscionable or imposed in terrorem, even if it entitles the owners to something that could not be claimed but for the clause.

I would not accept that submission, essentially for a reason which I gave in relation to the first point. Unless it is a condition of the charterparty (as to which see below), a breach of the first sentence of the clause is not a repudiatory breach of the charterparty and I can see no reason to construe the second sentence of clause 101 as if it was. Yet that is what the owners seek to do because their argument that it contains a pre-estimate of the loss assumes that, but for the breach, the vessel would have been delivered to them before the redelivery date, which in its turn assumes that they accepted the breach as a repudiation of the charterparty. Further, for the reasons I have already given, I do not think that the clause has the effect of treating the charterers as having persisted in the breach so as to repudiate the charter.

Mr Baker’s third point is that the first sentence of clause 101 is a condition of the charterparty, any breach of which brings the charterparty to an end. I would accept Mr Hirst’s submission that the test for the construction of a term as a condition is a very difficult one to satisfy but, whether that is so or not, the first sentence of clause 101 is not a condition. For the reasons I have already given, I would hold that a breach of the clause at most gives the owners the option not to perform the last voyage. I see no reason not to treat the first sentence as a similar provision to the ordinary case where it is a breach of the charterparty to give an order for an illegitimate last voyage, with the consequences referred to above.

I am not sure that, if the matter is approached in that way, Mr Baker submitted that the second sentence was not a penalty. It was conceded, in my view correctly, that a provision for payment, as compensation for late redelivery, of a higher market rate for the period of overrun and also for the last 30 days of the contracted period would be penal. Since the effect of the conclusions I have set out above is that, but for the clause, the measure of damages is the same whether the breach of the obligation is a breach of clause 101 or the breach of the obligation to redeliver on or before the redelivery date, it seems to me that the concession should logically apply to a breach of the second sentence of clause 101, namely that the second sentence is a penalty.

Assuming the point to be live, however, I would uphold the decision of the arbitrators as approved by the judge that the second sentence of clause 101 is indeed penal. At [15] the judge noted that there was expert evidence before the arbitrators to the effect that a vessel such as the Paragon would lift about six cargoes a year, with an average voyage duration of about 60 days, or a combination of voyages between 40 and 80 days, although there are other trades of a much shorter duration of between 25 to 30 days. The owners relied upon that evidence, submitting that the period of 30 days referred to in the clause is not a figure picked at random, but corresponds to half the length of an average voyage for this type of vessel. The owners argued that the period of 30 days was thus a sensible commercial agreement reflecting a middle position between what the owners might have lost.

The arbitrators rejected that approach. On the authorities, since there was no repudiatory breach accepted by the owners, their loss was simply a figure to be calculated at the market rate for the 6.166 days between the contractual redelivery date and actual redelivery. It is that figure which is to be compared with the figure calculated by reference to clause 101. The arbitrators concluded at paragraph 26 of the award that the primary purpose of the clause was to deter the charterers from failing to make the relevant arrangements and investigations before issuing voyage orders.

The judge said this at [32]:

I agree. It follows that I would dismiss the appeal. I would also order the owners to pay the charterers’ costs but would give the charterers a short period in which to make submissions to the contrary.

I agree.

I also agree.