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Isabella Shipowner SA v Shagang Shipping Co Ltd

This appeal against an arbitration award for error of law under s. 69 of the Arbitration Act 1996 arose out of the premature redelivery of a time chartered ship. When the defendant time charterers had made clear (in admitted repudiatory breach of the charter) that they intended to redeliver the vessel about 3 months prior to the end of the 59-month agreed minimum period, the claimant shipowners had applied to the arbitrator for a partial award declaring that they were entitled to affirm the charterparty and to be paid hire up to the end of the minimum period. The arbitrator had declined to grant the relief sought, on two grounds, namely that: (1) the owners were not able to fulfil their side of the charter without the charterers' cooperation, so the owners' remedy lay in damages rather than hire; and (2) in any event, the owners had "no legitimate interest" in affirming the charter and recovering hire, as opposed to accepting the repudiation and suing for damages.

Cooke J held that the arbitrator had erred in law on both grounds.

On the first ground, the arbitrator had accepted the charterers' submission that time charters fall outside the ratio of White and Carter (Councils) Ltd v Macgregor [1962] AC 413 because of a limitation referred to in the speech of Lord Reid in that case, namely that if the party seeking to affirm the contract cannot earn the contractual remuneration without the other party needing to "do or accept anything", then the affirming party's remedy will lie in damages only. In The Puerto Buitrago [1976] 1 Lloyd's Rep. 250 (a case of a demise charter), a majority of the Court of Appeal had held obiter that the owners had been unable to fulfil the charter without the charterers' cooperation. Subsequent time charter cases such as The Odenfeld [1978] 2 Lloyd's Rep. 357 and The Dynamic [2003] 2 Lloyd's Rep. 693 had assumed that White and Carter applies to time charters, as had the leading textbooks; while in The Alaskan Trader No. 2 [1984] 1 All ER 129, Lloyd J had considered that there was at first blush much to be said for the argument that White and Carter did not apply because of the need for cooperation. Cooke J held that the issue came down to the simple question of whether the owners could earn hire without the need for the charterers to do anything, and he held that they could. Hire could be earned without the charterers providing any voyage orders or supplying any fuel. Cooke J followed the view expressed by Nicholas Strauss QC (sitting as a deputy judge) in Ministry of Sound (Ireland) Ltd v World Online Ltd [2003] 2 All ER (Comm) 823 that Lord Reid had only had in mind contracts under which the right to payment depended on full prior performance. Cooke J held that a time charter is materially different from a demise charter, in that under a demise charter the charterer takes possession of the vessel: thus in The Puerto Buitrago, when the charterers had abandoned the ship, this gave the owners no practical option but to put their own personnel on board, thus regaining possession. Cooke J held that this was similar to the law of landlord and tenant, exemplified by Reichman v Beveridge [2007] Bus LR 412, that where rent or hire is payable in return for possession, the re-taking of possession by the owner puts an end to the right to rent/hire.

On the second ground, Cooke J held that the effect of the authorities (in particular The Puerto Buitrago, The Odenfeld, The Alaskan Trader, Stocznia Gdanska v Latvian Shipping [1996] 2 Lloyds Rep. 132 and The Dynamic) is that the innocent party will only have no legitimate interest in affirming the contract if damages are an adequate remedy and his insistence on affirming can be described as "wholly unreasonable", "extremely unreasonable" or "perverse?". Cooke J held that the arbitrator had failed to apply the correct test, and that he had (incorrectly) focused on whether the owners had been able to mitigate their losses in the market, and on the fact that the charterers had unequivocally communicated that they had no further use for the vessel. The arbitrator had also found that there was nothing exceptional or unusual about the facts of the case. Cooke J held that the present case was to be distinguished from The Alaskan Trader, in which the arbitrator's finding of "no legitimate interest" had been held to be conclusive, in that in The Alaskan Trader counsel had been unable to identify any error of law in the arbitrator's reasoning, whereas in the present case the arbitrator's conclusion had been based on a misunderstanding of the test.

Cooke J held that based on the arbitrator's finding that the case was not exceptional or unusual, the application of the correct legal test could lead to only one answer, which was that the owners had been entitled to affirm the charter and claim hire. He therefore decided to vary the award so as to make a declaration to that effect.

The owners had also challenged the award under s. 68 of the Arbitration Act 1996, on the ground that in his Reasons the arbitrator had failed to summarize or refer to their final round of "surrejoinder" submissions. Cooke J held that it was clear on the evidence that the arbitrator had studied the owners' submissions in detail, and he was not in any way bound to summarize their contents, nor was there any substantial new point raised in the owners' surrejoinder. Accordingly, and applying Lesotho Highlands v Impregilo [2006] 1 AC 221,  the owners' criticisms of the arbitrator had been unfair and they had not made out the kind of irregularity to which s. 68 is intended to apply.

Timothy Young QC and Simon Milnes acted for the Respondent (instructed by Holman Fenwick Willan).