Maredelanto Compania Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos) [1970] EWCA Civ 4 (01 July 1970)

A ship was chartered with a clause stating it was 'expected ready to load' by a certain date. The shipowners could not reasonably have met this date. The court held this clause was a condition, allowing the charterers to terminate the contract.

Facts

The shipowners (claimants) chartered their vessel, the ‘Mihalis Angelos’, to the charterers (defendants) for a voyage from Haiphong in North Vietnam to a European port. The charterparty, dated 25th May 1965, contained a clause stating the vessel was ‘expected ready to load under this Charter about 1st July 1965′. The charter also included a cancelling clause, allowing the charterers to cancel if the ship was not ready to load by 20th July 1965. On 17th July 1965, the charterers purported to cancel the contract, citing a force majeure clause because the loading of the intended cargo had become impossible due to the escalation of the Vietnam War. The shipowners treated this cancellation as a repudiation of the contract, accepted it, and claimed damages for the loss of the charter. However, it was established in arbitration that on 25th May 1965, the shipowners could not have reasonably expected the vessel to be ready to load around 1st July, as it was still far away in the Pacific Ocean with cargo to discharge. In fact, the ship would not have been ready by the cancelling date of 20th July. The charterers argued that the shipowners’ breach of the ‘expected ready to load’ clause, being a breach of a condition, entitled them to terminate the contract, meaning the shipowners had suffered no loss.

Issues

The central legal issue for the Court of Appeal was the legal status of the ‘expected ready to load’ clause within the charterparty. The court had to determine whether this clause was:

1. A contractual ‘condition’, the breach of which would entitle the charterers to treat the contract as repudiated, regardless of the consequences of the breach.
2. A ‘warranty’, the breach of which would only entitle the charterers to claim damages for any loss sustained.

A secondary issue concerned the assessment of damages: if the charterers’ cancellation was a wrongful repudiation, what damages were the shipowners entitled to, given that the charterers would have been entitled to cancel the contract lawfully a few days later under the cancelling clause?

Judgment

The Court of Appeal unanimously held that the ‘expected ready to load’ clause constituted a condition of the contract. The appeal by the charterers was allowed.

Lord Denning M.R.

Lord Denning emphasised the importance of certainty in commercial contracts. He reasoned that a charterer needs to know their legal position immediately upon learning of a breach, rather than having to wait and see what the actual consequences of the delay would be. He distinguished the case from Hongkong Fir Shipping Co. Ltd. v Kawasaki Kisen Kaisha Ltd., where the ‘seaworthiness’ clause was deemed an innominate term. Here, the nature of the clause pointed towards it being a condition.

The question in this case is whether the clause ‘expected ready to load under this charter about 1st July 1965’ is a condition or a warranty. If it is a condition, the charterers were entitled to throw up the charter. If it is a warranty, they can only sue for damages… I have come to the conclusion that this clause is a condition. It is a term which, if not fulfilled, is a ground for repudiation.

On damages, Lord Denning concluded that even if the clause were only a warranty, the shipowners would have suffered no damage. Since the ship would not have been ready by the 20th July cancelling date, the charterers would have lawfully cancelled the contract anyway. The shipowners had therefore lost nothing of value.

Edmund Davies L.J.

Edmund Davies L.J. agreed, stating that precedent and commercial practice strongly supported the classification of this type of clause as a condition. He noted that the statement of expected readiness was not just a promise but an assurance of a present state of affairs founded on reasonable grounds.

I have, however, come to the clear conclusion that the charterers’ right to terminate was established on the first of these grounds, namely, that the owners were in breach of the ‘expected readiness’ clause and that this constituted a breach of condition.

He argued that treating it otherwise would introduce uncertainty into commercial dealings, as a charterer would not know whether they could make alternative arrangements upon discovering the ship would be late.

Megaw L.J.

Megaw L.J. provided a compelling analysis grounded in the need for commercial certainty. He argued that if the clause were an innominate term, the charterer would be placed in an impossible dilemma upon discovering the owner’s breach.

If the charterer does not know, and cannot tell, whether he can validly treat the contract as at an end, he is in a dilemma. If he wrongly treats the contract as being at an end, he is himself liable in damages… If he is to be told that the test is that a ‘serious’ breach of the term… is a condition, but a ‘non-serious’ breach is a warranty, how is he to act?

He concluded that the term’s very nature required it to be a condition, allowing the charterer to act with certainty. Therefore, the breach by the shipowners entitled the charterers to treat the contract as at an end.

Implications

The Mihalis Angelos is a leading authority on the classification of contractual terms. It clarifies that, despite the development of the ‘innominate term’ concept, the courts will not hesitate to classify a term as a condition where its nature and the need for commercial certainty demand it. The ‘expected ready to load’ clause in a charterparty is a prime example of such a term. The decision confirms that a breach of condition entitles the innocent party to terminate the contract, irrespective of the actual harm caused by the breach. The case is also significant for its reasoning on damages, establishing that a claimant cannot recover substantial damages for a repudiatory breach if the defendant would have been able to terminate the contract lawfully at a later date for a different reason.

Verdict: The appeal by the charterers was allowed. The court held that the shipowners were in breach of a condition and the charterers were entitled to terminate the contract. The shipowners’ claim for damages therefore failed.

Source: Maredelanto Compania Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos) [1970] EWCA Civ 4 (01 July 1970)