In the case of Spar Shipping AS v Grand China Logistics Holding (Group Co. Ltd) 
, the defendant’s subsidiary, GCS, hired three ships. The hire agreement was guaranteed by the defendant, Grand China Logistics Holding (Group Co. Ltd). Under the agreement, payment had to be made 15 days in advance of each hire period.
Between April and September 2011, GCS failed to make timely payments and in September 2011 Spar Shipping terminated the agreement. Spar then sued Grand China Logistics Holding for the arrears as well as the future profits that it would have earned if the agreement had not been terminated.
Spar was entitled to recover the unpaid hire charges but the court had to decide if Spar could also terminate the agreement and recover lost profits. Spar would be entitled to recover lost profits if the requirement for prompt payment was a condition of the agreement i.e. an important term whose breach allowed Spar to terminate or if GCS’ poor payment history amounted to a fundamental/repudiatory breach.
The parties had not expressly designated the requirement for prompt payment as a condition of the agreement and GCS’ obligation to pay 15 days in advance of each hire period was not expressed to be time critical. However, GCS’ payment history was found to constitute a fundamental breach because it had been struggling to pay on time since April 2011 and had made no firm proposals to discharge the arrears. Spar therefore had no expectation that GCS would ever make the payments on time and was entitled to recover damages on account of the expected profits that it lost as a result of being forced to terminate the agreement.
Contracting parties should be aware that if they consistently make late payments the other party may terminate the agreement for fundamental breach and then sue for lost profits even if the obligation to make prompt payment is not a condition. Proposing a payment plan may be of limited assistance to the defaulting but it cannot avoid the risk having to pay substantial damages for lost profits. For more information and to find out how we can help you, please contact Alex Haddad by email or call 020 7294 7330.