Legal Significance And Legal Remedies
In international commerce there could possibly be various ways of getting paid by the customers. But despite the huge amount of different paying methods you could unfortunately find out that some of the payments end up with some delays.
Thus, it will be vital to discuss the significant role of late payment in the light of international commerce transactions and possible remedies upon which you could have a right to recover.
At Common Law, the interest was payable only in case where it had been provided by the contract. Also the interest could not be awarded as a general damage just because there was a particular delay in the payment.
The classical case to this situation is President of India v. La Pintada Compania Navigation where the following approach was stated by Lord Staughton: “here are three possible solutions. One is to award no interest at all during the period of the plaintiff's delay . . . Another is to award interest at the rate ordinarily given, despite the plaintiff's delay . . . My own preference is to take account of culpable delay on the part of the plaintiff in the rate rather than the period for which interest is awarded . . . All three situations would . . . be clearly within the lawful..”
The verdict of the case clarifies the fact that If the hire is paid late but without court proceedings no interest is normally payable, but the ship owner may be entitled to special damages if he can show that he has had to pay interest on an overdraft as a result of the charterer's late payment of hire even though the amount is paid before the commencement of proceedings for its recovery.
Now, by Statute, the court could also include in the judgment in accordance to any damage or debt.
It must be also born in mind that any terms providing for the payment of interest will always prevail under statutory rules.
Nature Of Repudiatory Breach.
There are number of ways that appreciate the fact of treating the contract as repudiated and then terminate it. It is quite common that the parties to the contract should agree in advance whether a particular type of breach would be repudiatory or not. And also it must be prescribed that the issue could be determined if the consequences of actual breach are possible.
Recently, there was a High Court case which regarding to the topic discussed could be quite helpful. A dispute arose between Dalkia which was contracted to build a combined heat and power plant for a paper mill belonging to Celltech. It was agreed that Celltech would make 174 monthly payment installments under the contract and that in the event of any non-payment; Dalkia would be entitled to £3,000,000 for the termination of the contract. Dalkia could terminate the contract for any material breach. Celltech failed to pay the last three installments because of financial difficulties. Dalkia regarded this as a material breach of the contract and sought to terminate and claimed the £3,000,000. The High Court held that Dalkia could terminate the contract on the grounds of material breach and was entitled to the £3,000,000. A breach of contract was material if the breach was intentional rather than due to error, if the amount involved was neither trivial nor minimal and if the impact of the breach on the innocent party was more serious than if the contract had been performed. In this case, Dalkia could also have terminated the contract on the grounds of repudiation by Celltech but since the contract was specific as to the circumstances under which the £3,000,000 would be payable (material breach) it could not have sought the whole sum had it chosen to terminate on grounds of repudiation. The £3,000,000 was a genuine pre-estimate of loss and not a penalty.
In the Court's view, the circumstances were such that Dalkia could terminate the contract on the grounds of material breach and was thus entitled to the £3m. In this case, Dalkia could have terminated the contract on the grounds of ‘repudiation' by Celltech, but since the contract was specific as to the circumstances under which the £3m would be payable, it could not have sought the whole sum had that course been chosen. The Court also confirmed that where the innocent victim of breach of contract has a choice of approaches, it is entitled to choose the most advantageous one to pursue.
Withdrawal Of Late Payment
Now, if we take into account the question relating to the charterparties, we will find out that there are lots of similarities that also could reflect the significance of the late payment question. This question is particularly important and connected with the withdrawal of late payment of hire by the shipowner in case of default of the payment by the charterer.
As we know, at Common Law, lack of payment of hire will only entitle the shipowners to treat the contract of hire as terminated for the repudiatory breach. But now, more and more contracts have an express term of withdrawal for non-payment of hire.
This right is regulated by clauses 5 and 6 of New York Product Exchange 46 (NYPE46) which state the following:
Payment of said hire to be made in New York in cash …semi-monthly in advance … failing the punctual and regular payment of the hire, or bank guarantee, or on any breach of this charter party, the owners shall be at liberty to withdraw the vessel from the service of the charterers …"
Payment of hire to be made in cash…without discount, every 30 days in advance. In default of payment the owners to have the right of withdrawing the vessel from the service of the charterers, without noting any protest and without interference by any court or any other formality whatsoever …
In classical The Chikuma it was stated by Staughton L.J. whether the payment is made by way of an inter-bank transfer, it must be on terms which provides that the owners will have unconditional use of the money on or before the due date for payment. Transfer on the due date but for value at a date thereafter is not "payment in cash" and will amount to a late payment. The verdict in The Chikuma explained the fact of so-called “payment in full”. It has been described that the payment did not amount to payment in full and the irrevocable transfer is now equivalent not to cash, but moreover to overdraft.
There also was another case The Effi, where it was discussed whether different contract variations permit or not late payment and also if this variation had been revoked.
The Nanfri produced another precedent, according to which the charterer may be justified in making less than a full payment and may deduct certain counterclaims from paying the hire. According to the Court of Appeal's verdict, the charterers could invoke the doctrine of equitable set-off to deduct from hire in their cross-claims, qualified by reasonable assessment made in good faith.
The facts which represented in a very important case The Laconia are the following:
12th April Sunday : The Hire was due for payment.
13th April Monday : The charterers paid the hire.
14th April Tuestay The ship owner directed the bank to return the money and at 18:55 p.m. The ship owner informed the charterers of withdrawal.
Finally, the court produced a very important verdict and stated that once a punctual payment of an instalment has not been made a right of withdrawal accrued to the owners. The clause required: Payment of hire, in advance, and failing punctual and regular payment the ship owner can withdraw.
And the last important point of this case is that the requirement of punctuality is very strict.
Another point where the hire is overdue was in famous and leading case in this area “The Afavos”. It is said there that the right of withdrawal comes into play subject to the requirements of any anti-technicality provisions contained in the charter party. Typically, the charter party will contain a clause which requires the owners to send an anti-technicality notice to the charterers.
Unless the charterparty expressly provides to the contrary, it has been established that in order to be effective an anti-technicality notice must inform the charterers that a) the hire is due and has not been paid and b) the vessel will be withdrawn unless the charterers remedy their default within the time specified.
The right of withdrawal comes into play subject to the requirements of any anti-technicality provisions contained in the charter party. Typically, the charter party will contain a clause which requires the owners to send an anti-technicality notice to the charterers. Unless the charterparty expressly provides to the contrary, it has been established that in order to be effective an anti-technicality notice must inform the charterers that:
- a) The hire is due and has not been paid and
- b) The vessel will be withdrawn unless the charterers remedy their default within the time specified.
The essence of this principle is where an individual promises to give up rights under a contract.
Treitel identifies three meanings of the word ‘waiver':
- (a) To mean rescission
- (b) To mean variation
- (c) To mean forbearance
Both parties to a contract must demand of the other whole, exact and complete performance of the contract. Thus, the contract will remain its force until the intention of either party to discharge it by frustration, breach, performance or by agreement between the parties under satisfaction point.
In addition, the parties may alter the contract and replace it with a new contract. This would amount to a rescission.
And a great explanation of rescission in accordance to the breach of the contract has been made by Lord Wilberforce in Johnson v Agnew:
“..this so called rescission, is quite different from rescission ab initio, such as may arise, for example, in case of mistake, fraud or lack of consent. In those cases, the contract is treated in law as never having come into existence. In case of repudiatory breach, the contract has come into existence but has been put to an end and discharged. Whatever contrary indications may be disinterred from old authorities, it is now quite clear, under the general law of contract, that acceptance of a repudiatory breach does not bring about rescission ab initio”.
An example from charterparties could also be applicable here in such a particular situation, where the shipowners have accepted the tendered payment. Hence, could they been taken to have waived their rights to withdrawal.
The answer to this lies in The Mihalios Xilas, where there was a lower due of hire by the charterers that has been expected by the shipowners. And it was held that the retention of hire by the charterers was not to be a waiver, as the shipowners were entitled to a reasonable time before deciding whether to withdraw the payment of hire or not.
So, it lights the situation where the performance of the contract became impossible due to lack of performance and in this case the Court has the power to award damages for the original breach.
When The Time Is “Of The Essence” Of The Contract
When time is not of the essence, courts generally permit parties to perform their obligations within a reasonable time.
But a particularly special criterion that time is of the essence with respect to all provisions of this agreement specifies the time for performance.
This clause can also be tailored to reflect special timing issues according to your contract. However, it is provided that the foregoing shall not be construed to limit or deprive a party to a contract of the benefits of any grace or use period allowed in this agreement.
The general rule is that time is not of the essence unless the contract expressly so provides. But the modern view to this is that the time is not the essence of the contract until the manifesting of the intention of the parties about such aspect.
Section 10 (1 and 2) of Sale of Goods Act 1979 could also be applicable here.
(1) Unless a different intention appears from the terms of the contract, stipulations as to time of payment are not of the essence of a contract of sale.
Whether any other stipulation as to time is or is not of the essence of the contract depends on the terms of the contract.
Time for payment is not automatically of the essence of the contract unless any agreed supply terms make it so. However, even if the terms and conditions do not make time of the essence, if payment is late against agreed terms then, under English law, a notice can be served making time of the essence and demanding payment within a further "reasonable" period.
In contract law, very often time is not a "material term," which means that one party cannot repudiate (i.e. attempt to cancel, or not fulfill your end of the bargain) the contract the other party is late with the payment or more often, with the installment payments. In general, if that party is late, they usually don't oblige to pay damages for their lateness, even if the other party suffered from them.
When there is a special term in a contract which states that "time is of the essence," both parties realize that there can be repudiation if one party performs late, and lateness may subject the breaching party to "consequential" damages as a result of the lateness.
Next question to discuss is the topic of estoppel and how could it work in case where the late payment is taken its place.
Where there's a dispute between the parties regarding the terms of an offer and a party has so conducted himself that a reasonable person would believe that he was assenting to the terms as proposed by the other party, the person who has so conducted himself, whatever his real intention may have been, is bound by the contract as if he'd meant to agree to the other party's terms
The case, which reaffirmed the doctrine of a promissory estoppel is The High trees, where it was held by Lord Denning J that a promissory estoppel is: “a promise was made which was intended to create legal relations and which, to the knowledge of the person making the promise, was going to be acted on by the person to whom it was made and which was in fact so acted on.”
The major case John Burrows Ltd. v. Subsurface Surveys Ltd. is also applicable in this situation. As we already know, during a period of over 18 months, the defendant was consistently more than 10 days in default with its monthly payments. On each occasion, the creditor accepted these payments without protest and without invoking acceleration clause. In other words, a debtor was consistently late in his payments even though the contract allowed the creditor to sue for the entire amount if payments were late. When the personal relationship between the two parties soured, the creditor sued. The debtor argued equitable estoppel.
Similarly, following a disagreement between presidents of the companies, the next time that the defendant was late in paying, the plaintiff sued for the whole amount owing.
Finally, the courts frequently face such cases of a promissory estoppel, which are not true because the representor may be bound by acceptance of any such unintended offer even before the representee acts upon it.
And all above now stands for the fact that 'estoppel' which creates a contract must be fully distinguished from the situation where there is already an existing contract and, one party represents that he won't enforce his contractual rights, without creating a new contract of variation, and may thereby become 'equitably estopped' from relying on those rights.
An Effect Of Sale Of Goods Act 1979
Implied terms under Sale of Goods Act 1979 are subscribed as being either conditions or warranties. The essence of this is that condition is a stipulation, and in case of breach it could give the right to treat the contract as repudiated. In case of breach of warranty it gives the right to a claim only for damages.
Also exist so-called intermediate terms. This term appear in such cases where the previous section does not work. The basic example of a particular case is
Hong Kong Fir shipping upon the judgment in which it became quite common that if the breach is as serious as to strike fundamentally the contract the breach will be treated as repudiatory (same in case of breach of condition). And if it is not so serious it will give rise only to a remedy by damages as in case of warranty.
Now, I'd like to discuss possible remedies for the late payment and probably decide if it is necessary to treat contract as terminated in case of lack of payment or claim for the interest.
Obviously, we can treat late payment as a breach of contract but nevertheless, it always must be the essence of the contract. In other words, the payment must be essential for you, your work, business, etc. The payee should remind the payer that the payment which is late is critical to the working process, business or whatever it is. If he still pays late, you have a right to terminate the contract without any further delay and also seek to recover damages.
At Common Law, there are exist special damages for late payment. Only in case where the contract provides that a particular interest is payable on a debt, it is payable. Even if the payment has been delayed, the interest could not be awarded just by way of general damages. But now, by Section 35 of Supreme Court at 1981 could include simple interest in its judgment and the rate which might be fixed from time to time by delegated legislation. The court also has a power to decide whether run an interest to a part or all of a sum. It could also award interest if there has been instituted that a debt is paid after proceedings for its recovery but before the judgment as it was in Edmunds v. Lloyd Italico.
And in such a case where D's breach of contract deprived C's opportunity to put the money to work, the court will use its power to award an interest at such a rate, at which C would have had borrow the amount.
According to Common Law rules on remoteness of damage,
special damages for interest may be awarded to claimant, where it was within reasonable expectation of both parties that claimant would incur interest charges from another source as a result of failure of a defendant to pay the debt. Similar situation was in Wadsworth v. Lyndall.
In times of modern economic relationships it is highly recommended to purchasers to avoid any negotiations connected with prolonging the credit periods. Because it is quite obvious that the more credit period is, the higher level of probability of the late payment is.
Legislation of Late Payment was produced to compensate the rights of suppliers in case of late payment. The regulations that have been brought into the law system in 2002 also add an additional penalty of the amount of payment in case of chasing the unpaid debts. The main purpose of the legislation is to change the previous culture of late payment in the country.
Without any doubt, the concept of late payment could sound very helpful in different business situations associated with the temporary insolvency of one party against another.
Also, the legal basis of the late payment system, which was formed by numerous court cases, helps to regulate the rights and obligations of the parties, as well as the causes of their legal remedies against each other.
Naturally, the situation relating to late payment is still far from ideal in many European countries and in the UK as well.
However, introduction of Late Payment of Commercial Debts Act and The Late Payment of Commercial Debts Regulations is certainly making some progress. And the introduction of these standards the delay of payment will continue to decline, as well as business expenses of companies.
Books and independent publications:
Dennis Campbell, Remedies for International Sellers, Yorkhill Law Publishing, 2006
Richard Stone, The Modern Law of Contract, Cavedish publishing, 2005
Donald Harris, David Campbell, Roger Halson, Remedies in Contract and Tort, Cambridge University Press, 2005
Roy Goode, Commercial Law, Penguin books, 2002
G. H. Treitel, The Law of Contract, Sweet & Maxwell, 12th edition, 2007
P.S. Atiyah, Sale of Goods, Pearson Education, Eleventh edition, 2005.
Michael Brindle, Raymond Cox, The Law of Bank Payments, Sweet & Maxwell, 3rd edition, 2004
The Modern Law of Contract, Richard Stone, Cavedish, 425.
Remedies in Contract and Tort, Donald Harris, Second edition, Cambridge, 108
Treitel on the Law of Contract, Treitel, Sweet & Maxwell, Twelfth edition, 2009
Sale of Goods Act 1979
Late Payment of Commercial Debts Act 1998
Table of Cases:
John Burrows Ltd. v. Subsurface Surveys Ltd.  S.C.R. 607
The Chikuma 1 Lloyd's Rep 371
The Effy  1 Lloyds Rep 18
The Laconia  1 Lloyds Rep 315 H.L.
The Afavos  1 Lloyd's Rep 335 and  1 Lloyd's Rep 562
Meehan v. Cable, 135 NC, App. 715
The Mihalios Xilas  2 Lloyd's Rep 303
Wadsworth v. Lyndall  2 All ER 401
Lloyd v. Italico  2 All ER 249
President of India v. La Pintada Compania Navigacion SA  AC 104
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd  2 QB 26
Centrovincial Estates plc v Merchant Investors Assurance Co Ltd (1983) Com LR 158, CA.
Central London Property Trust Ltd v High Trees House Ltd  KB 130
Smith v Hughes (1871) LR 6 QB 597 at 607 per Blackburn J
Freeman v Cooke (1848) 2 Exch 654
Hartley v. Hymans  3 KB 375
Johnson v Agnew  1 All ER 883
The Nanfri  QB 927
Dalkia v Celltech  22 February