Court Orders Rectification Of Charter Restructuring Agreement

DS-Rendite-Fonds Nr.106 VLCC Titan Glory GmbH & Co. Tankschiff KG and others v. Titan Maritime S.A. and others [2013] EWHC 3492

In this recent decision, the English Court repeated the principles that it will apply when asked to construe commercial contracts. The decision also serves as a rare example of an instance in which the test for rectification of a contract was met.

The background facts

Following the collapse of the market at the end of 2008 and beginning of 2009, the Charterers of a fleet of eight VLCCs found themselves in financial difficulty and fell behind on their hire payments. Following discussions with the Owners, the parties eventually signed a Charter Restructuring Agreement ("CRA") in March 2010. Unfortunately, in January 2011 the parties fell into a dispute over the meaning and effect of certain clauses of the CRA, which then became the subject of litigation.

In the discussions leading up to the CRA, the Owners explained to the Charterers that they needed to receive USD 22,000/day per vessel in order to operate the vessels, as well as service the loans taken out to finance them. The CRA accordingly provided for hire to be paid monthly in advance at the higher of the Floor Rate (USD 22,000/day per vessel) and the Market Rate. This Market Rate for each month was to be calculated by taking 3.35% off the Clarkson Index for the previous month. In addition, a semi-annual adjustment exercise was to be undertaken in order to factor in that the actual market rate in a given month might vary significantly from the Clarkson Index for the previous month.

Unsurprisingly, it was not long before the Clarkson Index fell below the Floor Rate of USD 22,000/day. At the next semi-annual adjustment, the Charterers contended that "the average of the Market Rates for the previous period of 6 months" (for the purpose of the adjustment) was simply the average of 3.35% below the Clarkson Index rate for each month, even if this was less than USD 22,000/day. Owners contended that the daily rate input for each month for the purpose of the adjustment should be the higher of (i) USD 22,000/day and (ii) 3.35% below the Clarkson Index. At the trial, the Owners argued that the Charterers' construction changed the agreement from one in which the parties agreed to track the Clarkson Index, subject to a floor of USD 22,000, into a simple agreement to track the Index.

Construction of the contract

Mr Justice Hamblen repeated the test for construction of...