The recent case of SK Shipping (S) PTE Ltd v Petroexport Ltd [2009] EWHC 2974 (Comm) concerned the disputed termination of a voyage charterparty. The “Pro Victor” was fixed to the defendant on the Asbatankvoy form for the carriage of a clean petroleum product cargo from Karachi, Pakistan for discharge at either Taiwan, Korea or Japan. Before loading operations commenced, owners purported to terminate the charterparty for anticipatory repudiatory breach by charterers. Charterers counterclaimed for damages, alleging the purported termination was itself a wrongful repudiation of the charterparty.
The cargo
The defendant, an oil trading company, agreed to buy 15,000 metric tonnes of naphtha from Pakistan Refinery Limited (‘PRL’). The conditions of sale required a performance guarantee or bid bond of USD 50,000 to be posted (which the defendant did) and a letter of credit to be established (which remained outstanding upon termination of the charterparty).
The defendant offered to purchase a further 10,000 metric tonnes of naphtha from Bosicor Refinery Limited (‘BRL’) in Pakistan. A performance guarantee was again required. However, at the time of termination of the charterparty no guarantee was in place and the court doubted the parties had reached final agreement on the terms of sale.
An additional 3,500 metric tonnes of naphtha was to be purchased from BRL, although no binding agreement was ever reached for that parcel.
Securing a buyer for the cargo
At the time the vessel was fixed, the defendant was negotiating the sale of the PRL and first BRL parcel with a potential buyer. Negotiations progressed to a point where the buyer considered a deal was agreed, however, the defendant did not share this view and this sale was never completed.
Meanwhile, separate negotiations were underway between the defendant and a second potential buyer; a sale was agreed and a signed agreement was apparently concluded between charterers and the second buyer (although this sale never proceeded to completion).
However, surprisingly, despite having concluded an agreement to sell the cargo, the defendant’s negotiator then re-approached the first potential buyer offering to sell same cargo. The same two parcels were later offered to a third potential buyer for delivery at Aqaba. The defendant had also been in negotiations with yet another party which was seeking a vessel to carry a different cargo from India to the West coast of Africa.
Proposals for alternative voyages
During the two days prior to the vessel’s arrival at Karachi, the defendant made two alternative proposals to the claimant, via their brokers, for alternative employment of the vessel, each of which would have amounted to a variation of the charterparty.
Charterers proposed a ”change of itinerary”, with discharge at Aqaba, followed by a time charter of approximately 45 days to re-position the vessel for redelivery in the Singapore/S. Korea range. Alternatively for a three month time charter, with a further three months at the charterers’ option.
Conduct of the defendant
As the vessel approached Karachi, charterers instructed the Master to reduce speed to the minimum safe speed.
Charters had also instructed owners that a copy of the notice of readiness should not be sent to the port authorities and cargo suppliers, reflecting the defendant’s difficulties in securing a buyer for the cargo.
Finally, defendants were delaying providing a signed copy of the charterparty, required to secure a freight tax exemption and owners were chasing them for the outstanding letters of credit in an effort to avoid berthing delays.
At this point significant costs had already been incurred as the vessel had sailed in ballast to Karachi from Ho Chi Minh City, Vietnam.
Communications exchanged
Between 27 and 29 August 2008, after the second proposal to vary the charterparty failed, a number of telephone calls and emails passed between the parties. Essentially, it was communicated orally that defendants had no buyer for the cargo and consequently no use for the vessel, although such conversations were disputed by the defendant.
In brief summary, as matters came to a head:
1. Owners sent charterers a message asking charterers to confirm that they would load a cargo at Karachi, whether the purchase of the cargo was completed and why the freight tax matter remained outstanding.
2. Charterers responded suggesting that they may need to declare force majeure, referring to the alternative proposals and suggesting a mutual cancellation of the charterparty.
3. Owners responded indicating that they took that message to be a declaration of non-performance.
4. Charterers rejected the suggestion that they had refused to perform, but referred to their alternative proposals as offering owners an opportunity to mitigate their losses.
5. Owners sought legal advice, and gave charterers a final opportunity to confirm unconditionally and unequivocally that they would perform the charterparty. Charterers did not respond in those terms prior to the deadline set and owners therefore sent a message on the evening of 29 August terminating the charterparty and indicating their intention to re-fix the vessel.
A right to terminate?
The right to treat a contract as at an end can arise in three sets of circumstances (Heyman v Darwins Ltd [1942] AC 356, p397):
- Renunciation by a party of their contractual obligations
- Impossibility of performance created by a party’s own act
- Partial or total failure of performance
The first two heads relate to “anticipatory breach” (in other words, a breach arising before or at the time at which the relevant contractual obligation is due for performance). The third relates to a breach at the time of or during performance. We will not be considering defective performance in this article.
It is important to note that an innocent party will not automatically have a right to terminate (or “rescind”) the contract for any breach of contract, whether anticipatory or otherwise. This right will depend on the nature and importance of the obligation which has been breached and may also depend on the extent to which a term of the charterparty is breached.
Rescission is a self-help remedy which must be exercised with utmost caution, since wrongfully purporting to terminate a charterparty could itself amount to repudiatory breach, entitling the other party to terminate (with potentially serious financial consequences).
The two types of anticipatory breach are examined further inUniversal Cargo Carriers v Citati [1957] QB 401, p 436-437
Renunciation
The elements of renunciation may be summarised as follows:
(1) a clear, unequivocal and absolute expression
(2) by words or conduct
(3) that would lead a reasonable person to conclude that the other party does not intend to fulfil its contractual obligations
(4) which the innocent party, in fact, takes as a demonstration that the other party does not intend to perform the contract.
The question of whether certain words or conduct amount to renunciation of the charterparty must be considered taking into account all the circumstances and history of the commercial relationship up to the point of termination (“The Hermosa” [1982] 1 Lloyd’s Rep 570, p 572-573).
Impossibility
An innocent party is entitled to treat a contract as at an end if, by an act of default of the other party, performance by that other party is made impossible.
This type of anticipatory breach is less often relied upon and it will often be very difficult or impossible to determine with certainty at the time of terminating the charterparty that performance would be impossible.
On the facts of this particular case, there could have been at least a chance that charterers might secure a buyer for the cargo at the final hour. Owners would therefore rely on “impossibility” at their peril since there is a risk that, after terminating the charterparty for anticipatory breach, a further unexpected change of circumstances might still allow charterers to perform their obligations.
Decision of the Commercial court
Claimant’s state of mind
At the relevant time, the appropriate person (the “agent to know” on behalf of the owners) did in fact believe that charterers had demonstrated an intention not to perform their obligations under the charterparty.
Demonstrating an objective intention not to perform
While charterers’ individual actions or communications may not have amounted to a renunciation of the contract, taking charterers’ communications and conduct as a whole, and considering all relevant circumstances (including the history of the contractual relationship), a reasonable person would have considered that charterers had demonstrated a clear intention not to perform. Owners were therefore entitled to accept charterers’ repudiatory breach of contract and terminate the charterparty.
Mitigation
In the circumstances, it was not reasonable to expect owners to accept charterers’ alternative proposals for employment of the vessel and owners had therefore not failed to properly mitigate their losses.
Conclusion
While this decision of the High Court does not represent any significant change of approach by the English courts to cases of alleged anticipatory repudiation, this case restates and clarifies the relevant law and also highlights the need for caution where problems arise which may place a party in breach of their obligations under a charterparty, or might require the drastic steps of its termination.
This article is intended to outline the position under English law; the position in other jurisdictions may vary. Members would be advised to consult the Club for further advice based on their own particular circumstances.
