Marine & Transit - December 2009
Pulling the plug on charters: anticipatory repudiatory
breach
SK Shipping (S) PTE Ltd v Petroexport Ltd – Commercial
Court (Flaux J) [2009] EWHC 2974 (Comm)
Before the time for performance has arisen, in
what circumstances can an innocent party terminate a contract by
reference to the other’s (anticipatory) repudiatory
conduct?
This was a Commercial Court dispute under a
voyage charter between SK as owners and Petro as charterers on the
Asbantankvoy form, for the carriage of a cargo of naphtha to be
loaded at Karachi and for discharge at various Far East port
options. The charter was terminated before laytime commenced with
ensuing claims by SK against Petro for damages for loss of freight
and wasted expenses.
Against the charter background, oil traders
Petro had contracted to purchase from one Pakistani supplier 15,000
m.t. naphtha (parcel 1) and was in negotiations with another
supplier to buy a further 10,000 m.t. (parcel 2). Unknown to
SK, problems developed with the purchase and following conclusion
of the charter, Petro failed to establish a letter of credit for
the purchase of parcel 1, and negotiations for parcel 2 fell
through. Compounding the problem was the fact that Petro,
despite having two potential on-buyers for the cargo, Glencore and
Delta Oil, saw these negotiations ultimately fail. The timing was
unfortunate since the vessel was en route to Karachi about to
tender notice of readiness.
In the days leading up to the vessel’s
arrival, a number of things happened:
- Despite a concluded voyage charter, Petro
made two alternative proposals – loosely described as “a change of
itinerary” - to discharge at Aqaba (rather than the Far East)
followed immediately by a time charter of 45 days to redeliver in
Singapore/South Korea range, or alternatively a three month time
charter with option for a further three month extension
- Petro ordered the vessel to reduce speed en
route to Karachi
- Petro failed to return a signed copy of the
charter to SK which would have entitled Petro to a Pakistani
freight tax exemption
- It came to light that Petro had not furnished
the letter of credit to secure parcel 1
Matters then revealed themselves. Petro sent
SK a message advising that it might be necessary to declare force
majeure due to circumstances beyond their control, and that they
would consider releasing the vessel from its current charter to
permit owner to seek other business, and to enable “mutual
cancellation.”
In response, SK advised Petro they understood
that charterers were declaring they would not perform the charter
and that they, SK, would have to look to mitigate their
losses. Petro rejected SK’s “declaration of non performance”
and offered an alternative loading option from West Coast India to
the Far East.
SK demanded final confirmation of Petro’s
willingness to perform the charterparty on its agreed terms, but
such confirmation did not appear. SK accordingly treated the
charter as terminated by reason of Petro’s anticipatory repudiatory
breach and claimed damages for the freight differential between the
current charter and the substitute fixture.
SK was successful. The approach of the
Commercial Court in deciding whether or not SK were entitled to
terminate was to judge Petro’s emails against their background
context and to ask whether a reasonable person in the position of
SK (as well as SK personnel, subjectively) would consider the words
and conduct as demonstrating a clear intention not to perform the
contract. Although a number of matters (as highlighted above)
reasonably caused SK concerns as to Petro’s ability and/or
willingness to perform they might not individually be
repudiatory. Nonetheless, individual bricks cumulatively
could amount to “a wall of renunciation” and which made it
legitimate for SK to demand a clear direction from Petro as to
their intention to perform. Indeed the lack of clear
confirmation underlined the conclusion that Petro would not perform
the contract or would only perform it on some other non-contractual
basis (The “Nanfri” [1979] AC 757).
Reluctant contractual partners, their conduct
and communications, can sometimes require the innocent
partner having to carefully consider entitlement to terminate,
which not only is a draconian step, but if misjudged can have
serious financial consequences. This decision illustrates that in
considering a party’s conduct, the English courts (and maritime
arbitrators) will look not simply to isolated communications and
actions, but will be heavily influenced by background events and
conduct leading to the immediate crisis, and both the objective and
subjective understanding of such conduct.
Mike Burns,
Partner
Weightmans LLP