Serious breach of contract? Think twice!

Vitol S.A. v JE Energy Ltd. [2022] EWHC 2494 (Comm) - This recent High Court decision allows us to revisit the concept of repudiatory breach. 

Facts

Vitol were the sellers under a sale contract for the sale of 30,000 (+/- 10%) of fuel oil (the “Cargo”) to JE. The deal was recapped on 10 December 2019 (the “Deal Recap”), and the idea was that the Deal Recap would be later supplemented with fuller terms. Vitol sued JE for damages on the basis that JE had repudiated the contract. JE denied liability, alleging that Vitol was in repudiatory breach. 

The Deal Recap stated that the laycan period would be from 23 to 24 December 2019. It also envisaged that payment security was to be made by way of “Documentary LC”, and the pricing period was on a “fixed date range 20-30 Dec (both dates included)”.

The parties entered into discussions about the terms of an acceptable LC and a suitable provider. JE did not attempt to open an LC until weeks later. Vitol continued chasing performance of the contract while the laycan was approaching. 

When the laycan period opened, JE confirmed that they had secured a vessel but were clearing her with port agents. In fact, JE had no sub-buyer for the Cargo and no vessel when the laycan closed on 24 December. Vitol did not terminate the contract. JE then attempted to vary the laycan to “18-20 January 2020”, but Vitol refused. 

On 6 January 2020, JE provided details of two allegedly “cleared” vessels. On 10 January 2020, JE concluded a sub-sale contract with AFCO Energy Pte Ltd on favourable terms for the latter. Vitol continued chasing JE’s LC and placed the Cargo on “financial hold” until financial security would be in place. 

When the LC was issued on 17 January 2020, it contained significant errors. As the vessel was taken off berth resulting from the delays in loading, Vitol requested that the latest day of shipment in the LC is amended to 31 January 2020.

On 1 February 2020, JE issued a notice that the contract was “null and void”, alleging that Vitol breached their contractual obligation to load the Cargo by 31 January 2020. In turn, Vitol treated this notice as a repudiatory breach. 

Decision 

1. The meaning of “laycan”: In an FOB contract, laycan is not the shipment or loading period. The buyer has to procure the vessel, and the seller can cancel the contract if the vessel does not arrive at the port by the cancellation date.
2. An agreement to extend the LC did not amount to an agreement to extend/vary the contract itself.
3. The fact that JE treated the contract as being “null and void” was a repudiatory breach because it evinced an intention not to be bound by the terms of the contract. 

This case serves as a reminder of the importance of properly recognising when a party has a right to terminate and when it does not. 

What should a party consider before terminating the contract?

As much as it is frustrating when a counterparty does not cooperate or abides by the contract religiously, the party wishing to terminate the contract needs to be careful in their assessment of the facts in parallel with the contractual terms. 

1. Review the terms of the contract to assess the scope of each party’s obligations. In other words, what does that party have to do under the contract?
2. Assess the actions of the party to see if they comply with the terms of the agreement.
3. Is it a simple breach giving rise to a remedy in damages alone, or is it a breach of condition and/or a breach going to the heart of the contract?
4. Consider any wording that may limit or exclude termination rights. 
5. Assess the implications of terminating the contract. Would it be more profitable to keep the contract alive?

This exercise may be easier if the terms of the contract have been expressly agreed upon between the parties and written down in a single agreement (as opposed to implied terms). That does not mean that issues with the interpretation of the agreed terms do not often arise. Where there is doubt, it is prudent to seek legal advice. 

What does “repudiatory breach” mean?

What amounts to repudiatory breach will vary with each contract and depend on the facts of the case. In general, a repudiatory breach occurs when a party does not perform an obligation that goes to the root of the contract, such as a breach of a condition of the contract or a serious breach of an intermediate/innominate term (Federal Commerce and Navigation Ltd v Molena Alpha Inc and others; The Nanfri, The Benfri, the Lorfri Commercial [1979] 1 All ER 307). 

Establishing whether a party is in breach of a condition is rarely straightforward. However, certain conditions may be implied by law or designated by the parties in the contract terms. 

What options does the innocent party have?

If a party is in repudiatory breach, the innocent party is entitled to either (a) accept the breach, terminate further performance of the contract, and claim damages, or (b) affirm the contract and claim damages. There is a risk of waiving the breach if a party continues to perform the contract and any right to terminate has to be exercised promptly or it may be lost. If the innocent party accepts the other party’s repudiatory breach, bringing the contract to an end, it cannot then withdraw such acceptance.

What did JE do wrong?

JE thought that Vitol had to load the Cargo by 31 January under the contract. However, the parties had not agreed to amend the contract. Vitol had simply requested that the LC was amended to ensure that it would be “cashable” given the delays and JE was contractually required to make the amendment. 

JE treated the contract as at an end when, in fact, Vitol was not in repudiatory breach. This amounted to a repudiatory breach. In the circumstances, Vitol was entitled to accept the repudiatory breach and claim damages from JE, who originally thought it was accepting a repudiatory breach.

Conclusion 

The courts have considered a number of cases over the years where a party wrongfully terminates the contract on the basis of repudiatory breach and is then found on the wrong side of the law. The mere fact that a party has breached its obligations does not mean that this would amount to a repudiatory breach. The “innocent” party should therefore think twice before terminating the contract as it might be itself found to be in repudiatory breach of the agreement.