Pro Victor: renunciation, repudiation and anticipatory breach

SK Shipping -v- Petroexport (Pro Victor) [2009] EWHC 2974 (Comm)

This article revisits a significant decision in a charterparty dispute, the Pro Victor, in which the Commercial Court helpfully restated the law on renunciation of contracts. The impact of the decision is considered in the light of subsequent cases dealing with similar issues.

Legal background

Before turning to the Pro Victor, it is helpful to outline some of the key principles governing common law rights of termination for breach of contract.

A party may choose to terminate a contract early because of its counterparty’s repudiatory conduct. There are three types of repudiatory conduct:

1. Renunciation of the contract. This is where a party says or does something to indicate that it does not intend to perform the contract in some substantial way. Renunciation is a form of anticipatory breach, because it is conduct that takes place before the time for performance.

2. Impossibility. This is where a party’s conduct makes it impossible for that party to perform the contract. Impossibility is also a form of anticipatory breach.

3. Repudiatory breach. This is where a party breaches the contract in a significantly serious manner, entitling the other party to terminate the contract.

The conduct complained of may constitute more than one type of repudiatory conduct. For example, in the Pro Victor, the owner argued that the charterer’s conduct was both renunciatory and also rendered the charterer’s performance impossible.

In all cases, the defaulting party’s conduct must be sufficiently serious as to justify the innocent party terminating the contract. Practically speaking, it can often be difficult to determine whether a counterparty’s conduct, or its written/verbal messages, amount to a repudiatory breach or renunciation of the contract. Misjudging the situation and terminating the contract prematurely can result in the terminating party being itself accused of repudiatory conduct of its own and finding itself on the receiving end of a damages claim.

Furthermore, repudiatory conduct does not automatically lead to termination. The innocent party may elect to keep the contract alive and continue to press for performance, rather than terminating. If the innocent party affirms the contract notwithstanding the breach, then it loses the right to terminate.

An innocent party facing a counterparty’s repudiatory conduct must, therefore, think very carefully how it wishes to proceed. It should be careful not to say or do anything that can amount to an affirmation of the contract unless and until it intends to keep the contract alive.

On the other hand, the innocent party is entitled to take some time to consider its position and decide how it wishes to proceed. Where it is still trying to resolve the situation with the defaulting party and seeking to establish the facts, including whether the breach is sufficiently serious or whether the breach will be rectified, it is advisable to take legal advice on how to proceed, to proceed cautiously and to expressly reserve rights.

Pro Victor

The background facts

Pursuant to a voyage charter dated August 2008, the vessel was contracted to carry a cargo of naphtha from Karachi, Pakistan, to either Taiwan, Korea or Japan. After the charterparty was concluded, the parties exchanged correspondence and had telephone calls, the result of which was that owners believed that charterers did not intend to perform the charter.

In essence, the charterer first proposed to change the itinerary, with discharge at Aqaba, Jordan, followed by a time charter trip from Aqaba with redelivery in the Singapore/South Korea range.

The vessel was then ordered to slow steam en-route to the load port. After the vessel arrived at the load port, she was ordered to wait at the outer anchorage because of a supposed problem in issuing a letter of credit required under the sale contract. The charterer also failed to provide a signed copy of the charterparty that was required to procure a freight tax exemption in Pakistan.

The first proposal did not go further. The charterer then made a second proposal, requesting that the voyage charter be converted to a six-month time charter.

Representatives of the parties then spoke on the telephone, with the charterer’s representative indicating that the buyer of the cargo had backed out. As no cargo would now be stemmed, the charterer no longer needed the vessel.

The owner then sent a message to the charterer asking if a cargo was going to be loaded or not. The charterer replied, stating that it might have to declare ’force majeure’ but that it would consider a mutual cancellation.

The owner responded in a message stating that it considered this to be a ’declaration of non- performance’. The charterer denied that it had declared non-performance but suggested that the owner should ’mitigate any alleged losses’ by agreeing to convert to a time charter trip for a cargo loaded out of India. The charterer ended its message with the following statement: ’sincerely regret current circumstances’.

The charterer's broker telephoned the owner's representative to reiterate that the charterer had lost its buyer and could not proceed with the charter.

The owner replied, requesting that the charterer confirm ’unequivocally and unconditionally’ that it would provide a cargo, otherwise the owner would assume that the charterer did not intend to perform the charter and would treat this as repudiatory conduct.

The owner gave the charterer a deadline to reply. The charterer protested against this ’ultimatum’ but did not provide the confirmation requested. The owner elected to treat the charterer's conduct as repudiating the charter and sought to mitigate its losses by attempting to conclude an alternative fixture for the vessel.

The critical question for the Court was whether, by its words or conduct, the charterer had evinced an intention not to perform the charterparty which a reasonable owner would regard as clear and absolute.

The Commercial Court decision

The Court decided that the charterer had been looking to bring about a mutual cancellation of the charter because the on-sale of the cargo had fallen through. While the charterer had sought to couch its communications in such a way as to avoid any statement that it would not perform the charter, nonetheless the totality of the charterer’s words and conduct had demonstrated an intention on its part not to perform the charter.

The Court thought that the charterer's proposal that the owner should mitigate its losses by converting the voyage charter to a time charter was a threat to the owner and the charterer's expression of regret at the situation was an apology for not being able to perform.

A key factor in the Court’s opinion was the charterer’s failure to give a clear and unequivocal statement that it was ready, willing and able to perform after the owner stated that it considered that the charterer had given a declaration of non-performance. In the Court’s view, by the time of termination, the owner subjectively believed that the charterer was declaring that it would not perform the charter.

The Court concluded that, having regard to all the circumstances and the communications between the parties, at the time that the owner terminated the charterparty on 29 August 2008, the charterer by its words and conduct had evinced an intention not to perform the charterparty, in a manner which a reasonable person in the position of the owner would have regarded as clear, unequivocal and absolute. The owner was entitled to accept that renunciation as a repudiatory breach and terminate the charterparty.

The Court, however, dismissed the alternative case of impossibility. The owner had not established that, on the date when the owner purported to terminate, the charterer had become wholly and finally disabled from finding a cargo and loading it before delay frustrated the charterparty.

Impact

The Court importantly clarified that renunciation need not be found in one aspect of the defaulting party’s conduct or in one or more individual communication. The Court can look at the totality of the words and conduct of the defaulting party and combine them to conclude that the defaulting party had demonstrated an intention not to perform the contract. As the Court put it, even where the individual bricks are not renunciatory, it is possible to use them to build a wall of renunciation.

The Court also observed, although on an obiter basis, that as well as needing to consider whether objectively the defaulting party's words or conduct would lead a reasonable person in the position of the innocent party to the conclusion that the defaulting party intended not to perform the contract, it is also relevant to decide whether, subjectively, the innocent party believed that the defaulting party had evinced an intention not to perform the contract.

There has since been some concern as to the potential introduction of a subjective element regarding the innocent party’s belief. Specifically, it has been suggested that this might impact commercial certainty because an innocent party might have no time to lose in deciding whether or not to terminate. In the 9th edition of Benjamin on Sale of Goods, at para. 12-021, the proposed requirement of a subjective belief is said to be an unnecessary requirement.

Subsequent cases

In Vitol SA -v- Beta Renewable Group [2017] EWHC 1734 (Comm), the parties entered into a contract for the sale of biofuel. After two agreed extensions, the seller confirmed that it would not be able to deliver the product. It did so before the time for nominating the carrying vessel and it was not disputed that this was a renunciatory breach. The buyer did not accept the breach until after the nomination deadline.

The Court had to decide whether the buyer’s decision not to nominate amounted to an acceptance of the seller’s renunciatory breach and, if not, whether nomination of a vessel was a condition precedent to the buyer’s obligation to deliver.

The evidence was that the buyer considered the contract to be at an end and had deliberately chosen not to nominate a carrying vessel because it would be pointless. Nonetheless, the Court held that the buyer’s silent failure to nominate was not sufficiently unequivocal when seen against the past extensions and some of the exchanges between the parties, with the buyer chasing the seller for updates. Consequently, the sale contract continued in place until after the deadline for nomination of a vessel. The buyer was ready, willing and able to perform its contractual obligations, whereas the seller was not. It would have been pointless to oblige the buyer to nominate a vessel.

One argument raised by the seller, who cited the Pro Victor, was that the buyer had to show it subjectively believed that the seller did not intend to perform at the time that it made a choice to accept the seller’s renunciation and terminate the contract. On the facts of this case, the Court did not need to decide the point and declined to do so. However, it did refer to academic commentary casting doubt on such a requirement.

In London Arbitration 7/14, the owners lawfully withdrew a vessel on time charter due to non-payment of a number of hire instalments. The charterers accepted that the owners were contractually entitled to withdraw the vessel but denied that they were liable for damages for repudiatory breach or renunciation.

Considerable correspondence had gone back and forth between the parties with regard to the outstanding hire and whether charterers intended to perform. In one message, on 17 February, the charterers stated among other things:

“As we have previously informed Owners, our intention has always been and still is, to perform our contractual obligations. Unfortunately, current financial conditions are preventing us from dealing with this matter as we would have liked to do. We are still discussing with various counterparts/partners and advisers as to how best to continue operating and hope to have some additional information soon. In the interim and as we have also previously informed Owners, if Owners have any idea, we are available to discuss these through with them. Likewise, if Owners believe the best way to mitigate is to fix the vessel for their own account, then we not stop them.”

The tribunal found in the owners’ favour. Despite the charterers’ words to the effect that they wanted to perform the charter, they were clearly unable to do so, given their failure to pay three hire instalments and then to find a sub-fixture for the vessel. The payment of hire under the charter was the charterers’ fundamental and overriding obligation vis-à-vis the owners.

The charterers’ response on 17 February amounted to a clear admission that they were unable to perform, and against the relevant background left no room for doubt. Part of that background was the charterers’ frequent and lengthy silences and failures to answer the owners’ messages raising unequivocal questions which required adequate answers. Although such messages as the charterers sent were carefully worded in an attempt to prevent the owners from arguing that the charterers were repudiating the contract, every indication was that they were unable to perform it. Their behaviour would be seen by any reasonable observer as renunciatory and/or repudiatory and owners were entitled to damages.

Comment

The Pro Victor remains a useful reminder that English law looks at substance rather than form. A party that wishes to avoid saying expressly that it will not perform may nevertheless, by a series of evasive messages, proposed substitutes, requests for cancellation and failures to answer direct questions, convey a clear intention not to perform the contract. The Court is entitled to examine the whole course of dealing, and the absence of a single express refusal is not fatal if the cumulative effect of the conduct is renunciatory.

Later cases show, however, that parties must be equally careful on the acceptance side. The Vitol case demonstrates that, even where the other side’s renunciatory breach is established, the innocent party’s response must itself be clear and unequivocal if it is to amount to acceptance of that breach. Mere silence, inaction or an internal decision that ’the contract is over’ may not suffice where, viewed objectively, the conduct remains ambiguous.

London Arbitration 7/14 underlines a simple point. Tribunals will look at commercial reality, not careful wording. Charterers may say they still intend to perform, but if the facts show repeated non-payment, evasive replies, and no real ability to carry on, those assurances will carry little weight.

The practical lesson is that parties facing a possible repudiation should take a disciplined approach. They should ask direct questions, require a prompt and unequivocal statement as to whether the counterparty is ready, willing and able to perform, keep a careful written record, and reserve rights while investigations continue. Equally, a party that still intends to perform should say so plainly and support that statement with concrete action. Carefully worded expressions of ’hope’ or ’intent’ will not assist if the surrounding facts show an inability to perform. The real risk in this area is not only being in breach but also misjudging whether the right to terminate has arisen at all.

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