Eric Eyo Partner
Court of Appeal agrees charterparty affirmed notwithstanding reservation of rights
SK Shipping Europe Ltd v. Capital VLCC 3 Corp (C Challenger)  EWCA Civ 231
Both the Commercial Court and the Court of Appeal have found that the Charterers in this case were not entitled to rescind the charterparty because they had affirmed the contract. In coming to this conclusion, the Court of Appeal agreed with the Commercial Court that although a reservation of rights will often have the effect of preventing subsequent conduct from constituting an election to affirm or rescind a contract, this is not an invariable rule. In deciding whether or not there has been an election one way or the other, the Court must consider all the relevant facts and circumstances, including any reservations which have been communicated to the other party.
The background facts
In late 2016, the parties entered into a two year time charter of the vessel C Challenger. A dispute subsequently arose regarding the vessel’s inability to meet her consumption warranty. A more detailed summary of the facts and the Commercial Court decision can be found in our earlier article here.
In brief, however, on 19 October 2017, the Charterers ceased providing orders to the vessel and purported to rescind the charterparty on the basis of the alleged misrepresentation of her performance capability. Alternatively, the Charterers purported to terminate the charterparty for repudiatory breach, relying on their prior reservation of rights.
In response and on the following day, the Owners purported to terminate the charterparty on the basis that the Charterers’ message was itself a renunciation of the contract. Among other things, the Owners argued that the Charterers had affirmed the charterparty by virtue of their conduct and delay and thus lost the right to rescind it.
The Commercial Court decision
The Commercial Court found in the Owners’ favour and held that the Charterers’ conduct was incompatible with an express reservation of rights. In other words, actions speak louder than words and by continuing to perform the charterparty for months after raising the misrepresentation argument (and having knowledge of their right to rescind), the Charterers were taken as having affirmed the charterparty and lost the right to rescind even though they had purported to reserve their rights.
The Court also held that the Charterers themselves were in repudiatory breach of charterparty when they had ceased to perform the contract based on their purported rescission (following their reservation of rights) and redelivered the vessel early. The Owners were accordingly entitled to claim damages.
The Court stated that where a party made an unconditional demand of substantial contractual performance of a kind which would lead the other party to materially change its position, that conduct might be wholly incompatible with any purported reservation of rights. Equally, where a party delayed significantly in exercising its right to rescind, then after a time it could be taken to have elected to keep the contract going and would lose the right to rescind.
In this case, the Court found that by giving an order to perform a voyage to Tanjung Pelapas in July 2017 (with knowledge of the vessel’s significant over-consumption and their legal rights), the Charterers’ conduct was so “inherently affirmatory” that it outweighed what was viewed as a more general reservation of rights in earlier correspondence.
The Court of Appeal decision
The Court of Appeal upheld the Commercial Court decision and dismissed the appeal. The Court of Appeal approved the lower court’s statement that although a reservation of rights will often have the effect of preventing subsequent conduct constituting an election to affirm or rescind a contract, this was not an invariable rule and the Court would have regard to all the relevant circumstances, including not just the nature and terms of the reservations of rights language communicated but also the nature and consequences of any demand for future performance. In respect of the latter, the Court of Appeal agreed with the Commercial Court’s statement that such an unconditional demand “may” be incompatible with a reservation of rights, not that it necessarily would be.
In considering the order to Tanjung Pelapas as intrinsically affirmatory conduct, the Court of Appeal held that the Commercial Court was taking into account all circumstances as existed at the time the order was given i.e. the fact that that voyage would last two months and that the general reservations made at that time concerned other complaints, not just the misdescription of the vessel. Based on its evaluation of the evidence and circumstances, the Commercial Court had been entitled to conclude that the Charterers had affirmed the charterparty.
While parties routinely use “reservation of rights “ language in correspondence, they should be aware that they cannot always rely on this wording as a legal basis for treating the contract as rescinded or to sue for repudiatory breach, if their conduct is consistent with the continuation of the contract. Inevitably, it is their conduct that will be considered regardless of the strength or clarity of the express reservation wording used. What is more, the party relying on such language may in turn be held to be in repudiatory breach and face a claim for damages should the Court find that all the circumstances, once considered, actually negated a right to rescind.
This article was co-authored by Natalie Dabdoub, Senior Associate.
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