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Anticipatory breach by renunciation and third parties

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29 May 2014

In Geden Operations Ltd v Dry Bulk Handy Holdings Inc ("The Bulk Uruguay") [2014] EWHC 855 (Comm), 28 March 2014, the English Commercial Court considered the correct test for anticipatory breach by renunciation when a party makes it clear that its ability to perform is wholly dependent on the actions of an independent third party. The Commercial Court held that the actions of a third party, in these circumstances, may not be enough to satisfy the test for anticipatory breach by renunciation and that it is necessary to also consider the benefit that the other party to the agreement may be deprived of if the independent third party acts in a way which does not enable performance under the agreement. In particular, it will be necessary to assess the benefit that the other party may be deprived of and whether this constitutes "substantially the whole benefit of the contract" in question.

Background

This dispute arose in relation to a charterparty entered into in July 2010 between Geden Operations Ltd (the claimant) and Dry Bulk Handy Holdings Inc (the defendant) under which the claimant agreed to charter a bulk carrier, the M/V Bulk Uruguay (the Vessel) (the Charterparty Agreement). 
 
The Charterparty Agreement contained two specific clauses: a "Conwartime 2004" clause and an amended "BIMCO Piracy Clause". The latter had been amended by the deletion of certain clauses and reflected market practice for charterparties where it was intended that the Vessel could transit the Gulf of Aden (the GOA) without first obtaining the defendant's consent. The inclusion of the amended BIMCO Piracy Clause in the Charterparty Agreement meant that the Vessel could be marketed as "GOA OK" which gave her a competitive advantage over other vessels (which often required the owner's prior consent to transit the GOA). The claimant made it clear to the defendant that the Vessel having "GOA OK" status was a "deal breaker" for them in negotiations prior to them entering the Charterparty Agreement. However, the Head Charter Agreement (the Head Charter) which was between the defendant and the owners of the Vessel required permission from a third party (the Head Owners) to be sought in order for the Vessel to transit the GOA.
 
The Head Owners initially refused the claimant permission to transit the GOA. Subsequently, the Head Owners granted the claimant permission to transit the GOA for the Vessel's maiden voyage. However, in doing so, the Head Owner made it clear to the claimant that permission to transit the GOA was granted for this voyage only and was not to form a precedent for other voyages.

The Dispute

The claimant took the view that the defendant's insistence that Head Owner had to give prior consent for each GOA transit constituted a repudiatory breach of the Charterparty Agreement, which the claimant purported to accept as terminating the Charterparty Agreement. The defendant accepted the purported termination itself as a breach of the Charterparty Agreement.
 
The parties originally referred their dispute to be determined by arbitration. By a majority the arbitral tribunal (the Tribunal) held that:
  • the Charterparty Agreement did not make GOA transit subject to the defendant's consent;
  • the defendant was not in anticipatory breach;
  • the claimant was not entitled to terminate the Charterparty Agreement;
  • the claimant's purported termination of the Charterparty Agreement was itself a repudiation which had been accepted by the defendant; and
  • the defendant was entitled to damages of USD 6.5 million (the Award).

Commercial court

The claimant appealed the Award under s69 (an appeal on a point of law) of the Arbitration Act 1996.
 
A key issue on appeal was the application by the tribunal of the following legal test to determine whether the defendant's actions entitled the claimant to terminate the Charterparty Agreement:
 

"(a) Did the [Defendant] by their words or conduct evince an intention not to perform, or expressly declare that they would be unable to perform, their obligations under the Charterparty [Agreement]?
(b) If so, did such a refusal have the effect of substantially depriving the Claimant of the whole benefit which it was the intention of the parties that they should obtain from the contract?"

 
Neither party disputed that this was the correct test to apply in the circumstances. The Commercial Court held that the test had been correctly applied by the Tribunal and rejected the claimant's appeal. In particular, Popplewell J held in respect of limb (a) of the legal test that the defendant had not evinced an intention not to perform under the Charterparty Agreement. The test of whether an intention was sufficiently evinced by conduct was whether the renouncing party had acted in such a way as to lead a reasonable person to the conclusion that he did not intend to fulfil his part of the contract. In accordance with the findings of the Tribunal, Popplewell J found that the defendant's position regarding consent for GOA transit was not to be understood as meaning that it would be unwilling to perform under the Charterparty Agreement if and when the claimant requested permission to transit the GOA. Popplewell J also noted that there was no principle of law whereby a party who had made his performance dependent on a discretion to be exercised by a third party was deemed to be evincing an intention not to perform.
 
However, and in any event, Popplewell J found that the claimant's arguments on this point were "an attempt to appeal a finding of fact by dressing it up as an issue of law". The Tribunal's finding that the Defendant did not mean to be understood as being unable or unwilling to perform under the Charterparty Agreement if and when the claimant requested a GOA transit was a conclusion of fact and, as a result, was not reviewable by the court on appeal under s69 of the Arbitration Act 1996 anyway.
 
In light of his conclusion in respect of limb (a) of the legal test referred to above, Popplewell J considered that the question as to whether there was an error of law in respect of limb (b) of the legal test set out above did not arise. However, in any event Popplewell J summarised on an obiter basis why he believed that the Tribunal had taken the correct approach dealing with this issue. The Judge stated that the correct approach was to identify the benefit which the claimant would have been deprived of under the Charterparty Agreement (because anticipatory breach must be of a condition or innominate term which goes to the "root of the contract or deprives the innocent party of substantially the whole benefit of the contract"). Popplewell J added that this determination should be made prospectively as at the time of the alleged anticipatory breach. In this case, Popplewell J stated that the benefit that the claimant would have been deprived of was the long-term chance to market the Vessel as "GOA OK" (ie that it could transit the GOA without the defendant's consent). However, in accordance with the findings of the majority of the Tribunal, Popplewell LJ stated that various factors (including the fact that the claimant did not intend to use the Vessel for GOA transit in the near future, the competitive disadvantage of the claimant being unable to market the Vessel as GOA OK, the value the claimant put on that competitive disadvantage and the ability to trade the Vessel elsewhere) supported the factual conclusion that the claimant was "not deprived of substantially the whole benefit of the Charterparty".
 

Comment:

In this case, Popplewell J made it clear that words or conduct which gave rise to the uncertainty of future performance of a contract (the contingency of which rests on the conduct of a third party) will not necessarily be enough for a party to claim that another party to the contract demonstrated an intention not to be bound by a contract and that there is no general principle of law that means that a party who has made his performance dependent on a discretion to be exercised by a third party is deemed to have evinced an intention not to perform a contractual obligation. However, it is possible that the outcome of this case (or the decision of the Tribunal) could have differed if, for example, the Head Owner had a history of refusing consent for GOA transits or that the "GOA OK" status of the Vessel had been found to be substantially the whole benefit derived by the claimant under the Charterparty Agreement.
 
Although this case focuses on a situation which arose due to the relationship between the defendant and the Head Owner in a shipping context, the principles established as a result of this case could arise in other situations. For example, they could apply where performance of a contract depends on the conduct of a third party which is a parent company or another member of a group of companies.
 
In addition, the Commercial Court's decision in this case reinforces the position that courts dealing with appeals of arbitration awards will carefully consider whether the issue they are required to consider is one of fact or law (as the court can only consider an issue on appear that falls into the latter category). Courts will be unsympathetic to claimants who attempt to "dress up" factual matters as questions of law.
 

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution. For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.