Understanding the rights of rescission

 

By Eric Eyo, Ince

In SK Shipping Europe PLC v. (3) Capital VLCC 3 Corp and (5) Capital Maritime and Trading Corp (C Challenger) [2020] EWHC 3448 (Comm), the Court held that charterers were in repudiatory breach of charter by redelivering the vessel early. The charterers claimed that they were entitled to rescind the charter because the owners had misrepresented the vessel’s performance capabilities. The Court, however, held that the charterers had affirmed the charter by their conduct and had thereby lost the right to rescind it, even though they had continued to perform their charter obligations under a “reservation of rights”. In coming to this conclusion, the Court gave some useful guidance on the effect of a reservation of rights on affirmation of charter and hence the ability to rescind it.

Background facts

The owners, SK Shipping Europe, decided to offer the vessel, C Challenger, for time charter during November 2016. In order to do so, the market required the owners to offer warranties as to the vessel’s speed and consumption performance. The owners circulated this information to the brokers. Subsequently, Capital VLCC entered into negotiations with the owners for a potential charter of the vessel. Shortly thereafter, the parties concluded a two-year time charter, in which a warranty regarding the vessel’s bunker consumption was provided. Capital Maritime guaranteed Capital VLCC’s obligations under the charter; for the purpose of this article, Capital VLCC and Capital Maritime will be referred to as the charterers.

The vessel entered into the charter in February 2017. During the charter period, the vessel consumed more bunkers than the warranty had suggested that she would. As a result, the charterers alleged that the owners had misrepresented the vessel’s performance capabilities. After some intense argument, the charterers purported to rescind the charter for misrepresentation; or alternatively terminate the charter for repudiatory breach. In turn, the owners contended that the charterers had acted unlawfully and sought damages for breach of charter.

the charterers alleged that the owners had misrepresented the vessel’s performance capabilities

The issues

The judgment in this case is in excess of 100 pages and deals with a number of issues that are very case-specific. This article focuses on an issue that arguably has wider industry and general contractual significance:

1.   Can a party purport to rescind a contract even though it continues to perform its obligations thereunder whilst reserving its rights? Or;

2.   Will that party still be deemed to have affirmed the contract, thereby cancelling out its right to rescind?

When considering these issues, it is important to have a good understanding of what “rescission” and “affirmation” are.

Rescission is a remedy whereby the contract is set aside; and the parties are put back into the position that they were in before the contract was made. Crucially, it is one of the remedies available for misrepresentation. It will not be available if one of the bars to rescission is present (such as affirmation of the contract).

When a repudiatory breach of contract occurs (as was alleged by the charterers in this case), the innocent party has one of two choices: (a) elect to treat the contract as terminated, i.e. accept the repudiation; or (b) treat the contract as continuing, i.e. affirm the contract. Affirmation can be express or implied through words or conduct (and in very limited circumstances - through inaction).

The charterers first accused the owners of misrepresenting the vessel’s consumption warranties during a meeting in London on 21 March 2017. However, it was not until October 2017 that the Charterers purported to rescind and/or terminate the charter. Therefore, between March and September 2017, the Charterers continued to:

  • use the vessel;
  • periodically deduct from hire; and
  • reserve their rights.

The charterers first accused the owners of misrepresenting the vessel’s consumption warranties during a meeting in London on 21 March 2017.

It was not until the end of September/beginning of October 2017 that the charterers stopped giving orders to the vessel.

The owners argued that the charterers had affirmed the charter by conduct and had thereby lost the right to rescind it. In other words, because the charterers had continued to use the vessel for a period of around six months from the initial allegation of misrepresentation, they had acted in a way that was wholly inconsistent with a wish to rescind the contract.

The charterers counter-argued that they had not affirmed the charter because all their actions had occurred under an express reservation of rights.

because the charterers had continued to use the vessel for a period of around six months from the initial allegation of misrepresentation, they had acted in a way that was wholly inconsistent with a wish to rescind the contract

The Commercial Court decision

The Court noted that there had been very little previous judicial consideration of this issue and acknowledged that it was possible to find differing approaches in the authorities.

The Court set out the following guiding principles:

  • A reservation of rights will often have the effect of preventing subsequent conduct constituting an election to affirm or rescind (although this was not an invariable rule);
  • The Court will have regard to all the material, including any reservations which have been communicated;
  • Where conduct is consistent with the reservation of a right to rescind, but also consistent with the continuation of the contract, then an express reservation will preclude the making of an election to affirm or rescind;
  • Where a party makes an unconditional demand for substantial contractual performance of a kind that will lead the counterparty to alter its position, such conduct may be wholly incompatible with the reservation of some kinds of rights; and
  • Determining whether particular conduct gives rise to an election is ultimately a matter of legal characterisation and, in some contexts, actions speak louder than words.

On the facts, the Court held that the charterers had knowledge of their right to rescind but had demonstrated by their conduct an unequivocal choice to keep the contract alive. The charterers were, therefore, held to be in repudiatory breach of the charter and the owners were entitled to claim damages.

Although a reservation of rights is often added to the end of messages in pre-action correspondence as a matter of course, it is dangerous to ignore or underestimate its significance. Such a reservation could potentially have the effect of preventing an affirmation of contract from being treated as such. Equally, a party’s conduct may in certain circumstances compromise its ability to subsequently rely on any reservation of rights, as happened in this case.

Eric Eyo is a partner at Ince, based in the London office. He can be contacted on +44(0)20 7481 0010 or ericeyo@incegd.com.