Would a “reservation of right” prevent you from affirming the contract?
Introduction
It is a common practice for the parties to add an expression of
reservation of rights in the correspondence aiming to prevent any subsequent
conduct affecting their rights under the contract. However, in the recent English
decision SK Shipping Europe Ltd v
Capital VLCC 3 Corp (C Challenger) [2022] EWCA Civ 231, the Court of
Appeal decided that the charterers could not brought claims of
misrepresentation against the ship owners despite they had stated a reservation
of rights against the ship owners.
Facts
In November 2016, the Claimant, SK
Shipping (the “Owner”) circulated a
document on the market containing speed and fuel consumption data of C
Challenger (the “Vessel”) purportedly
based on average of the last three voyages (the “Circular”). Upon considering such data, the Respondent (the “Charterer”) entered into a two-year
time charter for the Vessel in December 2016, which contained a guarantee as to
the Vessel’s fuel consumption and speed. The charterparty also provided that
compensation was payable to the Charterer in the event of over-consumption.
However, there was no statement in the charterparty that the relevant data was
based on the Vessel’s past performance.
During the charter period, the Vessel
consumed significantly more fuel than suggested in the charterparty. In June
2017, the Charterer alleged that the Owner had misrepresented the Vessel’s
capabilities and thus entitled the Charterer to rescind or terminate the
charterparty. To this end, the Charterer requested the Owner to remedy the
breach of warranty, otherwise the charterparty would be terminated. Meanwhile
in July 2017, the Charterer fixed the Vessel for a two-month voyage from the UK
to Malaysia and in the subsequent correspondence, while reserving the right to
rescind or terminate the charterparty.
As the Owner denied any allegation of
misrepresentation, the Charterparty purported to rescind the charterparty, or
alternatively, to terminate for repudiatory breach. On the following day, the Owner
purported to terminate the charterparty on the basis that the Charterer's action
was itself a renunciation of the contract.
Commercial
Court’s decision
The Commercial Court decided in favour of
the Owner. Despite the Court agreed that the representations in the Circular relating
to fuel consumption were untrue and could influence a reasonable person in
deciding whether to enter into the contract, it found that the Charterer would
have concluded the charterparty on the same terms if the representations had
not been made.
The Court also found that the Charterer
had affirmed the charterparty by continuing to perform the charterparty for
months (in particular, fixing the Vessel for a two-month voyage) after having knowledge of right to
rescind based on misrepresentation.
Hence, the Commercial Court decided that
the Charterer was in repudiatory breach and the Owner was entitled to claim
damages. The Charterer appealed on a few grounds, including that the judge was
wrong to have found that the charterparty would have concluded on same terms if
the representations had not been made, and that the Charterer did not affirm
the charterparty as it made express reservation of rights in circumstances
where the Owner replied that more data was needed to review the position later.
English
Court of Appeal’s decision
The Court of Appeal upheld the Commercial
Court’s decision and dismissed the appeal.
The Court of Appeal emphasized that in
general, mere offer of contractual terms will not amount to any representation
in the absence of words of representation. In the present case, the offer of
guarantee in the charterparty should not of itself be held to involve an
implied representation as to current or recent performance of the Vessel.
On the point of inducement into contract,
the Court of Appeal identified the hypothetical scenario in which the
representations had not been made, that is, the Owner had offered the same
guarantee but made no representation as to the Vessel’s recent performance
(i.e. the Circular omitted the statement that the data was based on last three
voyages). In that scenario, the Court of Appeal found that the charterparty
would still have been concluded on the same terms, considering that the
charterparty contained a guarantee and provision for compensation that
warranted the consumption level as provided in the Circular.
Effect
of reservation of rights
Regarding whether the Charterer had
affirmed the contract, the Court of Appeal confirmed the principles that (i) a
decision to affirm the contract must be communicated unequivocally to the other
party; (ii) such communication may be done by conduct or by necessary
implication; (iii) the test is objective; and (iv) the effect of a reservation
of rights is, or at least may be, to prevent conduct that would otherwise
amount to an unequivocal affirmation, from having that effect.
The Court of Appeal held that it is not an
invariable rule that a reservation of rights will always have the effect of
preventing subsequent conduct constituting an election, and the court must have
regard to all the circumstances, including the nature and terms of any
reservation of rights which have been communicated, the nature and consequences
of any demand for future performance. In particular, an unconditional demand
for future performance may be incompatible with a reservation of rights.
In the present case, the Court of Appeal
clarified that the Charterer’s giving of the two-month voyage order was not
treated as a specific category of intrinsically affirmation conduct. The judge
at the Commercial Court was entitled to conclude that the Charterer had
affirmed the contract after evaluating all the circumstances at the time when
the said voyage order was made, including the facts that:-
1.
the voyage would take the Vessel from the UK to Malaysia where it would
be difficult for the Owner to obtain new employment without significant costs
for ballast voyage;
2.
the voyage order was given without any reservation of rights by the
Charterer; and
3.
although the Charterer had complained about the mis-description of fuel
consumption level, its recent complaints with reservations of rights in general
terms were directed to other complaints.
As such, in the absence of any legal
error, the Court of Appeal refused to disturb the Commercial Court’s decision
regarding the effect of the Charterer’s reservation of rights.
Key
takeaway
The English Court of Appeal in SK Shipping Europe Ltd made it clear that merely offering speed
and consumption warranty in the contract will not ordinarily involve an
implicit representation as to a vessel’s current or recent performance.
Further, parties using “reservation of rights” should be aware that they may
not always be able to rely on this expression to reserve its right to terminate
or rescind the contract. What is crucial is whether their conduct is consistent
with the termination or continuation of the contract. When considering
potential claim based on misrepresentation, it is recommended to obtain legal
advice before taking further steps so as to avoid affirming the contract inadvertently.
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Important: The law and procedure on
this subject are very specialised and
complicated. This article is just a very general outline for reference and
cannot be relied upon as legal advice in any individual case. If any advice
or assistance is needed, please contact our solicitors. |
Published by ONC Lawyers © 2022 |