England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice 7 Rolls Building, Fetter Lane London, EC4A 1NL
		28/03/2014

The Hon. Mr Justice Popplewell:

1. This is an appeal pursuant to s.69 of the Arbitration Act 1996 against an award by three experienced maritime arbitrators dated 17 July 2013 ("the Award"). It is concerned with whether disponent owners were in anticipatory breach of a three year time charter so as to entitle the charterers to treat themselves as discharged from further performance. The majority of the tribunal held that the disponent owners were not in anticipatory breach, the charterers were not entitled to terminate, the charterers' purported termination was itself a repudiation which had been accepted by the disponent owners, and the disponent owners were entitled to damages of over US$ 6.5 million. The source of the dispute was the right of the charterers to give voyage instructions for the vessel to transit the Gulf of Aden ("GOA"), a well known area of piracy, for which additional war risk premium is payable. The charterers contended that they were entitled to give orders for such voyages, subject to paying the additional cost. The disponent owners contended that there was no such right and that GOA transit was subject to the disponent owners' consent. The latter was the position under the head charter, such that the disponent owners would only be able to comply with such a voyage order if the head owners gave consent. The Tribunal held that on the true construction of the charterparty GOA transit was not subject to the disponent owners' consent. The disponent owners' rights and obligations were therefore not back to back in this respect.
2. Permission to appeal was granted by Males J on 11 November 2013.
3. The reasons attached to and forming part of the Award were those of the majority ("the Reasons"). The other arbitrator published his dissenting reasons for considering that the disponent owners were in anticipatory breach and that the Charterers' termination was lawful. The following facts are taken from the Reasons.
4. By a time charterparty dated 2 July 2010 on an amended NYPE form, the Defendant ("the Owners") chartered the 58,000 mt Supramax bulk carrier M/V BULK URUGUAY ("the Vessel") to the Claimant ("the Charterers") for about 35 to about 37 months at a daily hire rate of $18,500. The Charterparty was concluded whilst the Vessel was under construction in the Philippines, with delivery anticipated the following year. Clause 8 provided in the usual way that the Captain was to be under the orders and directions of the Charterers as regards employment of the Vessel.
5. The Charterparty contained (as the arbitrators found) a Conwartime 2004 clause and an amended BIMCO Piracy Clause. The latter had been specifically amended by deletion of paragraphs (a) and (b) which reflected the market practice where it was intended that the vessel could transit GOA without the owner's consent. Such a vessel is marketed as "GOA OK", which gives her a competitive advantage over vessels for which such a route requires owners' consent.
6. During the negotiations the Charterers had made it plain to the Owners that the ability to transit the GOA without seeking the Owners' permission was a "deal breaker" for the Charterers (Reasons para 136). The Owners knew from the course of the Charterparty negotiations that at that time such GOA OK status was a matter of importance to the Charterers (Reasons paras 132, 134, 145).
7. By a message via brokers on 8 July 2011, shortly before the Vessel was to be delivered into the Charterparty concluded a year earlier, Charterers indicated that for her maiden voyage from the Yard in the Philippines they were looking to bring the Vessel back to the Atlantic via GOA and asked for information regarding the additional premium costs. The Owners asked head owners for permission in relation to this maiden voyage. Head owners initially refused permission for GOA transit on 11 July 2011. On 15 July 2011 head owners changed their position and granted permission. In doing so they made clear that permission was granted for this voyage only and was not to form a precedent for other voyages.
8. There followed correspondence, some of which is set out in the Reasons, in which the Owners asserted that the Charterparty terms required their permission in order to transit GOA, and indicated that the Owners' position in relation to giving permission would be dictated by the position taken by head owners. Matters culminated in the Charterers' email of 23 July 2011 (Reasons para 93) in which the Charterers treated the Owners' insistence that prior consent would have to be obtained on each occasion as a repudiatory breach, which they purported to accept as terminating the Charterparty. By an email of 25 July 2011 the Owners accepted the Charterers' purported termination as itself a repudiatory breach.
9. The Reasons identified the legal test to be applied in determining whether the Owners' stance entitled the Charterers to terminate on 23 July 2011 in the following terms at paragraph 156:

"Two sub-issues seemed to us to arise in the context of the alleged repudiation:-

(a) Did the Owners 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?

(b) If so, did such a refusal have the effect of substantially depriving the Charterers of the whole benefit which it was the intention of the parties that they should obtain from the contract?"

10. The majority answered both questions no.
11. As to the first, their reasoning was as follows:

(1) The Owners' position relating to consent was bound to be dictated by the position taken by the head owners, and always would be. The answer to any request made to the head owners for permission to transit the GOA in the foreseeable future might well be no (Reasons para 157).

(2) The Owners' conduct amounted to no more than an assertion that the Charterers required their permission in order to transit the GOA. It did not involve a refusal to comply with an order to transit the GOA (Reasons para 160).

(3) It did not follow from the fact that Owners required the head owners' consent for any GOA transit that such consent would not be forthcoming at such time as the Charterers might have ordered the Vessel to transit the GOA, or that there would necessarily be some delay in complying with the Charterers' orders to do so if and when they were given (Reasons para 162). Had such an order been given, the Owners may well have been able to comply promptly with it (Reasons para 163). The Charterers' case at its highest was that it was possible that on some occasions consent might not have been forthcoming, although this conclusion was essentially speculative (Reasons para 168).

12. In the light of these findings their conclusion on the first question was expressed in these terms at para 167:

"That being so, we considered that the question was whether a reasonable person viewing the messages sent by the Owners over the whole of the relevant period, would conclude that the Owners had evinced an intention not to comply or not to comply promptly if at some time in the future during the three year period of the charter the Charterers gave orders to transit the GOA. We could not accept that any reasonable person would have reached the conclusion that the Owners had made that clear by 23^rd July."

13. In relation to the second question the majority's reasoning and conclusion was as follows:

(1) The Vessel would have been traded initially in the Far East; the Charterers' evidence that they were seriously intending to take the Vessel through the GOA on her maiden voyage was rejected (Reasons para 178).

(2) Thereafter it is likely that the Vessel would have been traded in the Far East for the foreseeable future; alternatively if she had been repositioned to the Mediterranean on her maiden voyage, for which head owners had given GOA transit permission, she would have remained in the Atlantic for the foreseeable future and would not therefore have needed to transit the GOA southbound in the foreseeable future (Reasons para 200); the possibility that the Vessel might be unable to transit the GOA at some stage in the foreseeable future could not be regarded as having any significant effect on her earning capacity at the date of delivery (Reasons para 179). Although Mr Kimmins QC argued that the findings in paragraph 200 were addressed to a Golden Victory argument which allowed account to be taken of the intentions of the Charterers after the date of termination, the terms of paragraph 179 of the Reasons make clear that this was the majority's view of the Charterers' intention at the date of termination.

(3) Since the Charterers did not control their own cargoes, the effect of not being able freely to transit GOA in the longer term was to be measured by the competitive disadvantage to the Charterers in seeking potential sub-charterers as against vessels which could be marketed as GOA OK. In this respect the fact that the Vessel could not be marketed as GOA OK put her at something of a competitive disadvantage. This had to be seen against the ability to trade the Vessel elsewhere worldwide (Reasons para180).

(4) There was clear contemporaneous evidence, from the Charterers' renegotiation offers immediately after termination, that they regarded the GOA OK status to be worth no more than $1,250 per day (Reasons para181).

(5) In these circumstances "the evidence before us simply did not support a conclusion that the consequences of the Owners' refusal to allow the Vessel to transit the GOA freely deprived the Charterers of substantially the whole benefit of the contract" (Reasons para 176).

The First Question

14. Mr Kimmins QC for the Charterers argued that although the test expressed by the majority at para 156 of the Reasons was the correct one, they fell into error at paras 164 and 167 in treating the first limb as meaning that in order to demonstrate that the Owners had evinced an intention not to be bound by the Charterparty, it was necessary to show that a reasonable man would have concluded that head owners and hence the Owners would have refused to comply, or comply promptly, with an order to transit the GOA if and when made. He argued that such was an error of law because the very act of making it plain that consent was (and always would be) entirely dependent upon the choice of head owners was itself sufficient to evince the necessary intention; determining whether or not head owners would in fact grant permission was a speculative exercise which was irrelevant. Where one party puts it out of his power to perform his obligations, his self created incapacity automatically evinces an intention not to be bound. A classic illustration of this principle is where one party makes his future performance solely dependent on the actions of an independent third party over whom he has no actual or legal power to compel performance. By contracting with head owners on terms which were not back to back in respect of GOA consent, the Owners had put it out of their own power and control to perform their obligations under the Charterparty.
15. Resort to basic principles reveals this to be an attempt to appeal a finding of fact by dressing it up as an issue of law. Anticipatory breach is the name given to conduct of one party to a contract before the time for performance of his obligations has arrived which is sufficient to entitle the other contracting party to treat himself as discharged from further performance. It may consist of one or both of two kinds of conduct. The first, renunciation, comprises words or conduct which evince an intention by the contracting party no longer to be bound by his contractual obligations. The second, self induced impossibility, comprises conduct by the contracting party which puts it out of his power to perform his contractual obligations. In each case the anticipatory breach must be repudiatory in character. That is to say that the breach of contractual obligations, which the party's conduct anticipates that he can not or will not perform, must be of the same character as would entitle the other party to treat himself as discharged from future performance if it occurred after the time for performance had arisen. So the anticipated breach must be breach of a condition, or breach of an innominate term which goes to the root of the contract or deprives the innocent party of substantially the whole benefit of the contract.
16. The relationship between the two types of anticipatory breach was discussed by Devlin J in Universal Carriers v Citati [1957] 2 QB 401 at 436-438:

"The law on the right to rescind is succinctly stated by Lord Porter in Heyman v. Darwins Ltd. as follows: "The three sets of circumstances giving rise to a discharge of contract are tabulated by Anson as: (1) renunciation by a party of his liabilities under it; (2) impossibility created by his own act; and (3) total or partial failure of performance. In the case of the first two, the renunciation may occur or impossibility be created either before or at the time for performance. In the case of the third, it can occur only at the time or during the course of performance."

The third of these is the ordinary case of actual breach, and the first two state the two modes of anticipatory breach. In order, that the arguments which I have heard from either side can be rightly considered, it is necessary that I should develop rather more fully what is meant by each of these two modes.

A renunciation can be made either by words or by conduct, provided it is clearly made. It is often put that the party renunciating must "evince an intention" not to go on with the contract. The intention can be evinced either by words or by conduct. The test of whether an intention is sufficiently evinced by conduct is whether the party renunciating has acted in such a way as to lead a reasonable person to the conclusion that he does not intend to fulfil his part of the contract. This application is fully discussed in Forslind v. Bechely-Crundall and forms the basis for the arbitrator's findings.

Of the two modes, renunciation has since the decision in Hochster v. De La Tour established itself as the favourite. The disadvantage of the other is that the party who elects to treat impossibility as an anticipatory breach may be running a serious risk. Suppose, for example, that a man promises to marry a woman on a future date, or to execute a lease, or to deliver goods; and that before the day arrives he marries another, or executes the lease in favour of another, or delivers the goods to a third party. The aggrieved party may sue at once. "One reason alleged in support of such an action," Campbell C.J. observed in Hochster v. De la Tour, "is, that the defendant has, before the day, rendered it impossible for him to perform the contract at the day: but this does not necessarily follow; for, prior to the day fixed for doing the act, the first wife may have died, a surrender of the lease executed might be obtained, and the defendant might have repurchased the goods so as to be in a situation to sell and deliver them to the plaintiff." But if the plaintiff treats the defendant's conduct as amounting to renunciation and justifies his rescission on that ground, the defendant could not avail himself of this defence.

…………

Since a man must be both ready and willing to perform, a profession by words or conduct of inability is by itself enough to constitute renunciation. But unwillingness and inability are often difficult to disentangle, and it is rarely necessary to make the attempt. Inability often lies at the root of unwillingness to perform. Willingness in this context does not mean cheerfulness; it means simply an intent to perform. To say: "I would like to but I cannot" negatives intent just as much as "I will not." In the earlier part of his argument Mr. Mocatta contended that a statement of inability without unwillingness did not amount to a renunciation, but in the end he abandoned the point. He concedes that the arbitrator's conclusion that the charterer evinced an intention not to perform is sufficiently supported by the finding that his attitude was that he was willing to perform if he could, but that he could not. In the other form of anticipatory breach, Mr. Mocatta, as will be seen, contends that the disablement must be deliberate and not negligent or accidental. But to the extent that inability enters into renunciation, Mr. Mocatta is not concerned with the character of the inability. If a man says "I cannot perform," he renounces his contract by that statement, and the cause of the inability is immaterial.

……….

"The two forms of anticipatory breach have a common characteristic that is essential to the concept, namely, that the injured party is allowed to anticipate an inevitable breach. If a man renounces his right to perform and is held to his renunciation, the breach will be legally inevitable; if a man puts it out of his power to perform, the breach will be inevitable in fact—or practically inevitable, for the law never requires absolute certainty and does not take account of bare possibilities. So anticipatory breach means simply that a party is in breach from the moment that his actual breach becomes inevitable. Since the reason for the rule is that a party is allowed to anticipate an inevitable event and is not obliged to wait until it happens, it must follow that the breach which he anticipates is of just the same character as the breach which would actually have occurred if he had waited. In Thorpe v. Fasey Wynn-Parry J. said: "In my judgment, when one considers these cases there is neither any good reason for a distinction nor, in my view, does there exist any distinction between the nature of the repudiation which is required to constitute an anticipatory breach and that which is required where the alleged breach occurs after the time for performance has arisen." If this is right, it seems to me to dispose in principle of Mr. Mocatta's submission that the disablement must be deliberate. If when the day comes for performance a party cannot perform, he is in breach, quite irrespective of how he became disabled. The inability which justifies the assumption of an anticipatory breach cannot be of any different character. Anticipatory breach was not devised as a whip to be used for the chastisement of deliberate contract-breakers, but from which the shiftless, the dilatory, or the unfortunate are to be spared. It is not confined to any particular class of breach, deliberate or blameworthy or otherwise; it covers all breaches that are bound to happen."

17. Three points emerge which are important. First, the rationale for treating both renunciation and self induced impossibility as entitling the innocent party to treat the contract as at an end prior to the time for performance is the inevitability of non performance. Since the reason for the rule is that a party is allowed to anticipate an inevitable event and is not obliged to wait until it happens, anticipatory breaches are treated in the same way as actual breaches because they are bound to happen. In the case of self induced impossibility, this means actual inevitability. In the case of renunciation, it means legal inevitability, in the sense that the innocent party is entitled to treat as inevitably going to happen that which the contract breaker clearly conveys by words or conduct that he intends will happen.
18. Secondly, self induced impossibility is narrowly confined to those cases where breach is rendered inevitable. Save for possibilities which are so remote that in practice they can be ignored, what is required is inevitability. It is not sufficient if something is done which makes future performance unlikely, even very unlikely, still less that it renders performance uncertain. That is why renunciation is often a more favoured basis for invoking the doctrine of anticipatory breach.
19. Thirdly, the lease and marriage cases which Devlin J had in mind are best explained as examples of renunciation, not self induced impossibility. The position is explained by the learned authors of Smith's Leading Cases 13^th Edn (1929) at pp 38 to 41, the last part of which was cited with approval by Devlin J in Citati at p 441:

"In Short v Stone, 8 Q.B. 358, it was held that if a man promises to marry a woman on a future day, and before that day marries another woman, he is instantly liable to an action; in Ford v Tiley, 6 B. & C. 325, and Lovelock v Franklyn, 8 Q.B. 871, it was held that if a man contracts to grant a lease on and from a future day for a certain term, and before that day he grants a lease to another for the same term, he may be immediately sued; in Bowdell v Parsons, 10 East 359, it was held that if a man contracts to sell and deliver specific goods on a future day, and before that day he sells and delivers to another, he is immediately liable to the first purchaser. In each of the above cases it was not necessarily impossible for the defendant to perform the contract; for, prior to the day fixed, the first wife may have died, a surrender to the lease might have been obtained, and the defendant might have repurchased the goods; and in each case it seems better to say that the act of the defendant was tantamount to a refusal to perform his side of the contract which the plaintiff was entitled to accept as a breach in accordance with the principles above discussed; see Hochster v De la Tour, 2 E. & B., at p 688, per Lord Campbell; Synge v Synge, [1894] 1 QB 466; McIntyre v Belcher, 14 C. B. (N.S.) 654; Ogdens, Ltd v Nelson, [1905] AC 109.

………

A party is deemed to have incapacitated himself from performing his side of the contract, not only when he deliberately puts it out of his power to perform the contract, but also when by his own act or default circumstances arise which render him unable to perform his side of the contract or some essential part thereof."

20. Applying these principles I can see no warrant for what I see as the central plank in Mr Kimmins QC's argument, which is that there is some principle of law whereby a party who has made his performance dependent on a discretion to be exercised by a third party is ipso facto deemed to be evincing an intention not to perform. Mr Kimmins QC confirmed that he was relying on renunciation, not self created impossibility. The Tribunal has found that the Owners' stance was not to be understood as being that they would be unable or unwilling to perform if and when Charterers gave a voyage order requiring GOA transit. That was the majority's finding of fact. Why, one asks, should the contrary be deemed as a matter of law? There is no authority to support such deeming, and it is contrary to established principle.
21. Where conduct renders future performance uncertain, the self induced impossibility ground for putting an end to the contract does not arise. The innocent party must bring himself within the doctrine of renunciation. Conduct which renders future performance uncertain may in the circumstances of a particular case be such that a reasonable man would conclude that it evinced an intention not to perform when the time comes. This is the explanation for the lease and marriage cases. Whether the conduct evinces such an intention is a question of fact in each case. Much will depend upon the degree of uncertainty, the nature of the contingency, in whom the contingency is vested, and a host of other circumstances peculiar to each case. Words or conduct which give rise to the uncertainty of future performance, the contingency of which rests upon conduct of a third party, will not necessarily evince an intention not to be bound. If, for example, a person has a contractual obligation to be at a place at 9 am on a particular day, and says that he only intends to fulfil his obligation if the early train is running as usual, he is making clear that his future performance is dependent upon a contingency which is in the hands of another. But he is not ipso facto evincing an intention not to perform his obligation, and the rationale for the anticipatory breach rule does not require some legal deeming that he is. On the contrary, it requires the other contracting party to wait to see whether there is a breach when the time for performance arises, a breach which before that time is not inevitable.
22. The principle is no different where the uncertainty arises out of a discretion which falls to be exercised by a third party from that which arises from any contingency, whether it be within or outside the immediate control of the contracting party. Contractual performance is commonly subject to a host of uncertainties and contingencies. When the time for performance arises there may be a breach which arises from an unwillingness or inability to perform driven by factors which rest on decisions of third parties, such as that of a seller's supplier up the chain, or other independent contingencies, such as an absence of goods available in the market to a seller who has assumed that contractual risk. A party may lawfully assume an absolute obligation which he hopes to fulfil when the time for performance arrives. He is not in anticipatory breach by reason merely of there being an uncertainty whether his hopes will be fulfilled. A party who contracts to sell specific goods which he is negotiating to purchase is not in anticipatory breach because he has not yet concluded the negotiations with the supplier and secured the means of supply. He is no more in anticipatory breach if he has concluded his supply contract but it provides for performance by the supplier which is subject to contingencies. If the supply is subject to the supplier's consent, which may or may not be forthcoming, that is but one example of where future performance is uncertain and depends upon a contingency outside the control of the contracting party. Similarly, a lessee who subleases a property from a future date in the hope and expectation that he will in the meantime obtain the landlord's consent is not ipso facto in anticipatory breach the moment he enters into the sub lease, notwithstanding that his ability to perform depends upon the consent of the landlord.
23. That is sufficient to dispose of the appeal. There was no error of law. The majority addressed the correct question and reached a conclusion of fact which was open to them and which is not susceptible of review on this appeal. The minority arbitrator concluded that the Owners made clear that they would not be able to comply with orders to transit GOA promptly. That was an alternative conclusion which may have been available on the facts, but it was not the view of the majority.

The Second Question

24. The question of whether there was an error of law in answering the second question does not arise. I will express my views on it briefly.
25. The hypothesis upon which this issue arises is that the Owners evinced an intention not to perform by making prompt compliance with a voyage order involving GOA transit dependent upon head owner consent. Mr Kimmins QC submitted that the anticipated breach, therefore, is a failure to comply promptly with a legitimate voyage instruction if and when made by the Charterers. This was the way the issue was formulated by the majority, in the heading to their reasons on the second question. Mr Kimmins QC accepted that clause 8 of the NYPE charter was an innominate term, but submitted that a breach in complying with a voyage order would almost always go to the root of a time charter, and inevitably did so in the present case where GOA OK status had been expressed to be a deal breaker, and the Owners knew that it was of importance to the Charterers. He relied in particular upon The Hill Harmony [2001] 1 AC 638, 643G, The Product Star (No 2) [1993] 2 Lloyd's Rep 397 at 407 col 2, and Time Charters 16^th Edn (2008) at 5.18.
26. Mr Hill QC submitted that this was not the correct approach. The required approach was to identify the benefit which Charterers would have derived under the Charterparty for the remainder of the contractual period, looking at the question prospectively at the date of anticipatory breach; and then to ask whether the Owners' conduct deprived them of substantially the whole of that benefit. This involved asking two questions. The first was whether and to what extent Charterers would have wished to trade via GOA. The second was what would have happened had they wanted to. The majority answered the first question by finding that Charterers would not have wished to trade the Vessel via the GOA in the foreseeable future. The second question was not answered by assuming that a voyage order via GOA would have been given, and not been promptly complied with, because knowing that head owner consent would be required, the Charterers would never have fixed the Vessel to a subcharterer for GOA transit; they would not have taken the risk that they could not procure prompt consent and so have incurred the risk of their own inability to comply with a valid voyage GOA transit order under a sub time charter, or to perform a GOA transit voyage sub charter. The benefit of which Owners' conduct deprived the Charterers therefore was the opportunity in the longer term to market the Vessel as GOA OK on those occasions when they would otherwise have wished to make her available to trade her via GOA.
27. I accept Mr Hill QC's submissions that this is the correct approach dictated by the principles set out recently by the Court of Appeal in Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577. That being so, the ground of appeal is essentially one of fact not law.
28. The Charterers face a high hurdle because they are not able to point to any error in the legal test which the majority posed for themselves. They rely upon the fact that the question whether or not a breach of contract is repudiatory is one of mixed fact and law and say that there is only one answer which the majority could have reached had they correctly applied the law to the facts, namely that the Owners' breach was repudiatory. The contrary conclusion by the majority is said to demonstrate that they either failed to apply the correct test for repudiatory breach or, if they did apply the correct test, their conclusion was one that no reasonable arbitrators could reach; and that either way, they erred in law. It is, say the Charterers, one of those cases such as Wuhan Ocean Economic v Hansa Murcia [2013] 1 Lloyd's Rep. 273 in which Cooke J said at [54]:

"The arbitrators erred in law. They set out the right test for repudiatory breach but they cannot have applied it…A correct application of the test for repudiatory breach in these circumstances would lead inevitably to one answer only and this is part of the second stage of the reasoning to which Mustill J (as he then was) referred in The Chrysalis at page 507. Furthermore, even if they did apply the right test…their conclusion is one that no reasonable arbitrators could reach".

29. Once it is recognised that the relevant question is not simply whether it would be a repudiatory breach for the Owners to fail to comply promptly with a voyage order for GOA transit if and when made, it is readily apparent that this is a high threshold which can not be met. The findings of the majority in relation to the intended use of the vessel for the foreseeable future, the competitive disadvantage in being unable to market the vessel as GOA OK, the value the Charterers put upon that competitive disadvantage, and the ability to trade the Vessel elsewhere, are capable of supporting the factual conclusion that the Charterers were not deprived of substantially the whole benefit of the Charterparty. That is a finding of fact which is not open to challenge on an appeal under s. 69. As Mustill J said in The Chrysalis [1983] 1 Lloyd's Rep 503 at 507: "….once the Court has concluded that a tribunal which correctly understood the law could have arrived at the same answer as the one reached by the arbitrator, the fact that the individual judge himself would have come to a different conclusion is no ground for disturbing the award." Accordingly the appeal fails on this ground also.