February, 2021 - The C Challenger: how effective is a reservation of rights?

It is common for parties to reserve their rights in general terms where a dispute is developing. This is often thought to protect a party’s rights under the applicable charterparty. However, in a recent case, the High Court held that the charterer had lost its entitlement to rescind the charterparty for misrepresentation, even though the charterer had expressly reserved its rights. 

In SK Shipping Europe PLC v (3) Capital VLCC 3 Corp (5) Capital Maritime and Trading Corp (“The C Challenger”) [2020] EWHC 3448 (Comm), following delivery of the ship into a long-term time charter, the charterer purported to rescind the charterparty on the basis that the owner had misrepresented the ship’s fuel consumption.  However, the court determined that the charterer, through its conduct, had affirmed the charterparty and it had therefore lost any entitlement to rescind. This was the case even though the charterer had included a clear “reservation of rights” in correspondence.

Background

The owner, SK Shipping Europe, had been in the business of chartering out its ships on the spot market through consecutive voyage charters. However, it decided to change its business practice to chartering out its ships to long-term period charterers. This required the owner to offer warranties as to speed and performance, something which it had not previously done.

The details circulated in the chartering market included information on the ship’s performance. The owner subsequently negotiated and concluded a two-year time charter, which contained a warranty in respect of bunker consumption, with Capital VLCC 3 Corp, guaranteed by Capital Maritime and Trading Corp. 

After the ship was delivered in February, 2017, it soon became clear that she consumed bunkers in excess of the warranted consumption and that the information which had been circulated by the owner was inaccurate. Although the charterer was aware of the over-consumption and threatened to terminate the charterparty, it continued to employ the ship under a “reservation of rights”. 

It was not until October, 2017, after a stand-off between the parties, that the charterer purported to rescind the charterparty for misrepresentation and/or terminate it for repudiatory breach. 

Rescission and affirmation

Rescission of a contract means that the contract is treated as though it never existed, and is to be distinguished from termination of a contract for breach. In the latter case the contract is treated as being valid and having existed up until termination. However, in both situations a party might affirm the contract and thereby lose its entitlement to bring the contract to an end. Affirmation may occur either by express words or through conduct.

Misrepresentation

The charterer alleged that the owner had induced the charterer to enter into the fixture by means of a fraudulent misrepresentation of the ship’s capabilities.  However, the court found that a mere offer of a speed and consumption warranty does not involve any representation as to a ship’s performance. 

However, when searching for potential charterers, the owner had disclosed consumption data and the court considered that this amounted to a representation that the data provided was based on actual performance, that it had been checked by the owner and that the owner was not aware of any reason to suggest that such information was not broadly accurate. It was found that these representations were untrue.

Conduct affirming the contract

In principle, this might have permitted the charterer to rescind the contract.  However, the court found that, in continuing to employ the ship under the charter, the charterer had affirmed the contract and had therefore lost any entitlement to rescind it. 

In particular, the court considered that a fixture which the charterer had entered into in July, 2017, and the resultant voyage instructions given by the charterer to the owner, could only be consistent with the charterer electing to maintain the charterparty, rather than reserving its entitlement to set it aside on the basis of misrepresentations which the charterer had complained about two months previously. 

Reservation of rights

The charterer, however, argued that its conduct did not amount to an affirmation of the charterparty because its correspondence had included a “reservation of rights”. The court rejected this argument. In doing so, it provided helpful guidance on the effect of a reservation of rights:

• A reservation of rights will often have the intended effect of preventing subsequent conduct constituting an election to affirm or rescind.
• 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 generally preclude the making of an election to affirm or rescind. This is likely to be the case where there is a reservation of rights accompanying the exercise of a contractual right to obtain information, or where a party is performing its own obligations while assessing its position. 
• However, where a party makes an unconditional demand for substantial contractual performance of a kind which will lead the counterparty to alter its position in significant respects, such conduct may be incompatible with the reservation of some kinds of rights, and such reservation may therefore be ineffective.

Repudiatory breach

The court went on to consider the charterer’s claim that it was entitled to terminate the charterparty due to the owner’s repudiatory breach. The court accepted that the owner had breached the performance warranty and that in certain circumstances the breach of such a provision might be so serious as to give the charterer the right to terminate a charterparty. 

However, in the present case the breach was not so significant as to deprive the charterer of substantially the whole benefit which it was intended to obtain under the charterparty, nor did the breach “go to the root” of the charterparty.  Therefore, the charterer would not be entitled to rescind the contract in this case.

It followed that the charterer itself was held to be in repudiatory breach of charter when it had stopped performing the contract, pursuant to its purported rescission, and the owner was therefore entitled to damages.

Lessons to be learnt 

Parties often include a boiler plate “reservation of rights” in their correspondence. This may have the effect of preserving a party’s right to bring a contract to an end, whether because of repudiatory breach by the other party or because of misrepresentation. However, The C Challenger demonstrates that this is not always the case. 

When a party becomes aware of grounds for rescinding or terminating a contract, it needs to act promptly and ensure that any actions that it might take do not prejudice its right to bring a contract to an end. In particular, a party should be cautious about demanding substantial performance from the other party to a contract if it believes that it has a right to bring the contract to an end.  If in doubt, Members should seek legal guidance to ensure that any action taken or messages sent do not prejudice their position. 

Members are invited to contact the Club for assistance or further guidance in relation to the issues discussed in this article.