In the recent case of the “BULK URUGUAY”, the Court examined whether anticipatory breach of contract can arise purely on the basis of future performance being made contingent on a third party’s conduct.
By way of a time charter entered into on 2 July 2010, the defendant, disponent owners (Owners), chartered the “BULK URUGUAY” to the claimant charterers (Charterers) for a period of about three years.
During the negotiation of the charterparty, Charterers had made it plain to Owners that the ability to transit the Gulf of Aden (GOA) - an area well-known for piracy - without the need to obtain Owners’ permission, was of paramount importance as this would result in a competitive advantage over other vessels. Such a clause was included in the final charterparty. In contrast, under the head charter, GOA transit was subject to the consent of the head owners, resulting in Owners’ rights and obligations not being back- to-back in this respect.
Shortly after granting permission to transit the GOA on the vessel’s maiden voyage, Owners asserted, in correspondence, that the charterparty terms required their permission to be sought each time the GOA was to be transited, and indicated that Owners’ position would be dictated by the position taken by the head owners. The Charterers treated the Owners’ insistence on prior consent for each occasion as a repudiatory breach which they purported to accept as terminating the charterparty. The Owners, in turn, accepted the Charterers’ purported termination itself as a repudiatory breach.
Arbitration was commenced to determine whether the Owners were in anticipatory breach of the charterparty. The majority of the Tribunal found that the Owners were not in repudiatory breach, Charterers were not entitled to terminate and, therefore, the Charterers’ purported termination was itself a repudiation which had been accepted by the Owners.
The Charterers appealed1 the decision on the basis that the majority of the Tribunal had made an error of law in determining that the Owners, by their words/conduct, had not evinced an intention not to perform their obligations under the charterparty.
Appeal from the arbitration award
Popplewell J set out that anticipatory breach may consist of one, or both, of two types of conduct. Firstly, renunciation, which comprises words or conduct which clearly evince an intention by a contracting party no longer to be bound by its contractual obligations (the test for this being whether a reasonable person would conclude this to be the case). Secondly, self-induced impossibility, which includes conduct by the contracting party which puts it outside of its power to perform contractual obligations. In each case, the anticipatory breach has to be repudiatory in character, i.e. 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.
Popplewell J referred to the comments of Devlin J in Universal Cargo Carriers Corporation v Citati 2 when discussing the relationship between the two types of anticipatory breach and highlighted that the inevitability of non-performance was the common factor which entitled the innocent party to treat the contract as at an end prior to the time for performance. In the case of self-induced impossibility, this meant actual inevitability, while in the case of renunciation, this meant legal inevitability – which is based on what is clearly conveyed by the words or conduct of the contract breaker. Popplewell J went on to stress the high threshold for self-induced impossibility by saying the breach must be inevitable, not very unlikely or uncertain.
Popplewell J made it clear that there was no principle of law whereby there is anticipatory breach purely on the basis that the future performance is made contingent on a third party’s conduct.
The Owners’ position was not to be understood as being that they would be unable or unwilling to perform their contractual obligations if, and when, Charterers gave an order requiring GOA transit. There was no error of law and the appeal was dismissed. Popplewell J held that the majority had addressed the correct question. The Judge’s acceptance that the correct approach was followed resulted in the ground for appeal essentially being one of fact and not law, and, therefore, the decision not being open to challenge on an appeal under section 69 of the Arbitration Act 1996.
Charterers and owners should consider carefully the basis on which they may claim anticipatory breach. Given the high threshold for establishing self-induced impossibility, renunciation is more likely to be the preferred route for a party wishing to demonstrate anticipatory breach.
Popplewell J stressed the analysis will be a question of fact, in each case, but that anticipatory breach will not be established purely on the basis of future performance being made contingent on a third party’s conduct. The judge cited the fact that contractual performance is commonly subject to a host of uncertainties and contingencies. A party seeking to rely on a purported repudiation should be able to demonstrate that the words and/or conduct of the other party have evinced a clear intention to no longer be bound by its contractual obligations and a subjective belief that the other party’s breach of contract will be inevitable.