In this decision of the High Court, heard under the shorter trials scheme, Mrs Justice Carr was asked to consider a contractual dispute concerning the sale and delivery of a biofuel product. Specifically, Mrs Justice Carr was required to consider two main issues: (1) whether the claimant’s failure to nominate a vessel amounted to acceptance of the defendant’s repudiatory breach and (2) whether this failure to nominate relieved the defendant of its obligations to deliver the biofuel. The case also considers the recoverability of hedging losses as an alternative to damages based on market values.

Factual background

By way of four contract documents dated 20 January 2016 (‘the contracts’) the claimant agreed to buy and the defendant agreed to sell 4,500 metric tonnes of a type of biofuel. The lifting period was stated in the contracts as 16 June 2016 to 30 June 2016 and the contracts each included a requirement that the buyer nominate a vessel at least three working days prior to the vessel’s arrival at the load port and the nominated vessel to arrive by 24:00 on the last day of the lifting period.

The claimant hedged the contracts against the risk of price fluctuations in the UCOME market by selling gasoil futures contracts.

In early to mid June 2016 the defendant indicated that it would be unable to provide the biofuel in accordance with its obligations under the contracts. In response to this, the claimant failed to nominate a vessel as required by midnight on 27 June 2016 and sent a notice of contractual termination by email on 7 July 2016.

As a result of the defendant’s breach of the contracts, the claimant claimed US$651,240 based on losses calculated by reference to its hedging activities, alternatively US$351,830.25 based on market value, by way of damages.

Legal issues

Were the contracts terminated by the claimant’s non-nomination by midnight on 27 June 2016 or by its notice of 7 July 2016?

The claimant stated that its failure to nominate a vessel by midnight on 27 June 2016 amounted to acceptance of the defendant’s repudiatory breach; alternatively the breach was accepted by the notice of contractual termination on 7 July 2016.

In response to this the defendant argued that the claimant’s failure to nominate was a mere oversight, and in any event did not amount to clear and unequivocal conduct conveying to the defendant that the claimant was treating the contracts as at an end. The defendant relied on the case of the “PRO VICTOR” (SK Shipping (S) Pte Ltd -v- Petroexport Ltd (the “PRO VICTOR”) [2012] 2 Lloyd’s Rep 158) in stating that in order for a renunciation to be actionable the party who purports to have accepted the renunciation as terminating the contract must also demonstrate that it subjectively believed that the relevant words or conduct were evincing an intention not to perform and that, at the time of the alleged acceptance, it actually accepted the same as terminating the contract.

Mrs Justice Carr considered the case of the “SANTA CLARA” (Vitol SA -v- Norelf Ltd (the “SANTA CLARA”) [1996] AC 800) which states that what is required for acceptance of repudiation is that the communication or conduct clearly and unequivocally conveys to the repudiating party that the aggrieved party is treating the contract as at an end. Mrs Justice Carr said that acceptance could therefore take place by conduct alone and by conduct of the innocent party not performing its obligations. After having considered both sides of the argument, Mrs Justice Carr concluded that the claimant’s failure to nominate was not a sufficiently clear and unequivocal act amounting to an acceptance of the defendant’s breach. Mrs Justice Carr said that the most fundamental reason for her reaching this conclusion was because the claimant’s omission (in failing to nominate the vessel) was not an omission responsive to an immediately prior communication or act, instead it was set in the context of the claimant’s email to the defendant on 27 June 2016 which contents were inconsistent with an intention on the part of the claimant to terminate the contracts in the next few hours by non-nomination. Mrs Justice Carr therefore concluded that the claimant had terminated the contracts by its notice of 7 July 2016.

Did the claimant’s failure to nominate by midnight on 26 June 2017 relieve the defendant of its obligation to deliver the biofuel?

The defendant’s argument on this point was that before delivery could take place the claimant was required to nominate a time for delivery and a performing vessel. The defendant said this was a condition precedent to the defendant’s obligation to supply and that because the claimant had failed to nominate a vessel the defendant was discharged of its further obligations under the contracts. The defendant placed strong reliance on the cases of Armitage -v- Insole (1850) 14 QB 728 and Sutherland -v- Allhusen (1866) 14 LT 666 and said that Mrs Justice Carr was bound by these authorities to find in the defendant’s favour. The defendant also quoted the case of the “SIMONA” (Fercometal SARL -v- Mediterranean Shipping Co SA, the “SIMONA” [1987] 2 Lloyd’s Rep 236) in saying that where a renunciation is not accepted as terminating a contract, the rights and obligations thereunder continue to subsist for the benefit of both parties.

The claimant relied on the case of Forrestt & Son Ltd -v- Aramayo [1900] 83 LT 335 as support for the fact that in order to succeed in a claim for damages it would have to show one of two things: either that it was ready and willing to nominate a ship which was able to load in accordance with the contracts, or that the defendant had indicated that they could not deliver within the contract period. The claimant submitted that it was entitled to damages on either basis.

Mrs Justice Carr said that she was unable to accept that there was no breach by the defendant in failing to deliver because the claimant had failed to nominate a vessel. Mrs Justice Carr justified this decision by stating that not only was the obligation to nominate not an express condition precedent, but also the defendant didn’t contend for the existence of an implied term. Further to this, Mrs Justice Carr said that without an assumed ability to perform there was no rationale for the existence of a condition precedent. In dealing with the authorities quoted by the defendant Mrs Justice Carr said that they were clearly and materially distinguishable on the facts. Mrs Justice Carr concluded that the claimant’s failure to nominate had not relieved the defendant of its obligation to deliver the biofuel.

Quantum

As to quantum, the claimant stipulated that it should be awarded US$651,240 based on losses calculated by reference to its hedging activities. The claimant contended that such hedging was foreseeable and was common practise in the biofuels market. The defendant on the other hand denied the existence of any common practise such as this and said that the claimant’s hedging was too remote and not reasonably foreseeable to the defendant at any material time.

Alternatively, the claimant said it should be awarded US$351,830.25 based on market value, by way of damages. The defendant’s argument was that this claim was over stated.

In relation to the claimant’s hedging claim, Mrs Justice Carr said that there was a fundamental problem in that the claim compared the price at which gasoil futures were sold under the ICE transaction with the average price for gasoil in July 2016, when the ICE transaction matured in March 2016. Mrs Justice Carr said that this claim was therefore not based on the necessary ‘like for like’ basis and rejected the claim as not representing a fair or proper basis of compensation. Mrs Justice Carr then went on to consider the claimant’s alternative claim, and in doing so decided that the claimant’s comparator market price was a fair one. Accordingly, Mrs Justice Carr awarded the claimant damages in the sum of US$351,830.25.

Case comment

This case highlights the importance of ensuring that any communication or conduct, which is intended to have the purpose of accepting a repudiatory breach, is clear and unambiguous, and clearly conveys that the contract is being treated as at an end.

It also illustrates the fact that without an assumed ability to perform there is no rationale for the existence of a condition precedent.

This article originally appeared in the July 2017 edition of shipping case digest.