Applicability of the Doctrine of Anticipatory Breach to Executed Contracts

In a rare appeal before five judges in the Singapore Court of Appeal, two questions of great practical significance pertaining to contract law were authoritatively and definitively answered:-

  1. Does the doctrine of anticipatory breach apply to both executed and executory contracts?
  2. Can insolvency be the basis for invoking the doctrine of anticipatory breach?

1.     The salient facts in brief

The Appellant supplied bunkers to the Respondent’s vessel, the “STX Mumbai” (“the Vessel”). Under the  terms of their agreement, the Respondent had 30 days to make payment upon supply of the bunkers; but three days before payment was due, the Appellant sent a letter demanding immediate payment and gave the Respondent up to the close of business on that same day to effect payment. The Respondent failed to make payment as demanded and the Appellant promptly arrested the Vessel and commenced proceedings against the Respondent.

The Respondent successfully applied to have the Appellant’s claim struck out. The first instance decision was upheld by Justice Belinda Ang who additionally ordered that the arrest should be set aside and that there be an investigation into the damages due to the Respondent for the wrongful arrest of the Vessel.

2.     The issues

The Appellant’s action of prematurely demanding payment was based on its view that the Respondent had committed an anticipatory repudiatory breach of its obligation to pay for the bunkers when payment fell due. This was because, inter alia, a related company listed as the Vessel’s “group owner”, STX Pan Ocean Pte Ltd (“STX Pan Ocean”), had filed for bankruptcy protection. This, and other facts suggesting the poor financial health of the group of companies that the Respondent appeared to be part of, led the Appellant to conclude that the Respondent had evinced a clear intention to renounce the contract or, at the very least, that the Respondent would find it impossible to pay for the bunkers when payment fell due.

Justice Ang upheld the Assistant Registrar’s holding that the Appellant’s claim was legally unsustainable. This was because insolvency per se did not automatically amount to a repudiatory breach in law and this principle applied a fortiori in this case, where the insolvency was that of a related company and not the Respondent itself. This being so, the Appellant had no legal basis for issuing the letter of demand and the Respondent’s failure to comply with the demand could not be construed as a renunciation of its contractual obligations. The insolvency of STX Pan Ocean also did not necessarily mean that it would have been impossible for the Respondent to meet its payment obligation when they fell due.

Justice Ang added, by way of obiter dicta, that the doctrine of anticipatory breach did not apply to executed contracts (i.e. where one party has fully performed its obligations in a contract and therefore what is left are the obligations of the other contracting party – such as the bunker supply contract in the present case) but only to executory contracts (i.e. where both parties to a contract still have outstanding obligations to perform). This novel point was fully argued before the Court of Appeal and thus was one of a number of issues considered by the five judges.

It is noteworthy that the Appellant raised a new argument and fresh evidence on appeal to buttress its submission on the impossibility of performance. This revolved around its standard terms and conditions. The Appellant submitted that, on a true interpretation of the relevant clause, it was in fact entitled to receive payment on the date of the arrest itself and so, in the absence of any evidence to suggest that the Respondent had arranged to make payment by that time, it was virtually impossible for timely payment to have been made. The Court of Appeal allowed the Appellant’s standard terms to be introduced into the record. This is discussed further below.

This article will focus on two issues: does the doctrine of anticipatory breach apply to executed contracts? If so, can insolvency be the basis for invoking the doctrine? The Court of Appeal, in a judgment delivered by Justice of Appeal Andrew Phang, disagreed with Ang J on both issues.

(i)      Issue 1 - Does the doctrine of anticipatory breach apply to executed contracts?

Justice Phang unequivocally held that, as a matter of legal principle, the doctrine of anticipatory breach can be invoked regardless of whether a contract is an executed or an executory one. In his words, “… we are of the view that, even in a situation where the plaintiff has already performed all its obligations under the contract, the defendant would nevertheless be in anticipatory breach if it states, in advance, that it will not perform its obligations under the contract when the time for the actual performance of these obligations arrives” (italics in original).

This was justified on two bases. First, in such a situation there would “be an actual breach of another separate (as well as implied) promise by the defendant to the effect that it (the defendant) would not act in such a manner so as to render the plaintiff’s performance of its obligations towards completion of the contract an exercise in futility” (emphases in original).

Alternatively, if “the defendant has evinced a clear intention that it will not perform its obligations under the contract, then we see little reason why this very fact might not itself form the basis for holding that, in principle and logic, an actual breach has, in substance, occurred – notwithstanding the fact that the time for the defendant’s performance has yet to arrive under the contract” (emphases in original).

Therefore, this decision makes it clear that the position under Singapore law is that if there is a breach of the sort that would justify the plaintiff electing to treat the contract as discharged, the doctrine of anticipatory breach can be invoked regardless of whether the contract is executed or executory in nature.

(ii)     Issue 2 - Can insolvency be the basis for invoking the doctrine of anticipatory breach?

Justice Phang held that it cannot be said that insolvency can never result in an anticipatory breach. He agreed that, in general, insolvency does not in and of itself amount to a breach of contract. However, it all turns on the factual background against which the insolvency takes place. In the present case, STX Pan Ocean’s insolvency may, when viewed together with the other facts surrounding the Appellant’s claim, lead to the conclusion that the insolvency did in fact render performance of the bunker supply contract by the Respondent (i.e. payment) impossible. These facts would only be able to be established at trial and therefore it was inappropriate for Ang J to summarily strike out the Appellant’s case.

Justice Phang also dealt with the venerable cases which were relied on as authority for the proposition that insolvency per se did not amount to an anticipatory breach which therefore led to Ang J’s conclusion that the Appellant’s claim was legally unsustainable.

These cases, Phang JA pointed out, involved contracts which were executory in nature.  Therefore, these contracts were potentially beneficial to the insolvents’ estates and as such, there was the possibility in each of these cases that the contract would have been adopted by the insolvent’s representative. Any argument that the insolvency rendered further performance of the contract by the insolvent party impossible was premature and speculative.

The bunker supply contract in the present case, however, was very different. All that remained was the obligation on the part of the Respondent to pay for the bunkers that had already been supplied by the Appellant. There was no good reason for a liquidator of the Respondent to adopt the contract and pay the Appellant. The debt would simply be an unsecured debt which would rank pari passu with other unsecured debts. In this situation, insolvency could thusly justify a creditor treating a contract as discharged because of an anticipatory repudiatory breach.

3.     Analysis

The Court of Appeal’s treatment of Issue 1 should be welcomed for its clarity and sound legal reasoning. The contrary position (i.e. having the doctrine of anticipatory breach apply only to executory contracts and not executed ones) would lead to the rather illogical and unfair situation where a plaintiff, which had in fact performed all of its obligations under the contract, would be in a worse position compared to if it (the plaintiff) had yet (although it was able and willing) to perform all of its obligations under the same contract.

Following this clarification of the local position by our apex Court, no longer will commercial men have to consider the nature of the contract they are dealing with before deciding whether they are entitled to treat the contract as having been discharged by the anticipatory repudiation of the counterparty. An innocent party would not have to wait until its counterparty’s performance fell due before taking steps to protect itself.

In contrast, the question of whether there is such anticipatory repudiation as a result of insolvency is rather more fraught. Generally, insolvency per se will not justify this conclusion. However, we now know that it could in certain circumstances. It all depends on the nature of the contract and the specific facts of the given case. Commercial men who have to make such decisions, often under time pressure (as was the case in the STX Mumbai), would be well advised to first seek legal counsel, especially from insolvency and shipping specialists. Careful analysis will be required of both the rights available to the innocent party and the interrelationship with the relevant insolvency regime, especially where the governing law of the contract is different from the lex concursus. See for instance the decision of Fibria Celulose S/A v. Pan Ocean [2014] EWHC 2124 (Ch), where the English High Court held that it would not intervene to prevent termination of an English law contract for insolvency even though such termination was inoperative or invalid under the foreign law governing the insolvency.

The Court of Appeal reserved the question of wrongful arrest to the trial judge to be considered after the relevant findings have been made. The fact that the Appellant has succeeded in reversing the Judge’s decision to strike out its claim merely goes towards the fact that the Court of Appeal was satisfied that the claim was not a plainly and obviously unsustainable one that should be struck out at this preliminary stage. It remains to be seen whether, as more evidence emerges during the course of the underlying proceedings, the trial judge will ultimately find that the arrest had been wrongful.

In respect of the Appellant’s new argument regarding the incorporation of its standard terms and conditions, the Court of Appeal was of the view that the Appellant’s proposed construction of this was not plainly unsustainable but how it is finally to be interpreted should be left to the trial judge. The significance of this new argument is that it may help establish a substratum of facts against which STX Pan Ocean’s insolvency should be considered and which may well lead to the outcome that such insolvency did in fact render performance of the contract impossible. The Court of Appeal emphasised that such a conclusion cannot be reached upon a consideration of STX Pan Ocean’s insolvency alone. However, when the relevant facts which were raised in argument are taken into account (which facts can only be established at trial), then this becomes a possibility that cannot be dismissed out of hand.