In the framework of this case, the court considered an interesting issue of the possibility of terminating the contract as a result of its violation by the other party but taking into account the fact that after the violation the contract continued to be executed under the reservation of rights. In this case, the court considered that such termination was unlawful.

Facts: in February 2017, SK Shipping Europe (Ship Owner) and Capital VLCC (Charterer) signed a 2-year time charter for the vessel C Challenger. During the negotiations, information about the fuel consumption of the vessel was announced, and later included in the charter.

During the charter it turned out that the vessel consumed more fuel than declared by the Shipowner. In March 2017, the Charterer notified the Shipowner for the first time that the latter had provided false information (misrepresentation) about the vessel’s fuel consumption. Only in October 2017, the Charterer announced the termination of the contract (rescission). Up to this point (or a little earlier, since the Charterer stopped giving instructions to the Shipowner in September), the Charterer continued to use the vessel, making deductions from the freight and constantly reserving his rights.

The Shipowner stated that the termination was unlawful. The Charterer, by continuing to use the vessel, affirmed the contract and, therefore, lost the right to terminate it. The Shipowner filed a lawsuit with a claim for damages. The Charterer argued that he did not confirm the contract, as he continued to reserve his rights all the time until September / October 2017.

Ruling of the court: taking into account specific facts, the court established that the Charterer knew about his right to terminate the contract in March 2017, when the violation of excessive fuel consumption was first discovered. However, the Charterer demonstrated an unambiguous choice to keep the contract by his behavior. As a result, the termination of the contract by the Charterer was recognized as a material breach of the contract (repudiatory breach), giving the Shipowner the right to recover damages.

Moreover, the court established the following general principles for such situations:

– while a reservation of rights will often have the effect of preventing subsequent conduct constituting an election to recognize or terminate the contract, this is not an invariable rule;

– the court to have regard to all the material, including any reservations which have been communicated;

– 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 preclude the making of an election;

– where a party makes an unconditional demand of substantial contractual performance of a kind which will lead the counterparty and/or third parties to alter their positions in significant respects, such conduct may be wholly incompatible with the reservation of some kinds of rights;

– determining whether particular conduct gives rise to an election is ultimately a matter of legal characterisation. There are some contexts in which actions speak louder than words¹.

Commentary: the principles developed by the court, as is often the case with the English courts, are so general and abstract in nature that the possibility of their application to specific disputes can be significantly hampered. These principles can be paraphrased below:

– usually, the reservation of rights can actually allow a party to avoid recognizing the contract as confirmed or terminated. For example, it is likely that in this particular case, after the discovery of increased fuel consumption in March 2017 and notification of this (including rights reservation) to the Shipowner, the contract would not have been recognized as confirmed by the Charterer if he had only completed the current voyage and had not given further instructions;

– if after the reservation of rights, it is impossible to unambiguously establish whether the behavior is related only to the termination or confirmation of the contract, then there is no election. The example above can be applied to this principle;

– if, after the rights have been reserved, the party demands performance from the other party (in this case, the Charterer submits an instruction for a new voyage after the discovery of increased fuel consumption), then such behavior may be deemed inappropriate to the reservation (in this case, the reserved right to terminate the contract is lost).

At the same time, the judgment provides an excellent illustration of how the reservation of rights, which is widely included in correspondence in connection with breaches of contracts, does not always allow a party to retain all “reserved rights”. Legal certainty requires all parties to understand what happens to a contract once it is breached. The party cannot keep the offender on the hook at its own discretion while continuing to execute the contract. ■

Notes