Legal Briefing

Courts clarify law on anticipatory breach

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Corporate and commercial | 01 February 2010

There are times when one party to a contract will know that the other has no intention of performing, even though the time for performance has yet to expire. The courts have again recently confirmed that, in certain circumstances, and provided the ingredients of a repudiatory breach are present (see pp8-9, IHL174), the innocent party may treat the contract as repudiated as a result of an anticipatory breach of contract.

A contracting party will be better placed to mitigate its losses if it is aware that the contract will not be performed prior to those obligations falling due. If an anticipatory breach occurs then the innocent party can treat the contract as repudiated and seek alternative deals, or take other remedial action. The crucial question is, at what stage will the innocent party be able to claim that there has been an anticipatory breach?

This issue has been dealt with recently in the case of SK Shipping (S) Pte Ltd v Petroexport Ltd [2009]. In SK Shipping, the Commercial Court examined the law of anticipatory breach and provided useful guidance on when an anticipatory breach may arise. It made clear that the innocent party is only able to terminate the contract if it can show that the other party acted in such a way so as to provide a clear and absolute intention that it would not perform its obligations, and that the words or conduct of the party would be clear and absolute to a reasonable person taking into consideration all of the circumstances at the time of termination. In addition to this, the innocent party must have a subjective belief that the other party will breach the contract. Only once these conditions are satisfied can the innocent party take steps to terminate the contract and mitigate its losses.

SK SHIPPING: FACTS

The facts of SK Shipping are complex, but to summarise:

  • The claimant shipowner (S) claimed damages for the anticipatory breach of a charterparty by the defendant charterer (D).
  • S argued that, following the charterparty being agreed, it became clear to it that D had no intention to perform the charterparty.
  • S submitted several facts that gave the impression that the charterparty would not be performed. These included: slowing the vessel down while en route to its loading port; failure to carry out the relevant steps for loading of the cargo; and attempts by D to renegotiate the charterparty, because no buyer for the cargo of goods could be found.
  • D argued that S had wrongfully treated the contract as repudiated while there were still days left to run on the charterparty, and that none of its actions or words made it clear that it would not perform the charterparty as agreed.

SK SHIPPING: DECISION

Flaux J held that taking into account the words and conduct of D over the course of the negotiations and (non-)performance of the charterparty, D had evinced a clear and absolute intention not to perform the charterparty. Flaux J explained that the matters in particular that reasonably caused S to be concerned that D would not perform were: the order to the vessel to reduce its speed; the failure to put up the letter of credit; the failure to return a signed copy of the charterparty that would have entitled D to exemption from freight tax in Pakistan; and the proposals for alternative charters. These were all matters that provided a background to which D’s words and conduct were to be considered. Flaux J said that S had subjectively believed that D would not perform the charterparty and was therefore entitled to treat the contract as repudiated.

TWO MODES OF ANTICIPATORY BREACH

The judgment in SK Shipping refers to three sets of circumstances giving rise to a right to rescind a contract, as set out by Lord Porter in Heyman v Darwins Ltd [1942]. These are:

  1. renunciation by a party of their liabilities under the contract;
  2. impossibility of performing one’s obligations due to their own act; and
  3. total or partial failure of performance.

The first and second of these circumstances can occur before or at the time performance is due. The third can only occur once performance is due. In other words, the first two are capable of amounting to anticipatory breach, whereas the third is an actual breach of contract. It follows that there are two modes of anticipatory breach of contract. The first is a renunciation made by one party, either by words or conduct. The second is where the party has made it impossible for it to perform its obligations.

The focus of SK Shipping was on anticipatory breach by renunciation. Flaux J referred to the case of Hochster v De La Tour (1853). He said that, since Hochster, renunciation is the favourite mode of anticipatory breach, because it is rare that circumstances will ever make it truly impossible for a party to perform its obligations. For example, if a party contracts to sell goods to one party but sells them to a third party, this does not make it impossible for the seller to purchase the goods back and honour the contract. As such, the courts have viewed such actions as indicating an intention not to perform the contract. The party is, by way of its conduct, indicating that it will not fulfil its obligations under the first contract. In SK ShippingFlaux J, on finding that there was no anticipatory breach due to impossibility, considered in detail whether there was a renunciation leading to anticipatory breach.

WHAT CONSTITUTES RENUNCIATION?

Since renunciation is widely accepted as being the primary basis for anticipatory breach, the courts have refined the test for when it can be said to have occurred. Donaldson LJ in The Hermosa[1982] sets out four key considerations in determining whether there has been a renunciation amounting to an anticipatory breach:

  1. Whether there has been a clear case of a refusal to perform contractual obligations such that it goes to the root of the contract.
  2. The refusal must be absolute. The renunciation cannot be conditional on some circumstance occurring or remaining.
  3. Whether there has been a sufficient refusal to perform must be judged in light of whether a reasonable person in the position of the innocent party would regard the refusal as being clear and absolute.
  4. The words and/or conduct relied on for the renunciation must be considered as at the time when it is treated as terminating the contract. This will therefore involve looking at the history of the transaction (later events being irrelevant).

One of the arguments relied on by D was that individually its actions and/or words did not constitute a clear and absolute refusal to fulfil its contractual obligations. As such, a collection of actions and words that individually did not amount to a clear intention to breach the contract could not be viewed as collectively amounting to such an intention. Flaux J disagreed. He said that regardless of whether conduct or words individually demonstrated an intention to breach the contract, it is the total sum of those actions or words that matters. Therefore, if the wrongdoing party can be said to have showed an intention not to perform over the course of time, through various actions, or in light of other circumstances, then this will satisfy the test.

Flaux J also concluded that there needed to be a subjective belief on the part of the innocent party that the other party intended to breach the contract.

SK SHIPPING: IMPACT

Following SK Shipping it should be clearer to contracting parties what they are able to treat as a demonstration of intention not to perform obligations under the contract. Parties should now be more aware that they need to show that:

  1. they have considered the contextual circumstances as a whole in determining whether the other party’s words or conduct have shown a clear and absolute intention not to perform the contract; and
  2. they carry a subjective belief that the other party really will breach the contract.