Introduction
It is a common practice for the parties to add an expression of reservation of rights in the correspondence aiming to prevent any subsequent conduct affecting their rights under the contract. However, in the recent English decision SK Shipping Europe Ltd v Capital VLCC 3 Corp (C Challenger) [2022] EWCA Civ 231, the Court of Appeal decided that the charterers could not brought claims of misrepresentation against the ship owners despite they had stated a reservation of rights against the ship owners.
Facts
In November 2016, the Claimant, SK Shipping (the “Owner”) circulated a document on the market containing speed and fuel consumption data of C Challenger (the “Vessel”) purportedly based on average of the last three voyages (the “Circular”). Upon considering such data, the Respondent (the “Charterer”) entered into a two-year time charter for the Vessel in December 2016, which contained a guarantee as to the Vessel’s fuel consumption and speed. The charterparty also provided that compensation was payable to the Charterer in the event of over-consumption. However, there was no statement in the charterparty that the relevant data was based on the Vessel’s past performance.
During the charter period, the Vessel consumed significantly more fuel than suggested in the charterparty. In June 2017, the Charterer alleged that the Owner had misrepresented the Vessel’s capabilities and thus entitled the Charterer to rescind or terminate the charterparty. To this end, the Charterer requested the Owner to remedy the breach of warranty, otherwise the charterparty would be terminated. Meanwhile in July 2017, the Charterer fixed the Vessel for a two-month voyage from the UK to Malaysia and in the subsequent correspondence, while reserving the right to rescind or terminate the charterparty.
As the Owner denied any allegation of misrepresentation, the Charterparty purported to rescind the charterparty, or alternatively, to terminate for repudiatory breach. On the following day, the Owner purported to terminate the charterparty on the basis that the Charterer’s action was itself a renunciation of the contract.
Commercial Court’s decision
The Commercial Court decided in favour of the Owner. Despite the Court agreed that the representations in the Circular relating to fuel consumption were untrue and could influence a reasonable person in deciding whether to enter into the contract, it found that the Charterer would have concluded the charterparty on the same terms if the representations had not been made.
The Court also found that the Charterer had affirmed the charterparty by continuing to perform the charterparty for months (in particular, fixing the Vessel for a two-month voyage) after having knowledge of right to rescind based on misrepresentation.
Hence, the Commercial Court decided that the Charterer was in repudiatory breach and the Owner was entitled to claim damages. The Charterer appealed on a few grounds, including that the judge was wrong to have found that the charterparty would have concluded on same terms if the representations had not been made, and that the Charterer did not affirm the charterparty as it made express reservation of rights in circumstances where the Owner replied that more data was needed to review the position later.
English Court of Appeal’s decision
The Court of Appeal upheld the Commercial Court’s decision and dismissed the appeal.
The Court of Appeal emphasized that in general, mere offer of contractual terms will not amount to any representation in the absence of words of representation. In the present case, the offer of guarantee in the charterparty should not of itself be held to involve an implied representation as to current or recent performance of the Vessel.
On the point of inducement into contract, the Court of Appeal identified the hypothetical scenario in which the representations had not been made, that is, the Owner had offered the same guarantee but made no representation as to the Vessel’s recent performance (i.e. the Circular omitted the statement that the data was based on last three voyages). In that scenario, the Court of Appeal found that the charterparty would still have been concluded on the same terms, considering that the charterparty contained a guarantee and provision for compensation that warranted the consumption level as provided in the Circular.
Effect of reservation of rights
Regarding whether the Charterer had affirmed the contract, the Court of Appeal confirmed the principles that (i) a decision to affirm the contract must be communicated unequivocally to the other party; (ii) such communication may be done by conduct or by necessary implication; (iii) the test is objective; and (iv) the effect of a reservation of rights is, or at least may be, to prevent conduct that would otherwise amount to an unequivocal affirmation, from having that effect.
The Court of Appeal held that it is not an invariable rule that a reservation of rights will always have the effect of preventing subsequent conduct constituting an election, and the court must have regard to all the circumstances, including the nature and terms of any reservation of rights which have been communicated, the nature and consequences of any demand for future performance. In particular, an unconditional demand for future performance may be incompatible with a reservation of rights.
In the present case, the Court of Appeal clarified that the Charterer’s giving of the two-month voyage order was not treated as a specific category of intrinsically affirmation conduct. The judge at the Commercial Court was entitled to conclude that the Charterer had affirmed the contract after evaluating all the circumstances at the time when the said voyage order was made, including the facts that:-
1. the voyage would take the Vessel from the UK to Malaysia where it would be difficult for the Owner to obtain new employment without significant costs for ballast voyage;
2. the voyage order was given without any reservation of rights by the Charterer; and
3. although the Charterer had complained about the mis-description of fuel consumption level, its recent complaints with reservations of rights in general terms were directed to other complaints.
As such, in the absence of any legal error, the Court of Appeal refused to disturb the Commercial Court’s decision regarding the effect of the Charterer’s reservation of rights.
Key takeaway
The English Court of Appeal in SK Shipping Europe Ltd made it clear that merely offering speed and consumption warranty in the contract will not ordinarily involve an implicit representation as to a vessel’s current or recent performance. Further, parties using “reservation of rights” should be aware that they may not always be able to rely on this expression to reserve its right to terminate or rescind the contract. What is crucial is whether their conduct is consistent with the termination or continuation of the contract. When considering potential claim based on misrepresentation, it is recommended to obtain legal advice before taking further steps so as to avoid affirming the contract inadvertently.
