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Up a creek without a boat? : Saying "no" to contractual obligations

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In the case of SK Shipping PTE Ltd v Petroexport Limited [2009] EWHC 2974, the Commercial Court provided useful clarification of the law surrounding renunciation of a contract.  Renunciation of a contract is where one party to a contract indicates an intention not to continue with the contract.  The "innocent" party to the contract may then choose to treat the contract as terminated and claim damages for non performance of the contract.

SK Shipping was a Singaporean company in a ship owning group. Petroexport was an oil trading company from the Cayman Islands. The parties entered into a contract for Petroexport to lease a vessel from SK Shipping.  Later, Petroexport allegedly contacted SK Shipping to say that Petroexport's buyer had pulled out and that Petroexport would no longer need the vessel to ship the cargo.

SK Shipping purported to terminate the contract, claiming that there had been a fundamental breach of the contract by Petroexport by virtue of its refusal to perform the contract.  One of the questions the Court had to answer was whether Petroexport had by its words or conduct renounced the contract, therefore entitling SK Shipping to accept that renunciatory breach and terminate the contract.

The Court reviewed previous case law on the test for renunciation of contracts.  Previous case law established that the test was whether the party renunciating "evinced an intention" not to go on with the contract and whether the renunciating party has acted in such a way as to lead a reasonable person in the position of the innocent party to the conclusion that he does not intend to fulfil his part of the contract.

In SK Shipping PTE Ltd v Petroexport Limited the Court confirmed the objective test from previous case law, but also stated that there was a second subjective test.  Not only must it appear to a reasonable person that the other party was renunciating, but that the innocent party must subjectively believe that to be the case.

The case also provided the following useful illustrations:

On the facts of the case it was held that Petroexport had, by its words and conduct evinced an intention not to perform the contract, in a manner which a reasonable person in the position of SK Shipping would have regarded as clear, unequivocal and absolute.   Petroexport had therefore renounced the contract and SK Shipping was entitled to treat the contract as terminated and claim damages.

Comment

The case is welcomed as providing an up to date summary of the "dual test" for renunciation. 

It highlights that care must be taken by a party which communicates a desire or intention to alter or not be bound by terms of a contract.  It is therefore important that if a party to a contract is contemplating this, it seeks legal advice before acting as otherwise it could allow the other party to allege that it is entitled to terminate the contract and claim damages.  Equally, a party to a contract which receives such a communication from another party, should consider taking legal advice since its response or lack of a response may determine its future rights and obligations.  An overreaction to such a communication by treating the contract as terminated when, on the facts, there is not actually a renunciation, could lead to a claim that the other party is itself in breach of contract.  A failure to respond in appropriate terms when receiving such a communication from one party, could lead to the other party being treated as accepting a change in contract, waving the breach and/or a loss of rights. 

Contact us

If you wish to discuss any issues relating to amendments to or the termination of contracts please contact John Mackle on 0113 336 3336 or at j.mackle@clarionsolicitors.com.

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