Misrepresentation and “Reservation of Rights” in Charterparties

SK Shipping Euorope Ltd v. Capital VLCC 3 Corp (C Challenger) [2022] EWCA Civ 231

The charterers entered into a charterparty contract with the owners of the C Challenger in February 2017 for a period of two years. The charterparty contained a term warranting fuel consumption and speed. Following problems with a turbocharger, the charterers alleged inter alia that the owners had misrepresented the vessel’s performance capabilities. The charterers raised the issue concerning potential misrepresentation on the part of the owner of the capabilities of the chartered vessel during a meeting in London on 21 March 2017. It was not until 19 October 2017 that the charterers purported to rescind for misrepresentation or to terminate for repudiatory breach. During the period of March- September 2017, the charterers continued to use the vessel (by fixing occasionally sub-fixtures); deduct periodically from hire and reserve their rights.

The following day, the owners purported to terminate the charterparty on the basis that the charterers’ message was itself a renunciation.

The trial judge (Foxton, J) found that there was no actionable misrepresentation. Furthermore, it was held that charterers’ conduct (especially fixing the vessel for a sub-charterer in July 2017 for a voyage to Tunjung Pelapas) was incompatible with an attempt to reserve rights to set aside the charterparty for misrepresentation) even though they expressly indicated that they “reserve their rights” after alleging that the owners misrepresented the capabilities of the chartered vessel (i.e. speed and consumption) during charter negotiations. The charterers appealed on both grounds.

Was there an actionable misrepresentation?

The key to the charterers’ appeal was a letter sent on behalf of the owner during pre-contract negotiations on 22 November 2016. The charterers argued that the representations made to them in that letter with regard to the chartered vessel’s last three voyages, its average speed and performance, included a representation as to future performance; and such representation was repeated in each of the parties’ subsequent communications by the restatement of the same data; and the trial judge was erred in law in concluding that there was no inducement

The Court of Appeal found that on an objective reading of the 22 November 2016 letter, a prospective charterer would have understood it be saying “this is how my vessel has performed on its most recent voyages and these are the warranties which I am prepared to give” and nothing more. It can, therefore, be safely concluded that there was no representation as to the future performance of the vessel with regard to speed and consumption. The tribunal also found that the explanation in the 22 November 2016 letter relating to the average of the vessel’s last three voyages was deliberately omitted once the parties began to negotiate. The natural conclusion that emerges from that is that they did not become part of the negotiations on which the charter in dispute was based or became “embedded” in the charterparty. (given that the Court already found that the representations in the letter did not include a representation as to the future, this finding had no impact on the judgment). Also, the Court was adamant that the trial judge made no error of law when concluding that there was no inducement.

Reservation of Rights

This part of the judgment has serious practical consequences for the shipping industry. A part of the industry until recently operated on the basis that the words “reserving my rights” would provide a silver bullet for an innocent party in a dispute or litigation that might follow! There is now authority to the effect that this is not necessarily the case.

The Court of Appeal agreed with the general statement that “a reservation of rights will often have the effect of preventing subsequent conduct constituting an election to affirm or rescind a contract”. However, just like the first instance judge, the Court stressed that this was not an inevitable rule. On this point, the Court agreed with the Commercial Court’s statement that actions of the charterer, i.e. nature and consequences of any demand for future performance, may in some instances be incompatible with a reservation of rights. By considering all relevant circumstances existed at the time the order to proceed to Tanjung Pelapas was given, i.e. the fact that the voyage would last two months and that the general reservations made at the time concerned other complaints, not just the misdescription of the vessel, the Court of Appeal endorsed the decision of the Commercial Court that the order was intrinsically affirmatory conduct.

Lessons!

The judgment is a good reminder that construction of the representations from an objective point of view will be vital in determining whether there is an actionable misrepresentation or not. But this is hardly new. More significant message to the industry (and lawyers) is that it should not be assumed that “reservation of rights” language will always have the effect of reserving the rights of an innocent party. This kind of language will be construed in the light of surrounding circumstances and whether it will have the desired impact will largely depend on the future actions of the innocent party.  

It is worth noting that in deliberating the consumption and speed warranty issue, the Court of Appeal in its judgment made reference to the work of late Dr Nikaki and Professor Soyer “Enhancing Standardisation and Legal Certainty through Standard Charterparty Contracts” published as Chapter 5 in Charterparties Law, Practice and Emerging Legal Issues (Informa Law, 2018)).  

          

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