Repudiatory breach
Vitol v JE Energy (High Court) [2022]
Rights to terminate a contract typically arise expressly under the terms of a contract but can also exist in parallel, at common law, for conduct which amounts to a so called ‘repudiatory breach’
Facts:
Vitol were the sellers of a volume of fuel oil (the “Cargo”) to JE. JE were speculative purchasers. At the time of the sale contract they had no onward buyer in place for the Cargo and no vessel arranged to take delivery. Because of fluctuations in the oil price the contract became loss making for JE.
The contract provided that a suitable letter of credit providing payment security was to be put in place by the purchasers by end December 2019, but it was not. The contract also provided for JE to nominate an appropriate vessel to receive delivery of the Cargo within a specified period which, again, it failed to do.
Vitol did not immediately terminate the contract but continued to chase JE’s letter of credit as well as for a suitable vessel to be provided. It placed delivery of the Cargo on “hold” until financial security was in place. A letter of credit was in fact issued on 17 January 2020, but it contained significant errors. As a result of the delays, the vessel that had by that time been nominated to receive the Cargo, and which had docked on the 16 January, was taken ‘off berth’ at the loading port. The seller then requested that the latest day of shipment specified in the letter of credit be amended to 31 January 2020 to reflect the next likely date of loading the Cargo in order to ensure that the terms of the letter of credit would be complied with and it would guarantee payment.
On 1 February 2020, JE issued a notice that the contract was “null and void” supposedly because of Vitol’s continuing unwillingness to permit loading of the Cargo until the letter of credit had been issued in the correct form. Vitol treated this notice as a repudiatory breach which they accepted, claiming that the contract was thereby at an end.
Decision:
According to the judge, JE's initial failure to make a suitable vessel available and arrange an appropriate letter of credit in the precise form that had been agreed within the specified period gave Vitol the option of either terminating the contract or continuing to demand performance. It chose to do the latter as it was entitled to do. The judge held that Vitol were entitled to place and keep the Cargo on financial ‘hold’ and they were not in breach of contract in doing so.
JE subsequently declaring the contract as “null and void” was a repudiatory breach because it evidenced an unjustified intention not to be bound by the terms of the contract. Vitol was entitled to accept that repudiation. Vitol was therefore awarded damages equivalent to the difference between the contract price and the price that it could obtain elsewhere for the Cargo on the date on which the contract was terminated.
Points to Note:
- Be very careful when suspending delivery. In this case, there was very little, if any, discussion of the legal grounds upon which Vitol had relied when withholding delivery. The judge simply asserted that Vitol had acted in accordance with its rights. However, it is clear that a suspension or refusal to perform can sometimes constitute its own repudiatory breach.
- This case serves as an important reminder to ensure that before going ahead and terminating a contract you make doubly sure that you have a right to do so, as otherwise you risk being in repudiatory breach thereby entitling your counterparty (who may well, originally, have been the defaulting party) to bring the contract to an end, be relieved of its obligation to perform and seek its own damages.