Landmark admiralty judgment STX Mumbai establishes another legal weapon for suppliers of goods and services

September 2016 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

financierworldwide.com

The STX Mumbai [2015] SGCA 35, considered two novel points of law related to the doctrine of anticipatory breach of contract. The doctrine of anticipatory breach is a concept which allows a party to treat a contract as breached and discharged in circumstances where the other party demonstrates by its words or actions that it will not perform its contractual obligations, before they fall due.

The judgment, handed down by a panel of five judges of the Singapore Court of Appeal, is relevant to the shipping industry and to any sector experiencing financial difficulties or operating in an uncertain market.

Firstly, the STX Mumbai judgment has clarified the scope of the doctrine of anticipatory breach in Singapore, such that it applies both in cases of ‘executed contracts’ (where one party has performed its contractual obligation, for example, supplying goods and/or services, while the other has not) and in cases involving so called ‘executor contracts’, i.e., where both parties have still to perform their respective obligations. This will be welcome news for service providers and sellers of goods who perform in exchange for deferred payment terms (as is often the case) because it may offer them another avenue of legal remedies.

Secondly, the Court of Appeal dealt with the question of whether insolvency could be the basis for invoking the doctrine of anticipatory breach. The upshot is that, in certain circumstances, insolvency may be used as grounds for invoking anticipatory breach. Sellers of goods and service providers may be assisted by this ruling, particularly those operating in financially unstable markets.

The facts of the case in brief

Transocean Oil Pte Ltd, a Singapore company, supplied bunkers to POS Maritime VX SA, the registered owners of the ship STX Mumbai, on the instructions of STX Corporation, as agent for POS Maritime. The payment terms stated that POS Maritime was required to pay for the bunkers within 30 days of the letter of supply, which would have been 16 June 2013.

Transocean had also dealt with STX Corporation for the supply of bunkers to four other ships, which it assumed were “part of a conglomerate of related companies”. One of these four ships named STX Pan Ocean as “group owner”. The STX Mumbai also named STX Pan Ocean as group owner.

In the days leading up to 16 June 2013, a number of events took place which Transocean claimed led it to believe that payment would not be made for the bunkers by POS Maritime on the due date. These included: (i) a missed payment for bunkers in respect of one of the other four STX Corporation ships; (ii) the release of news reports that one of STX Pan Ocean’s ships had been arrested; and (iii) the STX Pan Ocean had filed for bankruptcy in South Korea.

On 13 June 2013, Transocean demanded payment for the bunkers from POS Maritime. POS Maritime did not pay and the following day Transocean arrested the STX Mumbai.

History of the proceedings

POS Maritime applied to strike out Transocean’s action, set aside the arrest and claimed damages for wrongful arrest. The application to strike out Transocean’s action was granted by the assistant registrar. That decision was subsequently upheld by the High Court. Transocean then appealed to the Court of Appeal.

The issues on appeal

The Court of Appeal considered two key questions: firstly, does the doctrine of anticipatory breach apply to both executory and executed contracts, and secondly, can insolvency be the basis for invoking the doctrine of anticipatory breach?

Anticipatory breach – executory and executed contracts

In some jurisdictions (for example, the US and Canada), the doctrine of anticipatory breach is only applicable to executory contracts (i.e., where both parties are yet to perform their respective obligations) and not executed contracts (i.e., where the one party has performed all of its contractual obligations but the other has not).

The Singapore Court of Appeal unequivocally held that the doctrine of anticipatory breach can be invoked regardless of whether a contract is executory or executed. Arriving at this conclusion, the Court considered what it described as “the traditional view” on this issue, namely that there is an implied promise (made, in this case, by the party receiving the bunkers) not to prevent the innocent party (the supplier) from performing their part of the contract. The Court of Appeal judges found this implied promise concept to be artificial. The Court noted that the theory was difficult to apply to circumstances such as bunker supplies where the bunker supplier fulfilled their part of the contract at the very outset so, in reality, there was nothing more that their contractual counterpart could be required to promise not to interfere with. In other words, the implied promise became redundant in these circumstances.

The alternative approach favoured by the Court was that in circumstances where the defendant has evinced a clear intention that it will not perform its obligations then, as a matter of principle and logic, that clear intent may be considered as the basis for holding that an actual breach has, in substance, taken place even though the time for performance (i.e., payment) has not yet arrived.

The Court of Appeal focussed on reaching a conclusion based on principles of justice and fairness. In this respect, the Court concluded that it would be unfair to allow the doctrine only to apply to executory contracts (and not executed contracts) because that would result in leaving an innocent party who has already performed its contractual obligations in a worse position than one who has not yet performed, but is willing to do so.

Anticipatory breach – insolvency

It was recognised and acknowledged by the Singapore Court of Appeal that, in general, insolvency cannot amount to anticipatory breach. However, the Court concluded that the line of authorities for that proposition could be distinguished on their facts from the circumstances in the STX Mumbai case. In this respect, the Court examined circumstances in which a liquidator might elect to adopt a contract on the basis that it would be beneficial to the insolvent company’s interests. Their conclusion was that a bunker supply contract was very different in nature and thus not likely to be adopted by liquidators because the debtor had already had the full benefit of the services and thus to settle the debt would potentially breach the liquidator’s duties in terms of treating all creditors even handedly. The Court of Appeal did stress the view that a proper appreciation of the factual matrix behind the insolvency would ultimately determine whether the contract had become impossible to perform (and thus whether an anticipatory breach had been committed). However, the issue for the Court of Appeal was whether the bunker supplier’s case was legally unsustainable and thus capable of being disposed of (struck out) without a full trial. The full facts, therefore, including the question as to whether the bankruptcy at group level could or would affect the ability of the ship owner within the group to pay for its bunkers, would be referred back to the lower court for determination at a full trial.

What does this mean for ship owners and suppliers of goods and services?

The judgment will no doubt be welcomed by sellers of goods and suppliers of services that operate on deferred payment terms, particularly in today’s volatile and unstable markets, because it provides a basis for taking early steps to protect their position, especially in insolvency cases. That said, if the approach to be taken is to conduct a detailed analysis of the factual matrix behind an insolvency to determine whether that insolvency does or does not give rise to an anticipatory breach, then any arrests to enforce such a suspected breach will carry some degree of inherent risk, not least because the arresting party will almost certainly not be in possession of all of the facts.

Bunker suppliers in these circumstances may also need to consider whether the very recent English Supreme Court decision in The Res Cogitans [2016] UKSC 23 affects their particular situation. In brief, the Supreme Court has concluded that a bunker supply contract with a Retention of Title (ROT) clause and an express right for the ship to consume the bunkers during the credit period was not a contract to which the Sale of Goods Act 1979 applied and the bunkers remained the property of the supplier. Suffice to say, that a close examination of the terms of the ROT clause would be required before deciding on which avenue to proceed along in seeking a remedy.

Claire Morgan is an associate and Laura Hamilton is a senior associate at Norton Rose Fulbright. Ms Morgan can be contacted on +65 6309 5303 or by email: claire.morgan@nortonrosefulbright.com. Ms Hamilton can be contacted on +65 6309 5430 or by email: laura.hamilton@nortonrosefulbright.com.

Claire Morgan and Laura Hamilton

Norton Rose Fulbright