In Vitol S.A. v Beta Renowable Group S.A.  EWHC 1734 (Comm), the Commercial Court considered whether a seller was relieved of its obligations to deliver biofuels when the buyer did not nominate a vessel. As the seller had expressed that it could not deliver and the buyer wished to bring the contract to an end for renunicatory breach, the critical issue made the difference between the buyer having a remedy for the seller’s non-performance and not having a remedy at all.
The facts of the case serve as a reminder to innocent parties that they should act carefully to preserve their right to bring a contract to an end and claim damages in the face of a counterparty refusing to perform.
Vitol S.A. (“Vitol”), a major oil trading company based in Switzerland, entered into a contract with Beta Renowables Group S.A. (“Beta”), a manufacturer of bio fuel products, for the delivery of 4,500 metric tonnes of bio fuel at a price of EUR3,570,750. The contract provided a lifting period of between 16 and 30 June 2016, with Vitol being obliged to nominate a vessel by 27 June 2016 at the latest.
Beta experienced various troubles and notified Vitol that it was going to be unable to perform its obligations under the contract and deliver the biofuel. Through a series of emails and other communications, Beta requested that the contract for delivery of the biofuel be varied or brought to an end, and proposed an alternative arrangement in the form of a “tolling agreement”.
Ultimately, Beta did not deliver the biofuel. Vitol did not nominate a vessel and, on 7 July 2016, gave notice terminating the contract.
Vitol subsequently brought proceedings against Beta claiming loss of profits. It argued that Beta was in repudiatory and/or renunciatory breach of its contractual obligations by making it clear that it would not perform its contractual obligations, and that Vitol accepted that breach by either not nominating a vessel on 27 June, or alternatively through its notice of contractual termination on 7 July.
However, while accepting that it was in anticipatory breach, Beta argued that Vitol’s failure to nominate a vessel did not constitute acceptance of the breach and was a mere oversight. Beta also claimed that Vitol’s obligation to nominate a vessel was a condition precedent to the delivery occurring, without which Beta was unable to perform its contractual obligations and deliver the biofuel. Consequently, Beta argued that Vitol’s failure to nominate relieved Beta of its obligations under the contract.
The Commercial Court decided that Vitol’s failure to nominate a vessel was not a sufficiently clear and unequivocal act that could amount to its acceptance of Beta’s renunciatory/repudiatory breach. In reaching this decision, the Commercial Court considered the ongoing negotiations between the parties at the time, and the absence of an “express statement of termination”. Instead, Vitol terminated the contract by its notice dated 7 July 2016.
However, the Commercial Court also rejected Beta’s argument that the obligation on Vitol to nominate a vessel was an express condition precedent to the performance it its obligations. In doing so, the court rejected the authorities relied upon by Beta (Armitage v Insole (1850) 14 QB 728 (“Armitage”) and Sutherland v Allhusen (1866) 14 LT 666 (“Sutherland”)), both of which found that failure to nominate a vessel relieved the seller of its obligations to deliver. The Commercial Court distinguished those authorities on their facts. First, in Sutherland, although the seller’s stock had been exhausted, it had not repeatedly informed the buyer of its inability to perform the contract. Second, Armitage was distinguished because there was no lifting period in the contract and the seller’s duty to deliver only arose on nomination of a vessel by the buyer. Instead, the Commercial Court commented that:
“It is relevant to examine the purpose of the condition precedent contended for by Beta. It is to enable performance by the seller under the Contracts. When the parties know that such contractual performance is impossible, as was the case here, the obligation to nominate is simply stripped of its purpose and otiose. Without an assumed ability to perform, there is no rationale for the existence of a condition precedent. On the facts of this case, where to both parties' knowledge, the Contracts could not and would not be performed by Beta, the condition precedent contended for does not thus arise on a proper construction of the Contracts.”
Accordingly, in circumstances where Vitol was ready and willing to nominate, and Beta had indicated it could not deliver, Vitol had properly ‘terminated’ the contract and was entitled to damages.
In these difficult times for many oil and gas companies, it is not uncommon for a buyer of oil or other fuels to be faced with circumstances in which a seller indicates it is unable to perform its obligations to deliver under a contract. The buyer will then be required to consider whether it is able to claim contractual termination and/or to accept the sellers conduct as bringing the contract to an end as renunciatory/repudiatory breach and/or affirm the contract.
In the interim, while the buyer considers its options, it is apparent from the decision of the Commercial Court that it is possible that an intervening failure of a buyer to nominate a vessel, when contractually required to do so, might have the impact of relieving the seller of its obligations to deliver. If so, this might mean that the seller would not be in breach for a failure to deliver and prevent the buyer from terminating the contract and/or accepting of the sellers conduct as bringing the contract to an end as renunciatory/repudiatory breach. In these circumstances, the buyer would be left with no cargo and no damages for the buyer’s admitted inability to perform.
Whether any given circumstance does mean that a buyer’s obligation to nominate a vessel is a condition to the seller’s performance, creating the situation above, will turn on the terms of the contract in question and each factual circumstance.
The decision of the Commercial Court is doubtless controversial. However, it does emphasis the need for an ‘innocent party’ that is subject to a counterparty’s refusal to perform to carefully consider its own position and obligations speedily, reserving its rights in the interim, so as to ensure that any right is not lost.