This was a dispute about whether the negotiations for a voyage charter 'crossed the finish line' and in particular as to the effect of an outstanding 'subject' of those negotiations.

Factual background

It was common ground that between 8 and 13 January 2016, the claimant (Nautica), the registered owner of the vessel "Leonidas" and the defendant (Trafigura) were engaged in negotiations for the chartering of the vessel for the carriage of crude oil from the Caribbean to the Far East (the charterparty).

By 15.11 Houston Time (HT) on 8 January 2016, the parties had reached what was agreed to be a non-binding agreement in principle, which was stated to be 'on subjects'. The terms of that agreement were set out in an email (the preliminary recap) which provided among other things that:

i) The transaction was 'subject to Chtrs' S/S/RMGT approval latest 17:00 hours Houston time Tuesday 12'. It was common ground that 'S/S/R/MGT' stood for 'Stem /Suppliers/ Receivers/ Management', and that 'Stem' was an acronym for 'subject to enough material', which meant subject to the charterers confirming that they had sufficient cargo to load on the vessel. The result was that the conclusion of the charterparty was subject to:

a) The availability of sufficient cargo.

b) The suppliers' approval subject.

c) The approval of the receivers of the cargo.

d) The approval of Trafigura's management.

ii) The loading ports were to include Aruba and St Eustatius (generally referred to by the parties as Statia).

On 11 January 2016, Nautica asked for certain changes to be made to the position as recorded in the preliminary recap and Trafigura responded at 15:32 HT with their own comments. On 12 January 2016, Nautica confirmed its agreement to some of Trafigura's proposals. This was the day by which the preliminary recap provided that the subjects were to be lifted. Accordingly, Trafigura asked Nautica to move the deadline for lifting the subjects to 10:00 HT on 13 January, which was agreed.

It was common ground that on 13 January 2016 Trafigura offered to lift all of the subjects with the exception of the suppliers' approval subject, in return for a reduction of the demurrage rate to US$75,000 and an extension of the deadline for lifting that subject to 17:00 HT that day. Nautica's broker communicated that acceptance to Trafigura's broker. It was at that point that Nautica contended that the charterparty was concluded, albeit one which would cease to be binding if it was not possible for Trafigura to lift the suppliers' approval subject despite taking reasonable steps to do so.

At 15:53 HT, Nautica's broker emailed Nautica and Trafigura's broker to state 'owners have extended until 18:00 hrs NY today on suppliers approval of the vessel for Statia and Aruba'. In reply, Nautica sent an email to its broker at 15:56 HT stating:

'As discussed and agreed verbally, Owners hereby grant Charterers extension until 17:00hrs Houston 13/01/2016. As agreed all subjects lifted apart from vessel's clearance from [the terminals] at Statia and Aruba. Please confirm back the above in writing'.

At around the same time, Nautica's broker sent the following email to Nautica copied to Trafigura's broker:

'As per our telecon today at around 1313 NYT, Charterers lifted all subjects apart from suppliers' approval of the vessel for Aruba and Statia. As part of that you also agreed to reduce the demurrage rate to USD 75k'.

At 16:59 HT on 13 January 2016, Trafigura emailed their broker advising that at that time they were unable to lift all subjects on the vessel. Nautica's later email referred to the lifting of all subjects at 13:00 HRS New York on 13 January 2016 advising that the fixture had been concluded - subject only to suppliers approval of the vessel in Statia and/or Aruba.

Subsequently, on 14 January 2016 Nautica gave Trafigura until 11:00 HT to lift the suppliers' approval subject. When no response was received by that deadline, Nautica emailed accepting Trafigura's repudiatory breach of contract as bringing the charterparty to an end.

Nautica then entered into a substitute charterparty on 20 January 2016, which was less profitable than the charterparty. The difference in earnings of US$491,690.67 was claimed as damages in the current proceedings.

Legal analysis

There was little dispute as to the generally applicable legal principles: whether there was a binding contract between the parties and, if so, upon what terms depended upon what they had agreed. It depended not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that led objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law required as essential for the formation of legally binding relations.

The legal effect of phrases such as 'subject to contract' and 'subject to details' was to enable either party to avoid entering into contractual relations by not reaching agreement on any outstanding terms, as the case might be.

When the event on which the entry into contractual relations depended was a decision by one or both parties to undertake a legally binding commitment, there was no room for the argument that some form of preliminary agreement came into existence imposing an obligation on one or both of the parties to seek to complete the bargain. This was both because the purpose of the 'subject' was to signal that the parties had not yet reached the stage of any legal commitment and because of the traditional hostility of the common law to 'agreements to agree' given the difficulties of enforcing them.

In contrast, there were cases in which an agreement was said to be 'subject' to some event within the control of someone other than one of the parties, and in which it had been held that the 'subject' was not a 'pre-condition' which prevented a binding contract coming into existence, but instead had the effect that performance did not have to be rendered if the 'subject' was not satisfied for reasons other than a breach of contract by one of the parties (a performance condition). This was the position for example where a contract for international sale was made subject to obtaining an export licence or an import licence.

While each case would depend on its own individual facts and commercial context, the judge held that a 'subject' was more likely to be classified as a pre-condition rather than a performance condition if the fulfilment of the subject involved the exercise of a personal or commercial judgment by one of the putative contracting parties (e.g. as to whether that party was satisfied with the outcome of a survey or as to the terms on which it wished to contract with any third party).

Where a 'subject' was only resolved by one or both of the parties removing or lifting the subject, rather than occurring automatically on the occurrence of some external event such as the granting of a permission or licence, the 'subject' was likely to be a pre-condition rather than a performance condition.

'subject to Chtrs' S/S/RMGT approval latest 17:00 hours Houston time'

Turning to the specific phrase at issue in this case, Nautica rightly accepted that the reference to 'MGT Approval' created a pre-condition. Further, there was long-standing authority that 'subject to stem' was a pre-condition, rather than a performance condition.

In circumstances in which the first and last parts of what was a compendious phrase created pre-conditions and not performance conditions, it would be surprising if the two intermediate elements had a different status. That was all the more so when all were described as 'subjects', and the same tight deadline by which they had to be approved or lifted applied to all. The shortness of time for compliance was a factor which supported a pre-condition, rather than performance condition, analysis. Further, the first three subjects - stem, suppliers and receivers' approval - all related to matters which bore on the commercial desirability for the charterer of entering into the charterparty which the judge held were qualitatively different from matters such as the obtaining of import and export licences in sale of goods contracts.

Further, there appeared to be a surprising degree of uncertainty as to what the suppliers' approval subject meant. Nautica had originally pleaded that the phrase had a customary meaning, namely the approval of the terminal at which the cargo would be loaded. Trafigura contended that the expression meant approval of the seller from whom the charterer was acquiring the cargo. Neither expert called by the parties was able to point to any third party source shedding light on the question. Given the degree of uncertainty as to the meaning of the expression, the judge found that it was highly unlikely that the suppliers' approval subject was intended to create a contractual obligation of some kind, which would be the inevitable consequence of classifying it as a performance condition.

In any event, the judge preferred Trafigura's contention that the phrase encompassed all those approvals which the charterer commercially wished to obtain on the supply side and it could only be said to have been satisfied when the charterer lifted or waived the term. The judge saw no reason to read the suppliers' approval subject down so that it encompassed only one, rather than all, of the approvals which a charterer might wish to obtain in relation to the sourcing and loading of the cargo onto a particular vessel before committing itself to a charter. That conclusion as to the true scope of the suppliers' approval subject provided further strong support for the classification of this phrase as a pre-condition and not a performance condition.

Did the 13 January exchange lead to the conclusion of a contract, subject to a performance condition of the suppliers' approval subject?

The judge noted that parties who have been negotiating within a 'subject to contract' or similar framework could conclude a contract without expressly addressing that 'subject', where a decision to do so was objectively clear from their conduct. However, this was not something which would lightly be inferred. It had to be a rare case in which something short of the parties proceeding to perform the agreement which they had negotiated subject to an unsatisfied pre-condition would be sufficient to constitute an implicit agreement to waive or remove that pre-condition.

The judge held that the 13 January exchange did not effect the radical change in the nature of the parties' dealings which Nautica's case presupposed:

i) There was far too much left unsaid. There was no discussion of the nature or content of the suppliers' approval subject and nothing involving a significant implicit agreement to vary the status and/or content of those matters.

ii) There was no attempt for nearly three hours after the 13 January exchange to seek to capture the terms of any agreement in an email. Nor did the communications sent after the event (up to the point when the dispute crystallised) explicitly refer to any such change. On the contrary, the fixture was still described as 'on subs'.

iii) Even with the benefit of the extension of time to 17:00 HT, there remained a period of under five hours before the deadline for lifting the suppliers' approval subject. That tight deadline was more consistent with the parties seeing if, with the revised terms, they could get the deal 'over the line' within that limited window, rather than limiting the time available to Trafigura to satisfy a performance condition in a contract which, on Nautica's case, had already been concluded.

iv) Even on Nautica's account, and even if the suppliers approval subject bore the meaning for which Nautica contended, at the end of the 13 January exchange there remained a 'subject' which was for Trafigura to 'lift' before a fixture would be concluded. Consistent with the general status of such 'subjects' in charterparty negotiations, this was a pre-condition, as much after the 13 January exchange as it had been when included in the preliminary recap.

The judge held that no contract had been concluded and therefore Nautica was not entitled to damages.

The judge noted obiter that if he had concluded that the suppliers' approval subject was a performance condition, then he would have found that Trafigura was under an implied obligation to take reasonable steps to obtain that approval.

Comment

This case highlights the importance of seeing matters both from a legal and commercial perspective. It also contains an exhaustive review of the effect of "subjects" on contract negotiations.

As the judge noted the strongest point in Nautica's favour was that if the 13 January exchange did not lead to a legal commitment of some kind, it might well be asked what Nautica had got in return for agreeing to reduce the demurrage rate to $75,000 a day, and what the significance of lifting three pre-conditions to a contract was if Trafigura retained an absolute right not to proceed with the charterparty by reason of the fourth. That point clearly had force, but it involved analysing what was essentially a commercial negotiation from a purely legal perspective. For so long as no binding contract had been concluded, Trafigura had no more 'bagged' a reduced demurrage rate than Nautica had secured the fixture. Nautica was not obliged to keep its offer open until 17:00 HT on 13 January. It could be said that the 'subject to S/S/R/MGT Approval' rubric in legal terms involved no more than one subject: the charterer was not bound until it communicated a decision to be bound. However, from a commercial perspective, it signalled some of the issues which the charterer would need to resolve before being in a position to 'clean fix'. Trafigura's offer to remove most of those 'subjects' was a negotiating signal that the parties were moving closer to a deal but, in contractual terms at least, no more than that.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.