Nautica Marine v Trafigura Trading - the Leonidas

DMC/SandT/21/04

England

Nautica Marine Ltd v Trafigura Trading LLC (The “Leonidas”)

English Commercial Court: Foxton J: [2020] EWHC 1986 (Comm): 28 July 2020

Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2020/1986.html

Luke Pierce (instructed by Pennington Manches Cooper LLP) for Nautica (Owners)

Daniel Bovensiepen (instructed by Ince Gordon Dadds LLP) for Trafigura (Charterers)

VOYAGE CHARTER: WHETHER VOYAGE CHARTER CONCLUDED: WHETHER “SUBJECT” OF “SUPPLIERS’ APPROVAL” OF THE VESSEL A PRE-CONDITION OR A PERFORMANCE CONDITION OF THE CONTRACT: WHETHER CHARTERERS UNDER IMPLIED OBLIGATION TO TAKE REASONABLE STEPS TO OBTAIN “SUPPLIERS’ APPROVAL” WITHIN “SUBJECT” DEADLINE

Summary

In dismissing Owners’ claim for a putative loss of profit in having to enter a less profitable alternative fixture, the High Court held that a binding voyage charter had not been concluded on the basis that the “subject” (of “suppliers’ approval” of the vessel) was a pre-condition of the contract (rather than a performance condition under it), because the “lifting” of the “subject” (being the point at which the contract would become binding) was dependent on the exercise of commercial judgment and options by Charterers as to what cargo would be loaded, where loading would take place and who would supply the cargo, for which a wide range of commercial considerations would be in play.

Accordingly, Charterers were not under an implied obligation to take reasonable steps to “lift” the “subject” prior to the expiry of the deadline (as would have been the case for a performance condition), and so were not liable to pay Owners damages for the putative loss of profit.

Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor of England & Wales, LMAA Supporting Member and International Contributor to DMC’s Case Notes

Background

Nautica (“Owners”) negotiated a prospective voyage charter of the tanker “Leonidas” to Trafigura (“Charterers”) for a laden voyage carrying oil cargoes from and to various places, which was subject to obtaining, amongst other things, suppliers’ approval of the vessel within a set deadline of about four days (the other “things” comprising stem, receivers’ and management’s approval).

In the event, the deadline came and went without suppliers’ approval being obtained by Charterers, who thereafter walked away from the prospective charter.

Owners sought to claim damages, for the difference between the profit they would have made on the prospective charter and the (lesser) profit they in fact made on the fixture entered into in purported mitigation of Charterers’ alleged breach of the prospective charter.

Owners’ claim was premised on there being a legally binding contract under which Charterers were under a performance obligation to take reasonable steps to satisfy the “subject” by obtaining “suppliers’ approval” of the vessel within the deadline, which – the Owners argued - Charterers had failed to do.

Judgment

The judge first summarised the material facts concerning the negotiations that led to the prospective fixture (above) and then considered the legal principles concerning whether a legally binding contract has been concluded, as to which the judge noted that:

(A) The legal effect of the phrases "subject to contract" and "subject to details" is to enable either party to avoid entering into contractual relations by refusing to sign a written contract or reach agreement on any outstanding terms, as the case may be.

(B) When the event, on which the entry into contractual relations depends, is a decision by one or both parties to undertake a legally binding commitment, there is no room for the argument that some form of preliminary agreement comes into existence imposing an obligation on one or both of the parties to seek to complete the bargain.

(C) By contrast, there are cases in which an agreement is said to be "subject" to some event within the control of someone other than one of the parties, and in which it has been held that the "subject" is not a "pre-condition" which prevents a binding contract coming into existence, but instead had the effect that performance does not have to be rendered if the "subject" is not satisfied for reasons other than a breach of contract by one of the parties (“a performance condition”).

(D) An important factor in determining whether a "subject" is a pre-condition or a performance condition is whether the satisfaction of the "subject" depends upon the decision of a contracting party, or on that of a third party. However, not all "subjects" fit easily into one or other of these categories.

(E) While each case will depend on its own individual facts and commercial context, it is clear that a "subject" is more likely to be classified as a pre-condition rather than a performance condition if the fulfilment of the subject involves the exercise of a personal or commercial judgment by one of the putative contracting parties (for example, as to whether that party is satisfied with the outcome of a survey or as to the terms on which it wishes to contract with any third party).

(F) There is a particular feature of negotiations for the conclusion of contracts for the employment of ships which should be noted. When the main terms for a charterparty have been agreed but the parties have yet to enter into contractual relations, this is generally referred to by shipowners, charterers and chartering brokers as an agreement on "subjects" or "subs", an expression which signals that there are pre-conditions to contract which remain outstanding. The conclusion of a binding contract in respect of such an agreement is seen as dependent on the agreement of the relevant party or parties to "lift" (i.e. remove) the subjects.

(G) Where a "subject" is 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" is likely to be a pre-condition rather than a performance condition.

In light of the principles, the judge turned to consider the “subject to suppliers’ approval” in contention in this case, which was part of a list of “subjects” in the fixture which consisted of stem, suppliers, receivers and management approval, respectively, as to which the judge noted that:

(1) Owners had to accept, based on authority, that “subject to management approval” created a pre-condition, as did “subject to stem”. In circumstances in which the first and last parts of what is 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 are described as "subjects", and the same tight deadline by which they had to be approved or lifted applied to all.

(2) Further, the first three subjects – stem, suppliers and receivers’ approval – all relate to matters which bear on the commercial desirability for the charterer of entering into the charterparty: can the charterer procure a cargo for carriage on this vessel, which can be loaded on and discharged from the vessel, and is the vessel acceptable to the suppliers and receivers? "Subjects" which relate to matters affecting the commercial desirability for the charterer of the decision to charter the ship are qualitatively different from matters such as the obtaining of import and export licences in sale of goods contracts, which are performance conditions instead.

(3) There were other reasons to accept that the suppliers' approval subject, in its ordinary usage, was a pre-condition and not a performance condition. There appeared to be a surprising degree of uncertainty as to what the suppliers' approval subject meant. The better view appeared to be 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. Given the degree of uncertainty as to the meaning of the expression, it seemed 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.

(4) The conclusion reached as to the true scope of the suppliers' approval subject provided further strong support for the classification of the phrase as a pre-condition and not a performance condition. It was for the charterer to determine who its contractual supplier would be. It might be in discussions with more than one potential supplier at the same time or in quick succession, or have a choice between loading a cargo it already owned or buying cargo in from a third party. In those decisions, a wide range of commercial considerations would be in play. It would be wholly unreal against that background to suggest that the charterer was under an obligation to the owner to obtain the suppliers' approval from "whoever the defendant intended to be the suppliers" or "the approval of the supplier who they said they were waiting for the approval of" when the subject was imposed. This would constrain the charterers' choice of supplier, hinder its ability to "change horses" during a negotiation and commit it to obtaining the approval of a particular supplier even after negotiations with that supplier had broken down and that supplier had no reason to engage with requests that it approve a vessel to lift a cargo which it was not going to supply. In view of the above, having noted that had he concluded that the suppliers' approval subject was a performance condition, he would then have accepted that Charterers were under an implied obligation to take reasonable steps to obtain that approval (for which there is amply supporting authority), the judge dismissed Owners’ claim accordingly.

Comment

This judgment is a reminder that, in the ship-chartering context, the “lifting” of “subjects” is ordinarily considered to be a pre-condition of a prospective fixture becoming legally binding on the parties.

Accordingly, if parties wish a “subject” to be a performance condition, which would then oblige the relevant party to take reasonable steps to satisfy the “subject” within a set deadline, they must themselves agree expressly to that effect in the prospective contract.