When do negotiations become binding?

When do negotiations become binding?

Both sides of a charterparty need to be clear on what ‘subject to subjects’ actually means

By Catherine Earnshaw & Iain Preston, Ince

The English courts have generally held that the word “subject” or “sub”, when used in charterparty negotiations, indicates a pre-condition, which—until “lifted”—precludes a binding contract. In Nautica Marine Ltd v. Trafigura Trading LLC (Leonidas) [2020] EWHC 1986 (Comm), in a telephone call when negotiating the charter of a vessel, the charterer lifted all outstanding subs except one. Did a contract arise? The Court said not: it found no reason, on the facts, to depart from the orthodox treatment of a “subject” or “sub”.

The preliminary recap

On January 8, 2016, Trafigura, as charterers, entered into negotiations with Nautica, as owner of the Leonidas, to carry crude oil from the Caribbean to the Far East. The brokers drew up a written recap of the preliminary negotiations, which stated, “WITH SUBJECTS TO CHTRS’ S/S/R/MGT APPROVAL”. Unpacked, that indicated four subjects: (1) sufficient cargo; (2) the “Suppliers’ Approval Subject” (the meaning of which was the central issue at trial); (3) receivers’ approval; and (4) Trafigura management’s approval.

Further subs included agreements on an oil major’s warranty, a prospective intermediate ports clause, and additional clauses to be annexed to the standard BPVOY form. The parties agreed a deadline of January 12, 2016 for lifting subs.

By January 12, they had finalised the wording of the oil majors warranty. However, before Trafigura could lift subs, they still had to: (1) agree terms of purchase for one of their intended cargoes; (2) receive approval of the suppliers of that cargo that the vessel was suitable; (3) receive confirmation from local agents that the vessel was capable of loading at St Eustasius and Aruba; and (4) receive approval for loading from the operators of the terminals at those ports. It was disputed at trial which one or combination of those four factors comprised the “Suppliers’ Approval Subject”.

In light of the outstanding issues, Nautica agreed an extension to the deadline for lifting subs until 1000 Hawaii-Aleutian time on January 13.

January 13 Call

Trafigura missed the deadline. Nautica extended it again. Then, shortly after noon on January 13, a telephone call took place between the parties on which the whole case hung. It was common ground that on the call, in return for a reduction of the demurrage rate, Trafigura lifted all subjects except for the Suppliers’ Approval Subject, the deadline for lifting of which was extended to 1700 Houston time (HT) on the same day.

At that stage, therefore, the deal looked likely be concluded within a matter of hours. However, that was not to be the case as, at 1659 HT on January 13, 2016, Trafigura emailed their broker advising that they were unable to lift all subjects of the vessel.

Nautica subsequently held Trafigura in repudiatory breach of contract, entered into a less lucrative substitute fixture and claimed damages for the difference in the earnings they would have received under the Trafigura fixture.

The Commercial Court contrasted two types of contractual “subjects”, which it termed pre-conditions and performance conditions.

A pre-condition is usually an event or action in the control of a contractual party. If the parties agree a pre-condition subject, no contract arises until it is satisfied. Examples are “subject to contract”—i.e. the agreement will only be binding when both parties have signed a written document—and “subject to details”— i.e. the agreement will only be binding when the parties have agreed all terms.

In contrast, a performance condition is usually an event or action in the control of a third party. If the parties agree a performance condition subject, they might have agreed a binding contract. Indeed, the performance condition is itself usually a term of the contract. When the subject is satisfied, the relevant contractual partner becomes bound to perform. Until then, that party is only bound to perform if its breach has caused the subject to remain unfulfilled. An example of a performance condition is that found in a sale contract subject to obtaining an import or export licence.

Having made that distinction, the Court rather emphatically held that the words “subjects” or “subs” in charterparty negotiations signal outstanding pre-conditions. In light of that, Nautica’s characterisation of the Suppliers’ Approval Subject as a performance condition was perhaps always destined to fail.

Different interpretations

Nautica argued for a narrower meaning of “Suppliers’ Approval”: that it meant only the approval of the terminals at the supply ports. Trafigura argued that it meant not just the terminals’ approval but “all those approvals which the charterer commercially wishes to obtain on the supply side”—particularly the approval of the relevant supplier itself.

The Court favoured Trafigura’s interpretation. It found that the Suppliers’ Approval Subject was a pre-condition for the following reasons:

• the phrase in which it was embedded: “S/S/R/MGT APPROVAL” started and ended with what settled law holds are pre-conditions: sufficient cargo and management approval. It would, therefore, be incongruous if the middle terms were performance conditions;

• the same pressing deadline applied to each of those four subs, suggesting that they all had the same status;

• the first three subs all related to the commercial desirability of the charterparty from the charterer’s perspective. They, therefore, had a different quality to performance conditions such as obtaining a licence, over which the contractual party has no control; and

• the lack of clarity as to its meaning suggested that it was not intended to create a binding obligation.

As Trafigura never lifted the subject, the pre-condition was not met, and no binding contract arose. Nautica’s damages claim, therefore, failed.

The Court made a few additional interesting observations. First, had the Suppliers’ Approval Subject been a performance condition, Trafigura would have been obliged to take reasonable steps to seek the approval of suppliers. Secondly, had Trafigura failed to take such reasonable steps, the Court would have awarded damages on a “loss of chance” basis.

Fixing a voyage charterparty is a game of “round the table” ping pong—with owners, managers, charterers, brokers, suppliers, terminal operators, local agents, and receivers all playing their part to keep the rally going. This case usefully highlights the importance of parties ensuring that they are clear in contractual negotiations as to any subjects or conditions referred to and what must be done to satisfy such conditions, by whom and by when.

* Ince acted for the successful charterer in this case. Catherine Earnshaw is a partner and Iain Preston is a claims executive at Ince. They can be contacted on catherineearnshaw@incegd.com and iainpreston@incegd.com respectively.