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Thursday, 30 March 17
WHERE AN AGREEMENT FAILS TO DELIVER - WATSON FARLEY & WILLIAMS
 KNOWLEDGE TO ELEVATE
Watson Farley & Williams acted for MRI Trading AG in a leading case on ‘agreements to agree’ that was finally decided by the Court of Appeal in 20131 . That decision has recently been considered in the High Court by Mr Justice Walker in Teekay Tankers Ltd v STX Offshore & Shipbuilding Co. Ltd, 2 a shipbuilding case of particular relevance to parties that enter into long-term agreements or options leaving delivery terms to be agreed.
Agreeing to agree
Under English law, you cannot ‘agree to agree’. Where parties agree that they will agree to enter into a contract and no such contract is concluded, that initial ‘agreement’ will be unenforceable or void on the basis of uncertainty. An English court will not step in to complete the parties’ bargain where one or more essential terms of that bargain are uncertain. However, parties may not want to fix every contractual term at the outset of their relationship. For example, in long-term supply contracts, they may wish to finalise certain terms only when future market circumstances are known.
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“AN ENGLISH COURT WILL NOT STEP IN TO COMPLETE THE PARTIES’ BARGAIN WHERE ONE OR MORE ESSENTIAL TERMS OF THAT BARGAIN ARE UNCERTAIN.” |
A common way for drafters of contracts to achieve this is by reference to an objective standard, such as a published price index, against which a price adjustment can be made. However, even where the chosen mechanism fails or the contract does not provide for such a mechanism, there are circumstances in which English law will nevertheless uphold the parties’ bargain. The English courts have made it clear that each case is to be decided on its own facts and terms, but have identified factors that might indicate that the parties intended their bargain to be enforceable, in which case the courts will strive to give effect to that intention and seek, where possible, to preserve the parties’ bargain.
The facts of Teekay
In Teekay v STX, subsidiaries of Teekay had entered into four shipbuilding contracts with STX (“the SBCs”) and Teekay had entered into an option contract with STX by which Teekay was granted three options to order three additional sets of up to four vessels from STX (“the Option Agreement”). The Option Agreement provided that, on Teekay exercising each option, (subsidiaries of) Teekay would enter into shipbuilding contracts with STX on materially identical terms to the SBCs, but the “Delivery Dates for each [of the] Optional Vessels shall be mutually agreed upon at the time of [Teekay’s] declaration of the relevant option”. Importantly, the clause also provided that STX was to use its “best efforts” to “have a delivery” for each of the first set of optional vessels within 2016 and for each of the second and third sets of optional vessels within 2017.
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“STX DEFENDED THE CLAIM ON THE GROUNDS THAT IT HAD NO LIABILITY TO TEEKAY BECAUSE THE PROVISION IN THE OPTION AGREEMENT REGARDING DELIVERY DATES AMOUNTED TO AN ‘AGREEMENT TO AGREE’ THAT WAS VOID FOR UNCERTAINTY.” |
The specific Delivery Date for each vessel was integral to the operation of the anticipated shipbuilding contracts that would then be concluded, including the delay, cancellation and liquidated damages provisions. After Teekay exercised the first of the three options, STX’s statements and conduct demonstrated that it would not perform the Option Agreement. Teekay accepted those statements and conduct as a repudiation at common law, as a result of which the Option Agreement came to an end with no agreement having been reached as to the Delivery Dates.
Teekay claimed damages of over US$100m and STX defended the claim on the grounds that it had no liability to Teekay because the provision in the Option Agreement regarding Delivery Dates amounted to an ‘agreement to agree’ that was void for uncertainty.
For each set of vessels, Teekay asked the High Court to imply either of the following terms into the Option Agreement to resolve this apparent uncertainty:
a) the Delivery Date should be a date that STX offered within 2016 (for the first set of optional vessels) or 2017 (for the second and third sets) using its best efforts to do so, or, if STX was not able to offer such dates, the earliest date thereafter which it could offer using its best efforts (“the Offer Date Implied Term”); or
b) the Delivery Date was to be an objectively reasonable date (having regard to STX’s best efforts), to be determined by the Court if not agreed by the parties (“the Reasonableness Implied Term”).
The decision
Mr Justice Walker considered the authorities in detail, including MRI, and found that the starting point should be that the parties had intended the Option Agreement to be legally binding and that the court should strive to uphold the parties’ bargain.
Relevant factors taken into account by Mr Justice Walker in determining this starting point were that the Option Agreement formed part of a package of contracts that had been partially performed and the parties had acted as if the Option Agreement were binding.
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“THE STARTING POINT SHOULD BE THAT THE PARTIES HAD INTENDED THE OPTION AGREEMENT TO BE LEGALLY BINDING AND THAT THE COURT SHOULD STRIVE TO UPHOLD THE PARTIES’ BARGAIN.” |
From that starting point, Mr Justice Walker sought to determine whether the implied terms contended for by Teekay could properly be regarded as being the objective intention of the parties at the time they entered into the Option Agreement. Mr Justice Walker found that they were not and therefore they could not be implied, as a result of which the Option Agreement was void for uncertainty.
In relation to each implied term, Mr Justice Walker’s reasoning can be summarised as follows:
a) the Offer Date Implied Term would mean that the Delivery Dates would be at STX’s unilateral declaration, which would be contrary to one of the English law tests for implying a contractual term. It was not said to be objectively obvious, at the time that Teekay and STX concluded the Option Agreement, that if a Delivery Date was not agreed STX should unilaterally be able to declare a Delivery Date; and
b) as to the Reasonableness Implied Term, two factors were of particular importance:
(i) the Delivery Date was a critical term in the SBC that affected other provisions of the SBC; and
(ii) the Delivery Date was subject to STX’s “best efforts” obligation. As to the first factor, Mr Justice Walker noted that both parties would want to select a Delivery Date that suited their own commercial interests (which they were entitled to take into consideration) and their respective interests may be in conflict.
As to the second, the language of “best efforts” implicitly recognised that the parties would have contrasting interests in selecting a Delivery Date. Those circumstances precluded an identification of a date based on what would be reasonable; there could hardly be an objectively reasonable outcome if the parties had completely divergent interests. The reference to “best efforts” was, in Mr Justice Walker’s judgment, part of a process of seeking to agree an essential term in the SBC and very different from an enforceable obligation to use best efforts to achieve a result.
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“TEEKAY DEMONSTRATES THAT, WHERE THERE IS NO CLEAR CONTRACTUAL PATH BY WHICH THE COURT CAN PICK ITS WAY THROUGH THE PARTIES COMPETING COMMERCIAL INTERESTS, IT MAY NOT BE ABLE TO UPHOLD A BARGAIN DESPITE STRIVING TO DO SO.” |
In this sense, the Teekay and STX Option Agreement can be seen as a “one off” contract in which no objective criteria had been specified to determine a Delivery Date. Selecting a Delivery Date would involve both Teekay and STX taking into account a variety of commercial and practical considerations, which might affect their ability and willingness to agree. In those circumstances, “reasonableness” was not a sufficient criterion that would enable the Court to reconcile the parties’ potentially conflicting wishes.
Conclusion
It may come as a surprise to some commercial parties and seem somewhat unjust that otherwise carefully negotiated and detailed agreements might be held to be unenforceable or void because one or more (albeit essential) terms are uncertain. The courts have recognised this risk and have set out a clear and helpful framework against which they might uphold parties’ bargains. However, the courts have stressed that each ‘agreement to agree’ case is to be decided on its own unique facts and terms.
In MRI, the High Court and the Court of Appeal upheld the bargain by implying a term that a price adjustment and delivery schedule should be “reasonable” where the agreement stated that those matters “shall be agreed” but the parties had not agreed them. A key factor in that case was that the agreement had been entered into as part of a settlement agreement compromising a previous dispute and the remainder of that settlement agreement had been fully performed. However, this was in principle similar to Teekay, which involved a suite of contracts.
The court’s attempt to distinguish MRI on the basis that deliveries under commodities contracts were matters of routine was not borne out by MRI, where the London Metal Exchange Tribunal had found as a matter of fact (acknowledged in the appeal proceedings) that shipping schedules were not to be dismissed as matters of detail and involved important considerations concerning the parties’ commercial needs.
Teekay demonstrates that, absent any clear contractual path by which the court can pick its way through the parties’ competing commercial interests, it may not be able to uphold a bargain despite striving to do so. With this in mind, two drafting points of general importance arise from Mr Justice Walker’s judgment.
1. Parties entering into contracts should ensure that all their contractual terms are certain at its outset or, if that is not possible, include a contractual mechanism against which a term can be determined in the absence of agreement.
2. Parties should consider carefully the mechanism that will be used. The inclusion of a non-specific “best efforts” obligation in the Option Agreement may have been intended to compel STX to take appropriate action, but in fact worked against the implication of a term by the court. Teekay would have been in a better position if the Option Agreement had provided for a specific objective mechanism to set the Delivery Date, but may also have been in a better position if they had said nothing about “best efforts” at all.
At the time of writing it does not appear that this decision has been appealed. Perhaps the decision not to do so was for pragmatic reasons owing to the bankruptcy of STX and concerns over the eventual value of the claim even if the decision were to be subsequently overturned.
By: ANDREW HUTCHEON
Partner, Watson Farley & Williams
London
BEN LAMBLE
Senior Associate, Watson Farley & Williams
London
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Friday, 05 January 24
BANGLADESH’S 2023 COAL-FIRED POWER OUTPUT TRIPLED, EASING SHORTAGES - REUTERS
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KNOWLEDGE TO ELEVATE
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Tuesday, 02 January 24
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Showing 61 to 65 news of total 6871 |
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- Vijayanagar Sugar Pvt Ltd - India
- London Commodity Brokers - England
- Gujarat Mineral Development Corp Ltd - India
- TNB Fuel Sdn Bhd - Malaysia
- Straits Asia Resources Limited - Singapore
- Sojitz Corporation - Japan
- Commonwealth Bank - Australia
- Uttam Galva Steels Limited - India
- Timah Investasi Mineral - Indoneisa
- Marubeni Corporation - India
- Kalimantan Lumbung Energi - Indonesia
- Baramulti Group, Indonesia
- Billiton Holdings Pty Ltd - Australia
- Iligan Light & Power Inc, Philippines
- Siam City Cement - Thailand
- Malabar Cements Ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Eastern Coal Council - USA
- Anglo American - United Kingdom
- Pipit Mutiara Jaya. PT, Indonesia
- Carbofer General Trading SA - India
- Kartika Selabumi Mining - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Indian Oil Corporation Limited
- Altura Mining Limited, Indonesia
- Economic Council, Georgia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Romanian Commodities Exchange
- Salva Resources Pvt Ltd - India
- Bukit Baiduri Energy - Indonesia
- McConnell Dowell - Australia
- Interocean Group of Companies - India
- VISA Power Limited - India
- Globalindo Alam Lestari - Indonesia
- Thai Mozambique Logistica
- Mjunction Services Limited - India
- Coal and Oil Company - UAE
- Central Electricity Authority - India
- European Bulk Services B.V. - Netherlands
- Savvy Resources Ltd - HongKong
- Kobexindo Tractors - Indoneisa
- Jaiprakash Power Ventures ltd
- White Energy Company Limited
- Ind-Barath Power Infra Limited - India
- Mercator Lines Limited - India
- Formosa Plastics Group - Taiwan
- Australian Coal Association
- MS Steel International - UAE
- Wood Mackenzie - Singapore
- TeaM Sual Corporation - Philippines
- Trasteel International SA, Italy
- Planning Commission, India
- Central Java Power - Indonesia
- Larsen & Toubro Limited - India
- Bukit Makmur.PT - Indonesia
- South Luzon Thermal Energy Corporation
- Toyota Tsusho Corporation, Japan
- Renaissance Capital - South Africa
- Africa Commodities Group - South Africa
- Sindya Power Generating Company Private Ltd
- Binh Thuan Hamico - Vietnam
- Holcim Trading Pte Ltd - Singapore
- Bahari Cakrawala Sebuku - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Grasim Industreis Ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Asmin Koalindo Tuhup - Indonesia
- Banpu Public Company Limited - Thailand
- Intertek Mineral Services - Indonesia
- SMG Consultants - Indonesia
- Manunggal Multi Energi - Indonesia
- Global Business Power Corporation, Philippines
- Semirara Mining and Power Corporation, Philippines
- Eastern Energy - Thailand
- Borneo Indobara - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Orica Mining Services - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Xindia Steels Limited - India
- GN Power Mariveles Coal Plant, Philippines
- CNBM International Corporation - China
- Independent Power Producers Association of India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Mintek Dendrill Indonesia
- Cement Manufacturers Association - India
- PNOC Exploration Corporation - Philippines
- Ceylon Electricity Board - Sri Lanka
- SN Aboitiz Power Inc, Philippines
- PowerSource Philippines DevCo
- India Bulls Power Limited - India
- Ambuja Cements Ltd - India
- Bhatia International Limited - India
- Kaltim Prima Coal - Indonesia
- PTC India Limited - India
- Alfred C Toepfer International GmbH - Germany
- Bulk Trading Sa - Switzerland
- Rio Tinto Coal - Australia
- Dalmia Cement Bharat India
- Orica Australia Pty. Ltd.
- AsiaOL BioFuels Corp., Philippines
- Ministry of Finance - Indonesia
- Posco Energy - South Korea
- Parliament of New Zealand
- ICICI Bank Limited - India
- Cigading International Bulk Terminal - Indonesia
- San Jose City I Power Corp, Philippines
- International Coal Ventures Pvt Ltd - India
- Madhucon Powers Ltd - India
- Semirara Mining Corp, Philippines
- Rashtriya Ispat Nigam Limited - India
- Aboitiz Power Corporation - Philippines
- Tamil Nadu electricity Board
- Indo Tambangraya Megah - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Jindal Steel & Power Ltd - India
- Attock Cement Pakistan Limited
- Chettinad Cement Corporation Ltd - India
- The Treasury - Australian Government
- Coalindo Energy - Indonesia
- Indonesian Coal Mining Association
- Karaikal Port Pvt Ltd - India
- OPG Power Generation Pvt Ltd - India
- Wilmar Investment Holdings
- Antam Resourcindo - Indonesia
- Port Waratah Coal Services - Australia
- Latin American Coal - Colombia
- Indika Energy - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Energy Link Ltd, New Zealand
- Aditya Birla Group - India
- New Zealand Coal & Carbon
- Sarangani Energy Corporation, Philippines
- Therma Luzon, Inc, Philippines
- Minerals Council of Australia
- Simpson Spence & Young - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Price Waterhouse Coopers - Russia
- Bhushan Steel Limited - India
- Meenaskhi Energy Private Limited - India
- Makarim & Taira - Indonesia
- Mercuria Energy - Indonesia
- Tata Chemicals Ltd - India
- GVK Power & Infra Limited - India
- Videocon Industries ltd - India
- SMC Global Power, Philippines
- Indogreen Group - Indonesia
- Merrill Lynch Commodities Europe
- Agrawal Coal Company - India
- Kideco Jaya Agung - Indonesia
- Coastal Gujarat Power Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Indian Energy Exchange, India
- Kepco SPC Power Corporation, Philippines
- Leighton Contractors Pty Ltd - Australia
- Thiess Contractors Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Ministry of Mines - Canada
- Vedanta Resources Plc - India
- Sree Jayajothi Cements Limited - India
- Meralco Power Generation, Philippines
- Deloitte Consulting - India
- Heidelberg Cement - Germany
- Metalloyd Limited - United Kingdom
- Star Paper Mills Limited - India
- Maheswari Brothers Coal Limited - India
- Samtan Co., Ltd - South Korea
- Karbindo Abesyapradhi - Indoneisa
- GMR Energy Limited - India
- Global Coal Blending Company Limited - Australia
- Barasentosa Lestari - Indonesia
- Australian Commodity Traders Exchange
- Electricity Generating Authority of Thailand
- ASAPP Information Group - India
- Chamber of Mines of South Africa
- Ministry of Transport, Egypt
- Bhoruka Overseas - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Lanco Infratech Ltd - India
- Siam City Cement PLC, Thailand
- Medco Energi Mining Internasional
- GAC Shipping (India) Pvt Ltd
- Directorate General of MIneral and Coal - Indonesia
- Oldendorff Carriers - Singapore
- Energy Development Corp, Philippines
- Vizag Seaport Private Limited - India
- Edison Trading Spa - Italy
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Directorate Of Revenue Intelligence - India
- Electricity Authority, New Zealand
- Pendopo Energi Batubara - Indonesia
- Riau Bara Harum - Indonesia
- Petron Corporation, Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Essar Steel Hazira Ltd - India
- The State Trading Corporation of India Ltd
- IHS Mccloskey Coal Group - USA
- Sakthi Sugars Limited - India
- Kumho Petrochemical, South Korea
- IEA Clean Coal Centre - UK
- Bharathi Cement Corporation - India
- The University of Queensland
- Parry Sugars Refinery, India
- LBH Netherlands Bv - Netherlands
- Global Green Power PLC Corporation, Philippines
- CIMB Investment Bank - Malaysia
- Georgia Ports Authority, United States
- Gujarat Sidhee Cement - India
- Singapore Mercantile Exchange
- Power Finance Corporation Ltd., India
- Goldman Sachs - Singapore
- Jorong Barutama Greston.PT - Indonesia
- Bayan Resources Tbk. - Indonesia
- Sical Logistics Limited - India
- Standard Chartered Bank - UAE
- Bangladesh Power Developement Board
- Neyveli Lignite Corporation Ltd, - India
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