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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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Thursday, 30 March 17
PANAMAX : ACTIVITY IN THE PANAMAX MARKET HAS INCREASED SUBSTANTIALLY IN BOTH HEMISPHERES - FEARNLEYS
Supramax
This week we were looking at prolonged activity from ECSA, mostly with grain cargoes to Far East and SE Asia, where Ultras to SE Asia fi ...
Thursday, 30 March 17
THE ROLE OF COAL IN THE ENERGY SUPPLY OF THE EU-28: HANS-WILHELM SCHIFFER
The European Union (EU-28) is one of the largest economies in the world, with a gross domestic product (GDP) of €14,635 billion in 2015. It ha ...
Wednesday, 29 March 17
MARKET INSIGHT - NASOS SOULAKIS
Shipowners will always look for market signals in order to gauge market perception and decide upon which strategy to follow next. And while owners ...
Monday, 27 March 17
THE FREIGHT MARKET CONTINUED TO FIRM WEEK OVER WEEK
COALspot.com: The Freight market was continuing to firming up.
The Baltic Exchange, tracking rates for ships carrying dry bulk commodities ros ...
Friday, 24 March 17
ADARO INDONESIA'S COAL SALES VOLUME INCREASED SLIGHTLY TO 54.1 MILLION TONES IN 2016
COALspot.com: PT. Adaro Indonesia, Indonesia’s second largest coal miner’s sales volume increased slightly to 54.1 million tones (Mt) i ...
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Showing 2086 to 2090 news of total 6871 |
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- Bharathi Cement Corporation - India
- Mercuria Energy - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Electricity Authority, New Zealand
- Goldman Sachs - Singapore
- MS Steel International - UAE
- Cigading International Bulk Terminal - Indonesia
- SN Aboitiz Power Inc, Philippines
- Kohat Cement Company Ltd. - Pakistan
- Anglo American - United Kingdom
- Planning Commission, India
- Indian Energy Exchange, India
- Semirara Mining Corp, Philippines
- Bayan Resources Tbk. - Indonesia
- International Coal Ventures Pvt Ltd - India
- Ministry of Mines - Canada
- Intertek Mineral Services - Indonesia
- Merrill Lynch Commodities Europe
- PTC India Limited - India
- AsiaOL BioFuels Corp., Philippines
- Mintek Dendrill Indonesia
- Bukit Baiduri Energy - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Jindal Steel & Power Ltd - India
- Salva Resources Pvt Ltd - India
- Videocon Industries ltd - India
- Makarim & Taira - Indonesia
- Banpu Public Company Limited - Thailand
- GVK Power & Infra Limited - India
- Parry Sugars Refinery, India
- Indonesian Coal Mining Association
- Alfred C Toepfer International GmbH - Germany
- Ministry of Transport, Egypt
- Heidelberg Cement - Germany
- Thai Mozambique Logistica
- Holcim Trading Pte Ltd - Singapore
- Asmin Koalindo Tuhup - Indonesia
- Altura Mining Limited, Indonesia
- Aboitiz Power Corporation - Philippines
- PNOC Exploration Corporation - Philippines
- Semirara Mining and Power Corporation, Philippines
- Sical Logistics Limited - India
- Sojitz Corporation - Japan
- Baramulti Group, Indonesia
- Xindia Steels Limited - India
- Riau Bara Harum - Indonesia
- Formosa Plastics Group - Taiwan
- Romanian Commodities Exchange
- Kumho Petrochemical, South Korea
- Georgia Ports Authority, United States
- LBH Netherlands Bv - Netherlands
- TeaM Sual Corporation - Philippines
- White Energy Company Limited
- Vijayanagar Sugar Pvt Ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Bukit Asam (Persero) Tbk - Indonesia
- Therma Luzon, Inc, Philippines
- Commonwealth Bank - Australia
- Malabar Cements Ltd - India
- Directorate General of MIneral and Coal - Indonesia
- Ind-Barath Power Infra Limited - India
- Ministry of Finance - Indonesia
- Tata Chemicals Ltd - India
- Sarangani Energy Corporation, Philippines
- Simpson Spence & Young - Indonesia
- Bangladesh Power Developement Board
- Coalindo Energy - Indonesia
- McConnell Dowell - Australia
- Latin American Coal - Colombia
- Barasentosa Lestari - Indonesia
- Sinarmas Energy and Mining - Indonesia
- London Commodity Brokers - England
- Miang Besar Coal Terminal - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Agrawal Coal Company - India
- Bukit Makmur.PT - Indonesia
- Eastern Energy - Thailand
- Rio Tinto Coal - Australia
- The Treasury - Australian Government
- The State Trading Corporation of India Ltd
- CIMB Investment Bank - Malaysia
- PetroVietnam Power Coal Import and Supply Company
- Ambuja Cements Ltd - India
- Savvy Resources Ltd - HongKong
- Petron Corporation, Philippines
- Globalindo Alam Lestari - Indonesia
- VISA Power Limited - India
- Africa Commodities Group - South Africa
- Manunggal Multi Energi - Indonesia
- Lanco Infratech Ltd - India
- Madhucon Powers Ltd - India
- Price Waterhouse Coopers - Russia
- Marubeni Corporation - India
- Coastal Gujarat Power Limited - India
- Straits Asia Resources Limited - Singapore
- New Zealand Coal & Carbon
- Maheswari Brothers Coal Limited - India
- Sakthi Sugars Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Antam Resourcindo - Indonesia
- Medco Energi Mining Internasional
- Standard Chartered Bank - UAE
- Directorate Of Revenue Intelligence - India
- CNBM International Corporation - China
- India Bulls Power Limited - India
- Dalmia Cement Bharat India
- Larsen & Toubro Limited - India
- Indogreen Group - Indonesia
- Kepco SPC Power Corporation, Philippines
- Minerals Council of Australia
- Petrochimia International Co. Ltd.- Taiwan
- Trasteel International SA, Italy
- Grasim Industreis Ltd - India
- Pipit Mutiara Jaya. PT, Indonesia
- Singapore Mercantile Exchange
- Meenaskhi Energy Private Limited - India
- Renaissance Capital - South Africa
- Posco Energy - South Korea
- Wood Mackenzie - Singapore
- Carbofer General Trading SA - India
- Independent Power Producers Association of India
- Leighton Contractors Pty Ltd - Australia
- Iligan Light & Power Inc, Philippines
- Vizag Seaport Private Limited - India
- Central Java Power - Indonesia
- Gujarat Sidhee Cement - India
- OPG Power Generation Pvt Ltd - India
- Eastern Coal Council - USA
- European Bulk Services B.V. - Netherlands
- Electricity Generating Authority of Thailand
- Tamil Nadu electricity Board
- Bhoruka Overseas - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Samtan Co., Ltd - South Korea
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Economic Council, Georgia
- Indo Tambangraya Megah - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Global Business Power Corporation, Philippines
- Pendopo Energi Batubara - Indonesia
- Jaiprakash Power Ventures ltd
- GMR Energy Limited - India
- Edison Trading Spa - Italy
- Mercator Lines Limited - India
- Power Finance Corporation Ltd., India
- Krishnapatnam Port Company Ltd. - India
- Borneo Indobara - Indonesia
- Orica Mining Services - Indonesia
- Vedanta Resources Plc - India
- Energy Link Ltd, New Zealand
- San Jose City I Power Corp, Philippines
- Oldendorff Carriers - Singapore
- Meralco Power Generation, Philippines
- SMC Global Power, Philippines
- Timah Investasi Mineral - Indoneisa
- Kapuas Tunggal Persada - Indonesia
- Sree Jayajothi Cements Limited - India
- Bhatia International Limited - India
- Global Coal Blending Company Limited - Australia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Bahari Cakrawala Sebuku - Indonesia
- Star Paper Mills Limited - India
- Chamber of Mines of South Africa
- Bulk Trading Sa - Switzerland
- Binh Thuan Hamico - Vietnam
- Billiton Holdings Pty Ltd - Australia
- GAC Shipping (India) Pvt Ltd
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Uttam Galva Steels Limited - India
- SMG Consultants - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Parliament of New Zealand
- Karaikal Port Pvt Ltd - India
- ICICI Bank Limited - India
- Australian Coal Association
- Energy Development Corp, Philippines
- South Luzon Thermal Energy Corporation
- Gujarat Electricity Regulatory Commission - India
- Coal and Oil Company - UAE
- Interocean Group of Companies - India
- Siam City Cement PLC, Thailand
- Siam City Cement - Thailand
- ASAPP Information Group - India
- Attock Cement Pakistan Limited
- Rashtriya Ispat Nigam Limited - India
- Australian Commodity Traders Exchange
- Aditya Birla Group - India
- Karbindo Abesyapradhi - Indoneisa
- IHS Mccloskey Coal Group - USA
- The University of Queensland
- Metalloyd Limited - United Kingdom
- Deloitte Consulting - India
- Central Electricity Authority - India
- Mjunction Services Limited - India
- IEA Clean Coal Centre - UK
- Jorong Barutama Greston.PT - Indonesia
- Kartika Selabumi Mining - Indonesia
- Wilmar Investment Holdings
- PowerSource Philippines DevCo
- Toyota Tsusho Corporation, Japan
- Kaltim Prima Coal - Indonesia
- Thiess Contractors Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Chettinad Cement Corporation Ltd - India
- Orica Australia Pty. Ltd.
- Sindya Power Generating Company Private Ltd
- Kobexindo Tractors - Indoneisa
- Essar Steel Hazira Ltd - India
- Bhushan Steel Limited - India
- Port Waratah Coal Services - Australia
- Kideco Jaya Agung - Indonesia
- Global Green Power PLC Corporation, Philippines
- Cement Manufacturers Association - India
- Indika Energy - Indonesia
- Indian Oil Corporation Limited
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