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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, 24 March 17
U.S COAL PRODUCTION ESTIMATE DECLINE 4.4% W/W - EIA
COALspot.com – U.S., the world’s second largest coal producers have produced approximately totaled an estimated 14.1 million short tons ...
Thursday, 23 March 17
CAPESIZE: TAKING A BREATHER AFTER RALLYING - BUT OUTLOOK FOR WEEKS TO COME NOT SCARY - FEARNLEYS
Supramax
In the Pacific the market seems somewhat slower this week, although healthy rates still being achieved said Fearnleys in its latest week ...
Thursday, 23 March 17
KOREA MIDLAND POWER COMPANY LIMITED INVITES BIDS FOR TOTAL 4.77 MILLION TONS OF BITUMINOUS COAL FOR ITS BORYEONG POWER PLANT
COALspot.com: South Korea state-owned utility Korea Midland Power (KOMIPO) issued a new tender for 2,090,000 Metric Tons of Bituminous coal f ...
Wednesday, 22 March 17
THE DRY BULK MARKET HAS UNDOUBTEDLY REBOUNDED SINCE THE SAME PERIOD LAST YEAR - KONSTANTINOS KONTOMICHIS
The Dry Bulk market has undoubtedly rebounded since the same period last year and currently enjoys healthier freight rates. The positive reversal i ...
Tuesday, 21 March 17
DESPITE THE CHALLENGING MARKET SITUATION IN 2016 THE DELTA DUNIA MAKMUR HAS ACHIEVED A NET PROFIT OF US$37 MILLION
COALspot.com: PT Delta Dunia Makmur Tbk. has announced its financial results for the period ended December 31, 2016.
Despite challenging marke ...
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Showing 2091 to 2095 news of total 6871 |
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- Anglo American - United Kingdom
- CNBM International Corporation - China
- Ministry of Transport, Egypt
- Agrawal Coal Company - India
- Simpson Spence & Young - Indonesia
- IEA Clean Coal Centre - UK
- Borneo Indobara - Indonesia
- PowerSource Philippines DevCo
- International Coal Ventures Pvt Ltd - India
- Wood Mackenzie - Singapore
- Binh Thuan Hamico - Vietnam
- New Zealand Coal & Carbon
- Indo Tambangraya Megah - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Therma Luzon, Inc, Philippines
- AsiaOL BioFuels Corp., Philippines
- Ceylon Electricity Board - Sri Lanka
- Petrochimia International Co. Ltd.- Taiwan
- Mercuria Energy - Indonesia
- Gujarat Sidhee Cement - India
- Global Coal Blending Company Limited - Australia
- Savvy Resources Ltd - HongKong
- Ambuja Cements Ltd - India
- Electricity Authority, New Zealand
- Marubeni Corporation - India
- Indonesian Coal Mining Association
- SMC Global Power, Philippines
- Samtan Co., Ltd - South Korea
- TNB Fuel Sdn Bhd - Malaysia
- European Bulk Services B.V. - Netherlands
- Dalmia Cement Bharat India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Renaissance Capital - South Africa
- Bukit Baiduri Energy - Indonesia
- Cement Manufacturers Association - India
- Parliament of New Zealand
- Sinarmas Energy and Mining - Indonesia
- GMR Energy Limited - India
- Commonwealth Bank - Australia
- Asmin Koalindo Tuhup - Indonesia
- The Treasury - Australian Government
- Malabar Cements Ltd - India
- Coal and Oil Company - UAE
- Kideco Jaya Agung - Indonesia
- Australian Coal Association
- Chamber of Mines of South Africa
- Kartika Selabumi Mining - Indonesia
- Interocean Group of Companies - India
- Altura Mining Limited, Indonesia
- Billiton Holdings Pty Ltd - Australia
- Kapuas Tunggal Persada - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Salva Resources Pvt Ltd - India
- Jaiprakash Power Ventures ltd
- Orica Australia Pty. Ltd.
- GAC Shipping (India) Pvt Ltd
- Posco Energy - South Korea
- PetroVietnam Power Coal Import and Supply Company
- Eastern Energy - Thailand
- Kepco SPC Power Corporation, Philippines
- Sakthi Sugars Limited - India
- Alfred C Toepfer International GmbH - Germany
- Maheswari Brothers Coal Limited - India
- Bhushan Steel Limited - India
- Africa Commodities Group - South Africa
- Sindya Power Generating Company Private Ltd
- SN Aboitiz Power Inc, Philippines
- White Energy Company Limited
- Gujarat Electricity Regulatory Commission - India
- Formosa Plastics Group - Taiwan
- Aboitiz Power Corporation - Philippines
- Siam City Cement PLC, Thailand
- Sojitz Corporation - Japan
- Directorate Of Revenue Intelligence - India
- Romanian Commodities Exchange
- Pipit Mutiara Jaya. PT, Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Global Green Power PLC Corporation, Philippines
- Kohat Cement Company Ltd. - Pakistan
- Larsen & Toubro Limited - India
- Coastal Gujarat Power Limited - India
- Makarim & Taira - Indonesia
- The University of Queensland
- Siam City Cement - Thailand
- Parry Sugars Refinery, India
- OPG Power Generation Pvt Ltd - India
- Thiess Contractors Indonesia
- Sical Logistics Limited - India
- Karaikal Port Pvt Ltd - India
- South Luzon Thermal Energy Corporation
- Price Waterhouse Coopers - Russia
- Bulk Trading Sa - Switzerland
- Bank of Tokyo Mitsubishi UFJ Ltd
- Petron Corporation, Philippines
- Indian Energy Exchange, India
- Energy Development Corp, Philippines
- Lanco Infratech Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Central Java Power - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Medco Energi Mining Internasional
- Jindal Steel & Power Ltd - India
- Kumho Petrochemical, South Korea
- Manunggal Multi Energi - Indonesia
- Mercator Lines Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Karbindo Abesyapradhi - Indoneisa
- Grasim Industreis Ltd - India
- Aditya Birla Group - India
- Globalindo Alam Lestari - Indonesia
- Bharathi Cement Corporation - India
- Chettinad Cement Corporation Ltd - India
- Ind-Barath Power Infra Limited - India
- Pendopo Energi Batubara - Indonesia
- Banpu Public Company Limited - Thailand
- Port Waratah Coal Services - Australia
- Latin American Coal - Colombia
- Eastern Coal Council - USA
- Goldman Sachs - Singapore
- Metalloyd Limited - United Kingdom
- Jorong Barutama Greston.PT - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Mjunction Services Limited - India
- Holcim Trading Pte Ltd - Singapore
- Sree Jayajothi Cements Limited - India
- Economic Council, Georgia
- Wilmar Investment Holdings
- Thai Mozambique Logistica
- Meralco Power Generation, Philippines
- Minerals Council of Australia
- Kobexindo Tractors - Indoneisa
- Bahari Cakrawala Sebuku - Indonesia
- Baramulti Group, Indonesia
- LBH Netherlands Bv - Netherlands
- India Bulls Power Limited - India
- San Jose City I Power Corp, Philippines
- Heidelberg Cement - Germany
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Riau Bara Harum - Indonesia
- Oldendorff Carriers - Singapore
- Bangladesh Power Developement Board
- Vizag Seaport Private Limited - India
- GVK Power & Infra Limited - India
- Singapore Mercantile Exchange
- SMG Consultants - Indonesia
- IHS Mccloskey Coal Group - USA
- Ministry of Finance - Indonesia
- PTC India Limited - India
- Xindia Steels Limited - India
- Directorate General of MIneral and Coal - Indonesia
- Mintek Dendrill Indonesia
- Bayan Resources Tbk. - Indonesia
- Indogreen Group - Indonesia
- Tamil Nadu electricity Board
- Miang Besar Coal Terminal - Indonesia
- Trasteel International SA, Italy
- Rashtriya Ispat Nigam Limited - India
- PNOC Exploration Corporation - Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- CIMB Investment Bank - Malaysia
- Indian Oil Corporation Limited
- Edison Trading Spa - Italy
- ASAPP Information Group - India
- Bhoruka Overseas - Indonesia
- Standard Chartered Bank - UAE
- Merrill Lynch Commodities Europe
- The State Trading Corporation of India Ltd
- Planning Commission, India
- Madhucon Powers Ltd - India
- Rio Tinto Coal - Australia
- Tata Chemicals Ltd - India
- Power Finance Corporation Ltd., India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Electricity Generating Authority of Thailand
- Energy Link Ltd, New Zealand
- TeaM Sual Corporation - Philippines
- London Commodity Brokers - England
- Indika Energy - Indonesia
- McConnell Dowell - Australia
- Central Electricity Authority - India
- Essar Steel Hazira Ltd - India
- Star Paper Mills Limited - India
- Australian Commodity Traders Exchange
- Intertek Mineral Services - Indonesia
- Coalindo Energy - Indonesia
- Antam Resourcindo - Indonesia
- Semirara Mining Corp, Philippines
- Barasentosa Lestari - Indonesia
- Bhatia International Limited - India
- Cigading International Bulk Terminal - Indonesia
- Carbofer General Trading SA - India
- Toyota Tsusho Corporation, Japan
- Bukit Makmur.PT - Indonesia
- Attock Cement Pakistan Limited
- Timah Investasi Mineral - Indoneisa
- VISA Power Limited - India
- Meenaskhi Energy Private Limited - India
- Straits Asia Resources Limited - Singapore
- Gujarat Mineral Development Corp Ltd - India
- ICICI Bank Limited - India
- Krishnapatnam Port Company Ltd. - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Iligan Light & Power Inc, Philippines
- Kaltim Prima Coal - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Georgia Ports Authority, United States
- Uttam Galva Steels Limited - India
- Independent Power Producers Association of India
- Videocon Industries ltd - India
- MS Steel International - UAE
- Vedanta Resources Plc - India
- Orica Mining Services - Indonesia
- Global Business Power Corporation, Philippines
- Ministry of Mines - Canada
- Sarangani Energy Corporation, Philippines
- Deloitte Consulting - India
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