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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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Wednesday, 15 February 17
SHIPPING MARKET INSIGHT - INTERMODAL
Looking at the state of the Dry Bulk market exactly a year ago, there is no doubt that there is a significant improvement and despite the fact that ...
Tuesday, 14 February 17
OPTIMISM HAS STARTED TO SLOWLY FLOW BACK INTO THE DRY BULK MARKET - GEORGE LAZARIDIS
Optimism has started to slowly flow back into the dry bulk market, with many in the market showing renewed optimism as the Pacific basin starts to ...
Monday, 13 February 17
COMBINED COAL SALES OF BUMI RESOURCES ROSE TO 87.7 MILLION TONS IN FY'16; UP 10.6 PERCENT Y/Y
COALspot.com: Combined Coal Sales of Bumi Resources rose to 87.7 million tons in FY’16 compared with 79.3 million tons in FY’15. ...
Monday, 13 February 17
THE FREIGHT MARKET CONTINUED TO TUMBLE IN FEBRUARY
COALspot.com: The Freight market was continued its downfall in all segments except Panamax for the week ending 10 February 2017.
The Balt ...
Friday, 10 February 17
U.S. COAL OUTPUT IS ESTIMATED TO HAVE DECLINED BY 158 MMST IN 2016 TO 739 MMST, SAYS EIA
COALspot.com – U.S., the world’s second largest coal producers have produced approximately totalled an estimated 17 million short tons ...
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Showing 2126 to 2130 news of total 6871 |
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- Meralco Power Generation, Philippines
- Thai Mozambique Logistica
- Ministry of Transport, Egypt
- Bhatia International Limited - India
- Global Coal Blending Company Limited - Australia
- Gujarat Mineral Development Corp Ltd - India
- Wood Mackenzie - Singapore
- TeaM Sual Corporation - Philippines
- Globalindo Alam Lestari - Indonesia
- Bukit Baiduri Energy - Indonesia
- Kobexindo Tractors - Indoneisa
- Dalmia Cement Bharat India
- PowerSource Philippines DevCo
- TNB Fuel Sdn Bhd - Malaysia
- Independent Power Producers Association of India
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- Global Business Power Corporation, Philippines
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- Anglo American - United Kingdom
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- Tata Chemicals Ltd - India
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- Energy Development Corp, Philippines
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- Medco Energi Mining Internasional
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- Oldendorff Carriers - Singapore
- Mercator Lines Limited - India
- Metalloyd Limited - United Kingdom
- Billiton Holdings Pty Ltd - Australia
- Mjunction Services Limited - India
- Siam City Cement PLC, Thailand
- PTC India Limited - India
- Intertek Mineral Services - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- PNOC Exploration Corporation - Philippines
- GN Power Mariveles Coal Plant, Philippines
- Samtan Co., Ltd - South Korea
- Kideco Jaya Agung - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Banpu Public Company Limited - Thailand
- Eastern Coal Council - USA
- Gujarat Sidhee Cement - India
- Bukit Makmur.PT - Indonesia
- Ambuja Cements Ltd - India
- Planning Commission, India
- Directorate Of Revenue Intelligence - India
- Sical Logistics Limited - India
- Electricity Authority, New Zealand
- Iligan Light & Power Inc, Philippines
- GVK Power & Infra Limited - India
- Interocean Group of Companies - India
- Bhushan Steel Limited - India
- San Jose City I Power Corp, Philippines
- Rio Tinto Coal - Australia
- Alfred C Toepfer International GmbH - Germany
- Krishnapatnam Port Company Ltd. - India
- Australian Commodity Traders Exchange
- Bangladesh Power Developement Board
- International Coal Ventures Pvt Ltd - India
- Siam City Cement - Thailand
- Minerals Council of Australia
- Coal and Oil Company - UAE
- Holcim Trading Pte Ltd - Singapore
- Price Waterhouse Coopers - Russia
- Malabar Cements Ltd - India
- Indonesian Coal Mining Association
- Merrill Lynch Commodities Europe
- London Commodity Brokers - England
- Simpson Spence & Young - Indonesia
- Kaltim Prima Coal - Indonesia
- White Energy Company Limited
- VISA Power Limited - India
- Agrawal Coal Company - India
- Australian Coal Association
- Electricity Generating Authority of Thailand
- Sindya Power Generating Company Private Ltd
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Videocon Industries ltd - India
- Mercuria Energy - Indonesia
- Parliament of New Zealand
- Maheswari Brothers Coal Limited - India
- OPG Power Generation Pvt Ltd - India
- Attock Cement Pakistan Limited
- IEA Clean Coal Centre - UK
- Edison Trading Spa - Italy
- AsiaOL BioFuels Corp., Philippines
- Thiess Contractors Indonesia
- Singapore Mercantile Exchange
- Orica Australia Pty. Ltd.
- Altura Mining Limited, Indonesia
- India Bulls Power Limited - India
- Posco Energy - South Korea
- Deloitte Consulting - India
- Essar Steel Hazira Ltd - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Maharashtra Electricity Regulatory Commission - India
- Karaikal Port Pvt Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- ICICI Bank Limited - India
- Jaiprakash Power Ventures ltd
- Manunggal Multi Energi - Indonesia
- Orica Mining Services - Indonesia
- Semirara Mining Corp, Philippines
- Barasentosa Lestari - Indonesia
- Jindal Steel & Power Ltd - India
- Timah Investasi Mineral - Indoneisa
- Cement Manufacturers Association - India
- Ind-Barath Power Infra Limited - India
- Leighton Contractors Pty Ltd - Australia
- Savvy Resources Ltd - HongKong
- MS Steel International - UAE
- Semirara Mining and Power Corporation, Philippines
- Sakthi Sugars Limited - India
- Baramulti Group, Indonesia
- Star Paper Mills Limited - India
- The State Trading Corporation of India Ltd
- Carbofer General Trading SA - India
- Pipit Mutiara Jaya. PT, Indonesia
- McConnell Dowell - Australia
- Miang Besar Coal Terminal - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
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- Kumho Petrochemical, South Korea
- Chamber of Mines of South Africa
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- Aboitiz Power Corporation - Philippines
- Bayan Resources Tbk. - Indonesia
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- Vizag Seaport Private Limited - India
- Xindia Steels Limited - India
- The University of Queensland
- Eastern Energy - Thailand
- Larsen & Toubro Limited - India
- Marubeni Corporation - India
- GAC Shipping (India) Pvt Ltd
- Ceylon Electricity Board - Sri Lanka
- Formosa Plastics Group - Taiwan
- Coalindo Energy - Indonesia
- Grasim Industreis Ltd - India
- Straits Asia Resources Limited - Singapore
- Georgia Ports Authority, United States
- Toyota Tsusho Corporation, Japan
- LBH Netherlands Bv - Netherlands
- Gujarat Electricity Regulatory Commission - India
- Tamil Nadu electricity Board
- Bhoruka Overseas - Indonesia
- Sarangani Energy Corporation, Philippines
- Binh Thuan Hamico - Vietnam
- Petron Corporation, Philippines
- Romanian Commodities Exchange
- Coastal Gujarat Power Limited - India
- European Bulk Services B.V. - Netherlands
- Therma Luzon, Inc, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Bulk Trading Sa - Switzerland
- Goldman Sachs - Singapore
- Global Green Power PLC Corporation, Philippines
- Commonwealth Bank - Australia
- Sojitz Corporation - Japan
- SMC Global Power, Philippines
- Indian Oil Corporation Limited
- Port Waratah Coal Services - Australia
- Latin American Coal - Colombia
- Antam Resourcindo - Indonesia
- Lanco Infratech Ltd - India
- Riau Bara Harum - Indonesia
- Trasteel International SA, Italy
- Kepco SPC Power Corporation, Philippines
- Central Java Power - Indonesia
- Uttam Galva Steels Limited - India
- Africa Commodities Group - South Africa
- Karbindo Abesyapradhi - Indoneisa
- Offshore Bulk Terminal Pte Ltd, Singapore
- Mintek Dendrill Indonesia
- Sree Jayajothi Cements Limited - India
- Directorate General of MIneral and Coal - Indonesia
- SN Aboitiz Power Inc, Philippines
- Central Electricity Authority - India
- Asmin Koalindo Tuhup - Indonesia
- Indogreen Group - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Neyveli Lignite Corporation Ltd, - India
- Ministry of Mines - Canada
- Salva Resources Pvt Ltd - India
- Kartika Selabumi Mining - Indonesia
- Parry Sugars Refinery, India
- New Zealand Coal & Carbon
- CNBM International Corporation - China
- Madhucon Powers Ltd - India
- Aditya Birla Group - India
- Jorong Barutama Greston.PT - Indonesia
- ASAPP Information Group - India
- South Luzon Thermal Energy Corporation
- SMG Consultants - Indonesia
- Heidelberg Cement - Germany
- IHS Mccloskey Coal Group - USA
- Standard Chartered Bank - UAE
- The Treasury - Australian Government
- Energy Link Ltd, New Zealand
- Economic Council, Georgia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Indian Energy Exchange, India
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