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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, 12 May 17
SLOW AND UNEVENTFUL WEEK FOR THE PANAMAX MARKET
Supramax
In the Atlantic, only USG were showing some improvement, where pet-coke cargoes to India was fixed in the range of 19-23k daily and to C ...
Wednesday, 10 May 17
MARKET INSIGHT - INTERMODAL
Up until a few weeks ago, demo deals were being concluded at just a fraction below $400/ldt. Last time we saw demo prices around that level was in ...
Tuesday, 09 May 17
DRY BULK TRADE IS STILL HEAVILY RELIANT ON CHINA - GEORGE LAZARIDIS
We have seen an overall cool down in the dry bulk and tanker markets over the final two weeks of April, sparking worries amongst ship-owners that t ...
Monday, 08 May 17
INDONESIAN COAL PRICE REFERENCE RISES FOR SECOND STRAIGHT MONTH IN MAY
COALspot.com: Indonesian government declared coal benchmark price rose in May, government data showed.
The benchmark price of Indonesian therm ...
Monday, 08 May 17
OCEAN BULK CARGO RATES FALL FURTHER THIS PAST WEEK
COALspot.com: The Freight market continues to slump this past week, with all segments show a negative downward trend week over week.
The Balti ...
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Showing 2051 to 2055 news of total 6871 |
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- Timah Investasi Mineral - Indoneisa
- Rashtriya Ispat Nigam Limited - India
- Bayan Resources Tbk. - Indonesia
- Mjunction Services Limited - India
- Meralco Power Generation, Philippines
- Petron Corporation, Philippines
- Kartika Selabumi Mining - Indonesia
- Thiess Contractors Indonesia
- SN Aboitiz Power Inc, Philippines
- Coastal Gujarat Power Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Ministry of Mines - Canada
- The State Trading Corporation of India Ltd
- Karaikal Port Pvt Ltd - India
- CIMB Investment Bank - Malaysia
- Attock Cement Pakistan Limited
- ICICI Bank Limited - India
- Mintek Dendrill Indonesia
- Grasim Industreis Ltd - India
- CNBM International Corporation - China
- Dalmia Cement Bharat India
- The Treasury - Australian Government
- Edison Trading Spa - Italy
- Eastern Energy - Thailand
- Lanco Infratech Ltd - India
- Bukit Baiduri Energy - Indonesia
- Madhucon Powers Ltd - India
- Aditya Birla Group - India
- Gujarat Mineral Development Corp Ltd - India
- Vijayanagar Sugar Pvt Ltd - India
- Uttam Galva Steels Limited - India
- Altura Mining Limited, Indonesia
- Borneo Indobara - Indonesia
- Therma Luzon, Inc, Philippines
- Central Java Power - Indonesia
- San Jose City I Power Corp, Philippines
- Pendopo Energi Batubara - Indonesia
- Rio Tinto Coal - Australia
- Semirara Mining Corp, Philippines
- Kumho Petrochemical, South Korea
- Bangladesh Power Developement Board
- Xindia Steels Limited - India
- Iligan Light & Power Inc, Philippines
- Planning Commission, India
- International Coal Ventures Pvt Ltd - India
- Straits Asia Resources Limited - Singapore
- Vizag Seaport Private Limited - India
- Oldendorff Carriers - Singapore
- PTC India Limited - India
- Aboitiz Power Corporation - Philippines
- Global Business Power Corporation, Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Bukit Asam (Persero) Tbk - Indonesia
- Samtan Co., Ltd - South Korea
- Thai Mozambique Logistica
- IEA Clean Coal Centre - UK
- Singapore Mercantile Exchange
- India Bulls Power Limited - India
- Antam Resourcindo - Indonesia
- Price Waterhouse Coopers - Russia
- Banpu Public Company Limited - Thailand
- Indonesian Coal Mining Association
- Agrawal Coal Company - India
- SMG Consultants - Indonesia
- Intertek Mineral Services - Indonesia
- Gujarat Sidhee Cement - India
- Orica Mining Services - Indonesia
- GAC Shipping (India) Pvt Ltd
- Petrochimia International Co. Ltd.- Taiwan
- Sree Jayajothi Cements Limited - India
- Africa Commodities Group - South Africa
- Krishnapatnam Port Company Ltd. - India
- Ind-Barath Power Infra Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Port Waratah Coal Services - Australia
- Chettinad Cement Corporation Ltd - India
- Bhatia International Limited - India
- Sinarmas Energy and Mining - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Ceylon Electricity Board - Sri Lanka
- Savvy Resources Ltd - HongKong
- Interocean Group of Companies - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Orica Australia Pty. Ltd.
- Electricity Authority, New Zealand
- MS Steel International - UAE
- Ambuja Cements Ltd - India
- Essar Steel Hazira Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Posco Energy - South Korea
- AsiaOL BioFuels Corp., Philippines
- Gujarat Electricity Regulatory Commission - India
- Bukit Makmur.PT - Indonesia
- TeaM Sual Corporation - Philippines
- Goldman Sachs - Singapore
- Renaissance Capital - South Africa
- Vedanta Resources Plc - India
- Indian Oil Corporation Limited
- Australian Commodity Traders Exchange
- Mercator Lines Limited - India
- Karbindo Abesyapradhi - Indoneisa
- Eastern Coal Council - USA
- Simpson Spence & Young - Indonesia
- Malabar Cements Ltd - India
- Miang Besar Coal Terminal - Indonesia
- Marubeni Corporation - India
- PNOC Exploration Corporation - Philippines
- Heidelberg Cement - Germany
- IHS Mccloskey Coal Group - USA
- Maharashtra Electricity Regulatory Commission - India
- Riau Bara Harum - Indonesia
- Metalloyd Limited - United Kingdom
- Deloitte Consulting - India
- ASAPP Information Group - India
- VISA Power Limited - India
- Sarangani Energy Corporation, Philippines
- Formosa Plastics Group - Taiwan
- GMR Energy Limited - India
- Kepco SPC Power Corporation, Philippines
- Directorate General of MIneral and Coal - Indonesia
- Coalindo Energy - Indonesia
- Anglo American - United Kingdom
- Jaiprakash Power Ventures ltd
- South Luzon Thermal Energy Corporation
- Power Finance Corporation Ltd., India
- Parliament of New Zealand
- PowerSource Philippines DevCo
- Barasentosa Lestari - Indonesia
- Maheswari Brothers Coal Limited - India
- European Bulk Services B.V. - Netherlands
- Sindya Power Generating Company Private Ltd
- Sakthi Sugars Limited - India
- Global Coal Blending Company Limited - Australia
- GN Power Mariveles Coal Plant, Philippines
- GVK Power & Infra Limited - India
- Georgia Ports Authority, United States
- Jindal Steel & Power Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Asmin Koalindo Tuhup - Indonesia
- Wood Mackenzie - Singapore
- PetroVietnam Power Coal Import and Supply Company
- Mercuria Energy - Indonesia
- Siam City Cement - Thailand
- Bank of Tokyo Mitsubishi UFJ Ltd
- Bhushan Steel Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Trasteel International SA, Italy
- Manunggal Multi Energi - Indonesia
- Siam City Cement PLC, Thailand
- SMC Global Power, Philippines
- Kaltim Prima Coal - Indonesia
- Indogreen Group - Indonesia
- Directorate Of Revenue Intelligence - India
- Sical Logistics Limited - India
- Holcim Trading Pte Ltd - Singapore
- Energy Link Ltd, New Zealand
- Romanian Commodities Exchange
- Ministry of Finance - Indonesia
- Latin American Coal - Colombia
- Tata Chemicals Ltd - India
- Global Green Power PLC Corporation, Philippines
- LBH Netherlands Bv - Netherlands
- Billiton Holdings Pty Ltd - Australia
- Ministry of Transport, Egypt
- Videocon Industries ltd - India
- Economic Council, Georgia
- Energy Development Corp, Philippines
- Baramulti Group, Indonesia
- OPG Power Generation Pvt Ltd - India
- New Zealand Coal & Carbon
- Meenaskhi Energy Private Limited - India
- Star Paper Mills Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Binh Thuan Hamico - Vietnam
- Kobexindo Tractors - Indoneisa
- Medco Energi Mining Internasional
- Tamil Nadu electricity Board
- Toyota Tsusho Corporation, Japan
- Electricity Generating Authority of Thailand
- Bulk Trading Sa - Switzerland
- Makarim & Taira - Indonesia
- Globalindo Alam Lestari - Indonesia
- Minerals Council of Australia
- Indika Energy - Indonesia
- Australian Coal Association
- Kideco Jaya Agung - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Merrill Lynch Commodities Europe
- Parry Sugars Refinery, India
- Carbofer General Trading SA - India
- Chamber of Mines of South Africa
- The University of Queensland
- Kalimantan Lumbung Energi - Indonesia
- Bharathi Cement Corporation - India
- Bahari Cakrawala Sebuku - Indonesia
- London Commodity Brokers - England
- Indo Tambangraya Megah - Indonesia
- Salva Resources Pvt Ltd - India
- White Energy Company Limited
- Bhoruka Overseas - Indonesia
- Standard Chartered Bank - UAE
- TNB Fuel Sdn Bhd - Malaysia
- Indian Energy Exchange, India
- Independent Power Producers Association of India
- Sojitz Corporation - Japan
- Cement Manufacturers Association - India
- Wilmar Investment Holdings
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Commonwealth Bank - Australia
- Central Electricity Authority - India
- Coal and Oil Company - UAE
- Kohat Cement Company Ltd. - Pakistan
- McConnell Dowell - Australia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Larsen & Toubro Limited - India
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