[2020] EWHC 1986 (Comm)

English High Court of Justice, Commercial Court

Facts: in 2016, Nautica (owners) and Trafigura (charterers) negotiated a voyage charter for The Leonidas. The parties reached a preliminary agreement, the terms of which were set out in a recap. Among other things, the charter was subject to “enough materials / Suppliers' / Receivers' / Management Approval”. The charterers were unable to get all approvals on time. Without instructions from the charterers, their brokers suggested that the owners consider all subjects (except for the approval of oil suppliers at the ports of loading on the island of Aruba) lifted in exchange for a reduction in the demurrage rate. The owners agreed, but the charterers changed their mind about entering into the charter.

Initially, the charterers intended to load oil in Aruba not from a berth (which the tanker could not approach), but from an offshore loading facility. But to prevent the contract from going into effect, the charterers received formal rejection letters from oil suppliers in Aruba confirming that the tanker was too large to be loaded at berths in Aruba - so the suppliers could not give their approval. The owners saw through the deception and demanded that the charterers perform the charter. When they refused, the owners canceled the charter, entered into a less profitable one with a third party and applied to the English court for damages.

The charterers objected that since the suppliers’ approval had not been obtained, the charter was not concluded in principle. The owners argued that the charter was concluded and is valid until the suppliers refuse to give their approval, in good faith and for valid reasons.

High Court of England and Wales: the owners’ claim dismissed, since the charter was never concluded.

There are condition, the occurrence of which determines whether the contract is concluded at all (so-called pre-conditions). The occurrence of such conditions depends on the actions of a party to the contract (for example, the contract is not concluded before it is signed or approved by the board of directors). Such conditions most often require the party to exercise personal or commercial judgment (for example, charter subject to a survey of the vessel to the satisfaction of the charterers).

There are other conditions, the occurrence of which determines whether the party must begin to perform its obligations under the contract (so-called performance conditions). The occurrence of these conditions depends on actions of third parties (for example, if the contract is subject to obtaining an export license or a planning permit).

In charterparties, if a charter is contains “subject to” language (for example, subject to management approval or enough materials from the charterers), then until the condition occurs or the parties agree to consider it lifted, the contract is not concluded.

The purpose of such conditions, which determine the conclusion of the charter, is to give the charterers as much freedom as possible in making commercial decisions. For example, often being a buyer, a voyage charterer himself determines who will be his supplier and where the cargo will be sourced from. The charterers may negotiate with several suppliers at once, and the supplier may change. Therefore, obtaining suppliers’ approval is dependent on the actions of the charterers and not on the actions of a previously agreed neutral third party (as is the case with obtaining licenses, for example).

Likewise, if a charter is subject to “enough materials” at the voyage charterers’ disposal, it is not a third party, but the charterers themselves who decide whether they have enough cargo. For example, even if the charterers actually have a lot of oil to transport, they may not confirm the sufficiency of the cargo to the owners if they choose not to ship oil on this ship. In both examples above, it is up to the charterers to decide whether the condition has been met and whether the charter has been concluded.

Comments: the outcome of this case clearly illustrates the differences between the English courts and the courts of many other countries with regard to chartering negotiations.

Under English law, a charter subject to a condition in the recap is not considered concluded – even if the parties agreed on all essential terms. In 1988 in The Junior K¹ the English court found that the phrase ‘subject to details of GENCON charterparty’ means that the charter is not concluded until the parties reach agreement on all details which must be changed in the standard form. The same applies to ‘subject to enough materials’² and ‘subject to management approval’ clauses. This is despite the fact that English recognize that this approach may run counter to accepted practice among chartering brokers.

In contrast, courts in the United States recognize charters “subject to details”³ or “subject to board approval”⁴ as concluded - if the parties have agreed on all essential terms. Otherwise, the party can destroy what is essentially a concluded agreement, refusing to negotiate on only one small detail of the charter. In the United States, the position is that if the charterers cannot perform the charter because they have not received approval (from management or from the suppliers), then their failure to obtain such approval is a breach of contract - and the charterers are liable in damages.⁵

The position in Russia is closer to that in the US, but depends on the specific “subject”. If the occurrence of the condition is purely fotruitous and depends on the actions of third parties (for example, on the obtaining of an export license by the suppliers), Art. 157 of the Russian Civil Code applies, and the charter will be considered concluded. The text of paragraphs 1 and 2 of Art. 157 of the Civil Code expressly states that it is the legal effect of the agreement (the creation or extinguishment of rights and obligations), and not its conclusion, that are subject to a condition.

The result will be the same if the condition is mixed, i.e. its occurrence depends in part on the actions of third parties and in part on the actions of a party to the charter (for example, the obtaining by the charterers of approval from the suppliers). While the parties may specifically agree that failure to obtain third party approval will result in the charter not being concluded , this is extremely rare in practice.

If the condition is "potestative", i.e. its occurrence depends solely on the actions of a party to the charter (for example, the decision of the charterers as to whether there is “enough materials”), then, according to Russian law, the charter will most likely not be considered concluded, since the charterer is not bound by the contract at all until he has expressed his intention for it to enter into force. ■

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