The case of Nautica Marine Limited v Trafigura Trading LLC (The Leonidas)[1] dealt with whether a contract of carriage was, in fact, concluded. In answering this, the Commercial Court provided guidance on the consequences of “subjects” clauses in contracts.  Deven Choudhary of CJC Newcastle explains.

Background

Nautica Marine Limited (“Owners”), who were the claimants, entered into a voyage charter on BPVOY3 form for their vessel, MT Leonidas (“Vessel”) with Trafigura Trading LLC (“Charterers”). Owners and Charterers were involved in fixture negotiations between 8-13 January 2016 for carriage of crude oil from the Caribbean to the Far East.

On 8 January 2016, in the preliminary recap amongst several terms, it was also included that,

“FOR ACCOUNT OF TRAFIGURA TRADING LLC OR NOMINEE WITH SUBJECTS TO CHTRS' S/S/R/MGT APPROVAL LATEST 1700 HOURS HOUSTON TIME TUESDAY 12, 2016”

However, subs could not be lifted on 12 January 2016 and parties agreed to lift them on 13 January 2016 as ‘Suppliers approval of the vessel for Statia and Aruba’ was awaited.

On 13 January 2016, after receiving the information from Charterers’ broker who was in close proximity with Owners’ broker (as they were part of same organisation), the Owners’ broker in a telecon confirmed to lift all subs except for “Suppliers’ Approval Subject” i.e. approval from local port authorities at Statia and Aruba on vessel’s clearance and agreed to lower the demurrage from USD 82,500 per day pro rata to USD 72,500 per day pro rata. However, Charterers on the same day confirmed that they were unable to lift all the subjects. Owners accepted the repudiatory breach of Charterers next day and brought Charterparty to an end and fixed a substitute fixture on 20 January 2016. 

Owners’ Arguments

1. As per the exchanges, the Charterparty was concluded, subject to a condition that it would cease to be binding if the “Suppliers’ Approval Subject” was not satisfied i.e. approval of the terminal at which the cargo was to be loaded by Charterers;
2. That Charterers failed to take reasonable steps to arrange “Suppliers’ Approval Subject” and that if reasonable steps were taken that this requirement would have been satisfied;
3. That due to this failure on the part of Charterers, Owners had to go for a substitute fixture with lower freight rate and suffered a loss to the tune of USD 491,690.67, for which Charterers to be held liable.

Charterers’ Arguments

1. Charterparty was never concluded because “Suppliers’ Approval Subject” remained outstanding at the time subs were supposed to be lifted;
2. That Charterers performed all the obligation to take reasonable steps to satisfy the “Suppliers’ Approval Subject”;
3. That Owners are only entitled to damages on a “loss of a chance basis”.

Decision

Foxton J rejected Owners claim for damages on the basis that there was no formal contract concluded between the parties.

Relying on some of the prior authorities[2], Foxton J investigated the rubrics of “subject to contract” and “subject to details” and reached the conclusion that the purpose of “subject to” terms in contract was to enable them to avoid entering into particular contract. That each case depends on its own individual facts, however, “subjects” is to be treated as a pre-condition of a contract rather than a performance condition. Lifting of subs in these commercial contracts are mostly relied on the outcome of either of the parties, rather than awaiting on an outcome of an external factor.

On “Suppliers’ approval subject”, Foxton J maintained that it seemed unlikely that this term is intended to create a contractual obligation which needs to be treated like a performance condition and that this term was not only limited to approval from the terminal but other approvals from suppliers/receivers for which Charterer was awaiting at the time on 13 January 2016.

For quantification, Foxton J, setting aside the reasoning from Owners, held that doctrine of loss of chance will be applicable under the present circumstances to quantify the loss and there seemed no reason to deviate from it.

Comment

This case clarifies the use of ‘subjects’ provisions and the effect it can have on contractual negotiations. Parties negotiating contracts should therefore bear in mind the applicable principles set out by Foxton J. This is because, outside established and tried circumstances, a court may come to a different conclusion from what one party thought a particular ‘subject’ was meant to constitute. It is also important that contracting parties understand the differences between performance conditions and pre-conditions - noting that performance conditions carry an implied term that one party would take reasonable steps to satisfy the subject.

It is also an important judgement for the brokers, as it shows the importance of communication between Owners, Charterers and brokers. Failure in proper communication and lack of written email trails can lead to differing understandings between parties and therefore parties should ensure to have emphasis on creating proper email trails.