Can a fixture ‘subject to’ be binding?

In the recent decision Nautica Marine Limited -v- Trafigura Trading LLC1, the Commercial Court considered whether the negotiations between the parties ‘crossed the finish line’ irrespective of an outstanding ‘subject’ of those negotiations.

The background

The parties initially agreed the terms of their fixture ‘subjects to chrts’ S/S/R/ MGT approval latest 1700 hours’ on 12 January (where ‘S/S/R/MGT’ stood for stem/suppliers/receivers/ management).

Before the expiry of the deadline, Trafigura, the charterer, offered to lift all the subjects, with the exception of the ‘suppliers’ approval’, in return for a reduction of the demurrage rate and an extension of the time limit for lifting that last subject. Nautica, the owner, accepted that offer.

Trafigura, having subsequently lost interest in confirming the fixture, engineered a rejection message coming from the terminal at which the vessel would have loaded.

The deception did not succeed and Nautica requested Trafigura to provide a ‘genuine rejection’ by a given time limit.

No response was received by the time limit set and, accordingly, Nautica said that it accepted Trafigura’s repudiatory breach as bringing the charterparty to an end.

Was there a binding charterparty?

In the dispute that ensued, the owner contended that the charterparty was concluded when an agreement was reached on all but one of the subjects. At that point, said the owner, the charterparty was binding but it would have ceased to be binding if it had not been possible for Trafigura to lift the ‘suppliers’ approval’ subject, despite taking reasonable steps to do so.

The question of law that the owner’s position raised was whether the ‘suppliers’ approval’ subject was a pre-condition or a performance condition. If it was a pre-condition, no contract was entered into, whereas if it was a performance condition, the charterparty was binding but its performance was subject to Trafigura taking reasonable steps to obtain the suppliers’ approval.

Predictably the question of whether a term is a pre-condition or a performance condition is to be addressed in light of the facts and the particular commercial context of each situation: on an objective analysis of the circumstances and the correspondence, did the parties intend to enter into a binding agreement, despite there being remaining ‘subjects’ to be addressed?

It should be noted however that the starting point of that analysis is that when the parties made an agreement on ‘subjects’ the court will not lightly hold that, against the background of the circumstances, they nevertheless intended to enter into a binding contract.

Furthermore, the court will consider a number of factors that will assist in determining the objective intention of the parties. In this situation, the court considered the following:

• The ‘who’ factor

The court very clearly stated that ‘when the event on which the entry into contractual relations depends is a [personal and/or commercial] decision by one or both parties […] there is no room for the argument’ that a binding agreement was entered into.

When however the ‘subject’ is within the control of a third party or indeed when the lifting of the ‘subject’ is to occur automatically on the occurrence of some external event, the term may be treated as a performance condition.

• The terms used

The phrases ‘subject to contract’ or ‘subject to details’ are clear indicators of the parties’ intention not to be bound.

The same applies to ‘subject to board approval’, because, said the court, ‘the effect of those words is to postpone the decision on whether to enter into legal relations to a subsequent stage’. Similarly, ‘subject to management approval’ also creates a pre-condition.

The court further said that there is longstanding authority that ‘subject to stem’ (where ‘stem’ stands for ‘subject to enough material’), is a pre-condition, rather than a performance condition.

This latter point had a particular significance in this situation, given that the first and the last part of the phrase ‘S/S/R/MGT’ intended to create pre-conditions. Therefore, the judge commented that it would be surprising if the two intermediate elements had a different status.

A further and relevant point was that it was unclear what the ‘suppliers’ approval’ meant, that is to say who were the ‘suppliers’ contemplated in this subject: did it include the loading terminal(s) and/or Trafigura’s sellers and, if the sellers, only those with whom Trafigura was in contact when the subject was agreed or, more generally, any party on the supply side from whom Trafigura wished to obtain approval?

Given the degree of uncertainty the court said that it was highly unlikely that the ‘suppliers’ approval’ subject was intended to be a performance condition.

In light of the above elements, combined with the fact that there were a number of gaps in the agreement that had been left for later discussion, the court held that the ‘suppliers’ approval’ was a pre-condition and that, therefore, no binding charterparty had been entered into.

As to Nautica’s questioning what would have been the significance of Trafigura lifting three of the four pre-conditions, in return for a reduction of the demurrage rate, if it then retained an absolute right not to proceed with the charterparty, the court commented that while the point had force, it essentially related to a commercial negotiation that did not affect the legal position: for as long as the last subject was not lifted, the terms of that negotiation were not binding on the parties.

Comment

This is an interesting decision, both because it clarifies the concept of a ‘performance condition’ that may not be familiar to many in the industry; and also because it serves as a reminder that ‘on subjects’ will not necessarily avoid there being a binding agreement between the parties, if, on an objective analysis, the communications and other circumstances of the case strongly suggest that the parties’ intention was to be bound.

A corollary question that the court did not need to address is whether, pending Trafigura’s lifting of the last subject, Nautica was bound by the agreement. There are arguments in both directions, but we believe that the better view is that until and unless Trafigura confirmed that it lifted the last subject, the agreement was not binding on either party and Nautica was free to walk away if it so wished.