29/07/2020

Nautica Marine Limited v Trafigura Trading LLC (“The Leonidas”)

On 28 July 2020 Foxton J handed down judgment in this important case concerning the effect of “subjects” in commercial negotiations, which contains a number of significant points of interest to those negotiating contracts, particularly in the charter market.

The effect of “subjects”: pre-condition or performance condition?

Whilst there is clear existing authority in respect of the effect of straightforward “subjects” like “subject to contract” and similar, such authority is lacking in respect of other kinds of “subjects”, and where a combination of “subjects” is used. Foxton J’s decision concerned negotiations for the voyage charter of a VLCC loading up to three different grades of crude oil at three different ports in charterers’ option. As is common in the trade, these negotiations were initially subject to Charterers’ Stem/ Suppliers’/ Receivers’/ Management Approval.

It was common ground that the Stem, Receivers’ Approval and Management Approval subjects were subsequently lifted, and so the central issue in the case was the effect of the “Suppliers’ Approval” subject. In particular, was it (1) a “pre-condition” to contract (which had the effect of preventing a contract coming into existence altogether), or (2) what the judge termed a “performance condition” (a condition which does not prevent a binding contract coming into existence, but which if not satisfied means that performance does not have to be rendered)?  A number of previous authorities concerning contracts subject to obtaining an import or export licence, or planning permission, had held the subject to be a performance condition, with an implied term obliging one party to take all reasonable steps to obtain the relevant licence or permission.

Foxton J held that the Suppliers’ Approval Subject was a pre-condition to a contract, and therefore the putative charterer, Trafigura, was not required to take reasonable steps to obtain its suppliers’ approval. In reaching this decision, Foxton J relied on the following key points:

• An important factor in whether a subject is a pre-condition or a performance condition is whether satisfaction of the subject depends on the decision of a contracting party or a third party (but such classification is not always straightforward, and past authorities were divided).
• A subject is more likely to be a pre-condition than a performance condition where the subject involves the exercise of a personal or commercial judgment by one of the potential parties. According to the Judge, fulfilling the Suppliers’ Approval subject involved commercial choices as to who the relevant suppliers would be, and which terminals, and berths/tanks within terminals, cargo would be loaded from, which therefore supported the view that it was a pre-condition.
• The particular negotiating language of shipowners, charterers and brokers referring to agreements as “on subjects”, and “lifting” subjects, points towards a subject in the chartering context being more likely to be a pre-condition, because it connotes that the subject is resolved by one or both parties removing it, rather than being resolved automatically on the occurrence of an external event.
• Based on previous authority, the Stem Subject and the Management Approval Subject were both pre-conditions; where subjects appear as a compendious phrase, it is more likely that they are all intended to have the same effect.
• Any uncertainty as to the meaning of the subject makes it less likely that the subject was intended to create any kind of binding contractual obligation. There was stark disagreement in the case as to whether the suppliers referred to in the subject were only terminals from which cargo was intended to be loaded or included the charterers’ contractual suppliers. Foxton J held that the phrase encompassed all those approvals which the charterer commercially wished to obtain on the supply side (with the Receiver’s Subject having an equivalent meaning and effect on the delivery side).

Assessing damages in the context of a performance condition

Foxton J’s judgment also addresses (obiter) legally complex and interesting questions in relation to damages:

1. Where does the burden of proof lie, and what is the standard of proof, in the context of failure to take reasonable steps to satisfy a performance condition?
2. Are damages to be assessed following the principle in the well-known House of Lords decision in Mackay v Dick, on the basis the performance condition is deemed satisfied if a party fails to take reasonable steps to fulfil it?
3. Must damages be assessed on the basis of a “loss of a chance”?

As to (1), the learned judge concluded that, insofar as the “subject to licence” cases place the burden of proof on the defendant, and may suggest a higher standard of proof than the ordinary civil standard, that was because the words “subject to licence” in those cases operated as a “special exemption clause”. Such reasoning does not apply more widely outside the context of these cases, which reflect a self-contained and special principle of law (to which the general principles of “loss of a chance” are also inapplicable).

As to (2), the Judge held that the precise status of the principle in Mackay v Dick is one which may well merit exploration by a higher court, but that on the facts of this case it would not be appropriate to deem satisfaction of the condition (had it been a performance condition). One reason for this was that the Judge doubted whether the principle in Mackay v Dick applied in cases where the party in breach had taken some steps towards fulfilling the condition (albeit inadequate ones). In addition, the Judge held that the principle in Mackay v Dick could not be used to give rise to a claim in damages, as opposed to a claim in debt (paragraph 110). According to the Judge, this was “more consistent with the increasing recognition of the overriding importance of the compensatory principle in the law of damages, with rules of law in relation to the assessment of damages intended to serve this principle, rather than displace it.”

As to (3), Foxton J determined that because the alleged lost benefit (lost profit under a concluded charterparty) was dependent on the decision of a third party (supplier) to approve the vessel, damages had to be assessed on a “loss of a chance” basis. Following the decisions in Wellesley Partners v Withers and Assetco plc v Grant Thornton the “loss of a chance” doctrine was mandatory and not permissive.

Luke Pearce appeared for the Claimant

Daniel Bovensiepen appeared for the Defendant

Read the judgment