Teekay Tankers Ltd (Teekay) brought a claim for USD180 million against STX Offshore & Shipbuilding Co., Ltd (STX).
By way of background, in the spring of 2013, STX and Teekay’s wholly owned subsidiary entered into four shipbuilding contracts which envisaged the construction of 16 crude oil tankers by STX. The parties also entered into an option agreement which gave Teekay the option to order three additional sets of up to four vessels (the Agreement). Teekay sought to exercise one of the options in relation to four vessels and alleged that STX had repudiated or renounced the Agreement based on its conduct. Teekay sought to terminate the Agreement and claim damages for the loss of profits it would have made had STX complied with its obligations. STX defended the claim by, among other things, arguing that the Agreement was void for uncertainty. Clause 4 of the Agreement read as follows:
‘‘4.1. Delivery dates for each of the optional vessels shall be mutually agreed upon at the time of Teekay’s declaration of the relevant option.
4.2. But STX will make best efforts to have a delivery within 2016 for each of the first optional vessels, within 2017 for the each of the second optional vessels and within 2017 for each of the third optional vessels.’
STX argued that no delivery dates had been discussed, agreed or even entertained and so no contract had been entered into. On the other hand, Teekay argued it was an implied term that the delivery date was to be an objectively reasonable date (having regard to STX’s obligation to use ‘best efforts’ in clause 4.2) to be determined by the court if not agreed between the parties.
On a plain interpretation of clause 4.1, a mutual agreement on the delivery date should have been reached at the same time as Teekay made its declaration of the relevant option. The Agreement was silent on a specific method to determine or identify delivery dates.
Walker J reaffirmed the general principle of contract law that the courts may permit a term to be implied which provides a way of determining an undetermined matter in the contract. Equally, if the parties have not reached agreement on a significant part or parts of a contract, it may be their intention that there should be no binding relationship until the remaining part has been agreed.
On the facts, Walker J was convinced that the parties intended the Agreement to be binding and enforceable. However, the question of whether the contract was void for uncertainty was dependent on whether the court could imply the method pursuant to which the delivery dates would be determined.
STX asserted that clause 4 was effectively an ‘agreement to agree’, that STX had the freedom to negotiate and therefore the decision was not a bargain which the courts could enforce.
Walker J considered MRI Trading AG v Erdenet Mining Corp LLC  EWCA Civ 156, which reaffirmed the two earlier decisions of Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD  2 Lloyd’s Rep 76 (Lord Justice Rix) and B J Aviation Ltd v Pool Aviation Ltd  2 P & CR 25 (Lord Justice Chadwick).
Rix LJ in Mamidoil set out ten principles. The following were helpful to Teekay’s case:
- particularly in commercial dealings between parties who are familiar with the trade in question…the court is willing to imply terms, where that is possible, to enable the contract to be carried out
- where the contract has come into existence, even the expression ‘to be agreed’ in relation to future executory obligations is not necessarily fatal to its continued existence, and
- where the parties may desire or need to leave matters to be adjusted in the working out of their contract, the court will assist the parties to do so, to preserve rather than destroy bargains, on the basis that what can be made certain is itself certain.
Walker J placed emphasis on the sophisticated commercial nature of the parties, both of whom were familiar with shipbuilding and the practice of granting options.
Based on the facts of the case and applying Rix LJ’s principles, Walker J concluded that this was a case where the court should strive to give effect to the bargain made by the parties if possible. However, he distinguished the Teekay case from MRI which concerned the agreement of delivery price and shipping schedules and where implied terms were found to be applicable. In particular:
- in commodity transactions (as in MRI) a shipping schedule is essentially a matter of routine whereas in the case of Teekay v STX, delivery dates are not so routinely determined
- the dispute in MRI arose in the context where shipping schedules had been agreed in each of the two previous years, whereas in Teekay v STX there was no historical context.
The Judge did not find the reference to ‘best efforts’ in clause 4 of the Agreement of any assistance as a criterion for reconciling the parties’ conflicting wishes. Only by agreement could the parties’ wishes be resolved and the ‘best efforts’ obligation was no more than ‘aspirational’. He considered the reference to ‘best efforts’ merely qualified the obligation to agree a delivery date. Clause 4 was incapable of giving rise to an enforceable legal obligation.
The court’s starting point when interpreting an agreement will be, as always, the parties’ intentions. On the basis that a legally binding agreement is intended, the courts will strive to give effect to the parties’ commercial intentions, taking into consideration the commercial sophistication of the parties and the type of term which is to be agreed.
On the facts of this case, the wording and the nature of the provision did not give rise to an objectively ascertainable obligation.
This decision should serve as a reminder to commercial parties that where provisions are left to be determined by future agreement, a suitable contractual mechanism should be included to avoid uncertainty and any contention that there is an ‘agreement to agree’. Parties should be cautious when using the words ‘to be agreed’ and ‘best efforts’ which may lead the court to decide the agreement is void for uncertainty.
Parties can rest assured that the court will endeavour to uphold a bargain where reasonably possible but this is more likely to be applicable to commercial terms which are essentially a matter of routine, not subject to negotiation and bargaining which the court cannot reasonably imply.