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:
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:
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