It is generally understood when negotiating contracts that the word “subject” or “sub”, precludes a binding agreement until any “subjects” have been dealt with. The “subjects” are a pre-condition to the formation of a contract. However, this may not always be the case. “Subjects” can also be performance conditions which when performed mean a contract has come into force.
An English High court decision of July 2020 addressed the distinction
The Leonidas [2020] EWHC 1986 (Comm)
The Facts
Nautica (“The Claimant”) were registered owners of the vessel “Leonidas” (“the Vessel”). They entered into negotiations to voyage charter the Vessel to T (the “Defendant”) to carry crude oil from the Caribbean to the Far East.
The negotiations took place between 8-13 January 2016 and were initially "subject to Chtrs' S/S/RMGT approval” (that is Stem / Suppliers / Receivers and Management Approval) but by the 13 January the only outstanding subject was the Supplier’s approval with the deadline for lifting this of 17:00 hrs.
However, at 16:59 hrs the Defendant emailed to advise that they were unable to lift all subjects on the Vessel.
The Claimant held the Defendant in repudiatory breach and entered into a substitute Charterparty but in a falling freight market at a less profitable rate, and. claimed damages for the difference in the earnings.
Submissions
The Claimants argued that the Suppliers’ Approval Subject was a performance condition that the Defendant was required to take reasonable steps to obtain that approval, and they had not.
Not surprisingly the Defendant’s position was that the Suppliers’ Approval subject was a precondition to the charterparty that had not satisfied and, therefore, the parties had not reached agreement on all essential terms.
The Decision
In deciding the case for the Defendant Mr Justice Foxton referred to the following authorities:
RTS Flexible Systems v Molkerei Alois Muller [2010] 1 WLR 753, [45] - (see also the article Contractual Negotiations - Caution Required) “Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations…”
Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd's Rep 601, 619 - “Even if the parties have reached agreement on all the terms of the proposed contract, nevertheless they may intend that the contract shall not become binding until some further condition has been fulfilled. That is the ordinary “subject to contract” case…”
The judge made the following comments when determining whether the subject was a pre-condition or a performance condition:
- “In circumstances in which the first and last parts of what is a compendious phrase create pre-conditions (Stem and Management Approval), it would to my mind be surprising if the two intermediate elements (Suppliers and Receivers Approval) are of different status. That is all the more so when all are described as “subjects”;
- “A “subject” is more likely to be classified as a pre-condition rather than a performance condition if the fulfilment of the subject involves the exercise of a personal or commercial judgment by one of the putative contracting parties”:
- “Where a "subject" is only resolved by one or both of the parties removing or lifting the subject, rather than occurring automatically on the occurrence of some external event such as the granting of a permission or licence, the "subject" is likely to be a pre-condition rather than a performance condition”; and
- Referred to Carver on Charterparties (2017) at para. 2-031 "The parties may agree the terms of a charterparty and one such term may be a condition precedent that unless and until the condition precedent is satisfied, no binding contract comes into being. In charterparty negotiations, such conditions precedent are often referred to as 'subjects' and the satisfaction of those conditions precedents is referred to as 'lifting the subjects'”.
On this basis there was no binding contract and the Defendant was not liable to the Claimant.
Comment
This case is reminder to those entering into Charters to take care in drafting or agreeing to terms in the contract and to consider the difference between pre-conditions and performance conditions before contracting. Indeed, if the Suppliers’ Approval Subject been a performance condition, there would have been an obligation to take reasonable steps to lift the approval, an in the event of failure to do so the Defendant would have been liable in damages to the Claimant.
Members should ensure they do not inadvertently waive a pre-condition unless they intend to, as this may have the effect of rendering a contract binding.
Members are also referred to the following articles on the topic.
Fixtures "Subject to Details" - English Courts Provide Further Guidance
London Arbitration - Misdescription and "Subject to Details"
