The recent English High Court decision in PT Berlian Laju v Nuse Shipping[1] highlights the importance of drafting a contract on precise terms and the importance of carefully checking that the drafted terms reflect those agreed, in a recap or otherwise, before signing.
The case concerned a dispute relating to the sale of a ship on the amended Norwegian Saleform 1993 terms. The sale fell through because the sellers claimed the buyers had repudiated the contract by failing to remit the full purchase price to the correct account by the closing date. The buyers claimed damages alleging they had complied with their obligations and it was in fact the sellers who were in repudiatory breach.
The dispute turned on the construction of the contractual payment obligations and whether the buyers were entitled to pay 10% of the agreed price by releasing the deposit in Singapore to the sellers, or whether they were required, as successfully contended by the sellers, to pay the full amount to the sellers’ nominated bank account in Greece. The recap email supported the buyer’s contention but the relevant term had been altered (without discussion or negotiation) in the MOA which was drawn up by the sale and purchase brokers and signed by the parties without objection.
In a decision that looked at principles of construction, the availability of rectification as a remedy and the final contract Aikens J found that the arbitrators had erred in law in key parts of their decision. Nevertheless, bound by their arguably unusual findings of fact, he had to dismiss the appeal and uphold the award in favour of the sellers. His reasons for doing so and the impact of the judgment are considered in the article that follows.
Background Facts
The buyers agreed to purchase the vessel “Aktor” for a total price of US$8,400,000. The agreement was set out in a recap mail which provided for
"1. Price: USD 8,400,000 cash on delivery ……
10 pct deposit to be lodged in an interest earning joint account between Sellers and Buyers, to Sellers nominated bank in Singapore within 3 banking days after MOA …
Balance of 90 pct… to be paid on day of delivery at Sellers nominated bank against delivery documents needed by Buyers to register the vessel under her new flag and delivery of the vessel …
Place of Closing / Exchange of Documents to be Singapore.”
The parties agreed vessel to be delivered to buyers either in Singapore or Indonesia. Recap incorporated the terms of Norwegian Saleform 1993 (NSF 93).
The deposit was paid into an account at Singapore nominated by the sellers. Thereafter a MOA was drafted on NSF 93 form, and signed by the parties, which was on materially different terms to the recap email, with payment provisions in the MOA as follows;
“1. Purchase Price US$8,400,000 CASH …
2. Deposit
As security for the correct fulfillment of this Agreement the Buyers shall pay a deposit of 10% … of the Purchase Price within 3 … banking days from the date of this Agreement being signed … This deposit shall be placed with Sellers nominated Bank in Singapore and held by them in an interest earning joint account for the Sellers and the Buyers, to be released in accordance with joint written instructions of the Sellers and the Buyers…
3. Payment
The said Purchase Price together with extra payment for bunkers ROB and for luboils, against delivery documents … shall be paid in full free of bank charges to Sellers nominated bank on delivery of the vessel, but not later than 3 banking days after the Vessel is in every respect physically ready for delivery …”
The MOA provided closing to take place in Singapore and delivery of the vessel to be either in Singapore or Indonesia.
The dispute arose when buyers contended they were entitled to pay 90% of the purchase price to the sellers' nominated bank account in Singapore, with the balance of 10% coming from the release of the deposit. Sellers disagreed and required full payment to be made into their nominated account in Greece. Eventually the buyers agreed to pay 90% of the price in Greece but insisted that the remaining 10% would be paid in Singapore by release of the deposit. Sellers conceded that the deposit could be used as part payment but still required that payment to be made into the Greek account. The buyers refused to pay 10% in Piraeus and the sellers, treating the buyers’ conduct as anticipatory repudiatory breach, accepted the contract had been terminated and walked away. Vessel was never delivered. (Incidentally, the market was rising and that the sellers' conduct was possibly a reflection of the commercial position.)
In their appeal against the award of the tibunal, buyers contended that under the contract they were not obliged to pay the purchase price in Piraeus. If that was wrong, they were only obliged to pay 90% in Piraeus and remaining 10% in Singapore. If both points were wrong, payment in Piraeus was only an intermediate term, breach of which did not go to the root of the contract.
Although the buyers various contentions were reviewed by Aikens J, it is submitted that at the core of this case lies the following question – which terms take precedence, those of an actively negotiated recap or those of a contract signed by the parties which would appear to be no more than a formality and a reflection of the terms negotiated and agreed in the recap?
Rectification
The answer, according to Aikens J’s accurate restatement of the law as determined by preceding cases, depends on the intentions of the parties as manifested through their conduct and not, as the arbitrators incorrectly held, on the subjective (privately held) intentions of the parties. According to Aikens J, if it could be shown that the parties did not intend to agree different terms in the formal contract to those they agreed when they initially concluded their agreement (i.e. in the recap), then it would be possible to “rectify” the MOA to reflect the terms of the recap – in which case the buyers would have prevailed.
Rectification is a remedy whereby a court corrects an agreement that parties have made but wrongly expressed. In order to allow rectification of a contract, the court will have to ascertain with certainty what the parties’ intentions were when they reached that agreement and whether that common intention continued up to the execution of the contract. In ascertaining intention the court relies on what a reasonable person in the position of the parties would have derived from what parties said or did in reaching that agreement. There is no requirement for parties to convey their agreement in formal communication or in any other outward expression of accord, as long as it can be implied from what they have said or done or it is obvious from what occurred. The burden to show what parties agreed and that it was wrongly expressed rests with the party seeking rectification.
The buyers failed to show that the parties did not intend to change the terms of the recap while drafting the MOA as the tribunal had found that by drafting the MOA parties intended MOA to be their final agreement and to supersede the recap. This was a finding of fact and in experience of the arbitrators, when a formal MOA is drawn up after terms are agreed, the parties’ intention is generally to record exclusively and comprehensively their agreement and buyers were not able to rebut this presumption. As the full arbitration award is not publicly available the logic of the arbitrators’ decision remains unclear. Some would argue that with a total absence of further negotiation or discussion the assumption should be that the negotiated recap agreement should supersede the signed final document. The question is, however, one of fact and the arbitrators’ factual reasoning (unlike their legal reasoning) cannot be appealed. We must, just as the court did, defer to the commercial wisdom of the arbitrators.
As the MOA terms governed, the prospects of the buyers succeeding with their other arguments were clearly remote.
Deposit and purchase money
The court agreed with the arbitrators that Cl. 3 of MOA was clear that the place of payment was to be the sellers’ nominated account, in Greece, and the buyers’ failed in their argument that the deposit account and sellers’ nominated account for the purchase price ought to be the same. It is trite law that deposit and payment of the purchase price are materially different and payment of deposit does not constitute part payment. While the seller had agreed the deposit could be used as part payment it did not agree to its payment at Singapore and the court accepted that there were sound commercial reasons why parties could have agreed different banks for payment of deposit and purchase price, such as requirements of a mortgage provider, which in this case was the sellers’ bank in Piraeus, and that this was common practice.
Place of payment is a condition of contract
The buyers’ final point was that the payment obligation was an innominate term and not a condition of the contract and that even if they were in breach by failing to pay 10% in Piraeus it would not entitle sellers to treat the contract as repudiated; the sellers would be entitled to their proven damages caused by 10% being paid in Singapore and nothing more.
The court rejected this argument, holding that payment of the contract price was unquestionably a condition of the contract and place of payment was an equally important part of that agreement. Accepting otherwise would expose the sellers to the risks involved in transferring funds through the banking system, such as claims from banks or others to freeze funds or prevent the sellers from redeeming any outstanding mortgage from the purchase price. Buyers, in failing to make the payment in accordance with the contract, were in repudiatory breach.
Conclusion
This case serves to underline the importance of carefully reviewing the formal written agreement before signing. These documents, both in sale and purchase and vessel chartering, are often treated as an afterthought – a formality to be dealt with after the cut and thrust of commercial negotiations are at an end. A lack of attention to detail can, and in this case did, have dire consequences for one of the parties.
[1]PT Berlian Laju Tanker TBK & Brotojoyo Maritime PTE Ltd v Nuse Shipping Ltd [2008] Lloyd’s Rep. Plus 60
