Bound by Conduct - Contract Formation, Waiver and Estoppel

September 2006

This article is a discussion of the recent decision by Mr. Justice Aikens in the case of Oceanografia SA de CV v. DSND Subsea AS¹.

The Disponent Owners (Owners) of the off-shore supply vessel "BOTNICA" (the Vessel), M/s DSND, with whom Oceanografia SA De CV (Charterers) had entered into negotiations for the provision of an off-shore supply vessel, commenced arbitration proceedings in London for unpaid sums under a purported charterparty dated 28 August 2001. The Charterers challenged the jurisdiction of the arbitration panel, contending there was never a binding contract and therefore no agreement to arbitrate. They sought to rely on Clause 18.1 of their offer which stated 'offer subject to the signing of mutually agreeable contract terms and conditions'. They further, and in the alternative, sought to argue that ih was a condition precedent to the contract becoming effective that the Head Owners (FMA) would agree to the Owners sub-contracting the vessel for the full period in question². The contract terms had not in fact been signed, and nor had FMA given its agreement.

The Owners countered that all of the terms had been agreed, and that if signature was a pre-condition, then the Charterers had waived that condition by words and conduct. The Owners also argued that Charterer's were estopped by convention from denying the existence of a binding Charterparty.

The following issues were discussed in the judgement:

1) Was there a sufficient agreement of terms, excluding the provisions of Clause 18.1, so as to create a binding contract? 

2) Did Clause 18.1 require that both parties sign all of the terms before there was a binding contract? 

3) Was there a condition precedent that needed to be satisfied before there could be a binding contract? 

4) Had the Charterers waived the requirement of Clause 18.1 so that there was a binding contract? 

5) Was there an estoppel by convention which prevented Charterers denying that there was contract?

Was there a sufficient agreement of terms so as to create a binding contract, excluding the provisions of Clause 18.1

In order for there to be a binding contract there must be an agreement between the parties, consisting of offer and acceptance as to the same terms. In ongoing negotiations it is often difficult to determine the point at which there is in fact a binding contract as there are many exchanges with new additions and deletions being raised at various stages.

In The Bay Ridge³ Mr. Justice Cresswell summarized the general principles applied by the court when determining whether or not there is a binding contract. The courts will look objectively at the correspondence as a whole to determine whether the parties have reached agreement on terms which they regard as essential before there can be any binding agreement. It follows therefrom, that there can still be a binding contract despite the fact that there are still terms to be agreed.

In Oceanografia, it was held that there was a sufficient agreement as to terms to create a binding agreement. A question had been raised with regard to a surety bond required under the contract, the amount of which was never agreed and in consequence the bond was never provided. Charterers had stated during the course of negotiations they 'agree the terms and conditions subject to Charter Guarantee Bond'. However, as Clause 18.7 provided for the amount of the bond to be determined at a later stage, Mr Justice Aikens found that this outstanding issue was not of sufficient importance to render the contract unworkable and, as such, there was an agreement as to terms.

Did Clause 18.1 require that both parties sign all of the terms before there was a binding contract?

The clause provided as follows 'Offer for the MSV BOTNICA is subject to the signing of mutually agreeable contract terms and conditions'.

It is well established law that when the phrase 'subject to' is utilised then there shall be no binding contract until such time as the subject is fulfilled. In The Junior K⁴ the correspondence stated 'subject to details of the Gencon charterparty', and it was held that there was no contract until such time as negotiations had taken place with regard to the detailed provisions of the charterparty.

In Oceanografia, whilst the Charterers had signed some of the documents relating to the charterparty they had at no time signed the standard Supplytime 89 contract presented by the Owners. Mr. Justice Aiken held that the wording of Clause 18.1 made clear that the parties were to sign mutually agreeable terms, which meant all of them, then the "subject" on which the contract depended had not been fulfilled and there was no binding contract. Mr. Justice Aikens did have reservations in reaching this conclusion: "I accept… that it is rare in the shipping world for there to be such a "signing subject" to the creation of a binding contract for the hire of a vessel. But the clear and obvious meaning of the words, in particular the words "is subject to…", whose meaning and effect is well known to commercial men, is that there will not be a binding agreement until that "subject has been fulfilled". In this case that is done by each side signing the mutually agreeable contract terms and conditions." ⁵.

Was there a collateral condition precedent before there could be a binding contract?

Mr. Justice Aikens dismissed the Charterers' argument that there could be no contract until the FMA agreed that the vessel would not be required to return to Finland for the icebreaking season.

This argument was dismissed as there was no written evidence which supported such a collateral condition precedent, and in fact the contractual terms suggested the contrary in that they provided that the notice with regards to availability during the winter season would be given no later than 1st October, whereas the vessel was expected to be deployed under the charterparty on about 15 September.

Had the Charterers waived the requirement of Clause 18.1 so that there was a binding contract?

The leading judgement with regards to waiver is The Kanchenjunga⁶. Lord Goff of Chieveley stated 'It is commonplace that the expression "waiver" is one which may, in law, bear different meanings. In particular, it may refer to a forebearance from exercising a right or to an abandonment of a right.'

The requirements for waiver are:

"a party has acted in a manner which is consistent only with his having chosen one of the two alternative and inconsistent courses of action then open to him'" 

by words or conduct the election must be communicated in clear and unequivocal terms 

the party making the election "must be aware not only of the facts giving rise to his rights but also of the rights themselves"

The Charterers were aware of their right to refuse to sign, and in fact continued to not undertake this act. The question as posed by Mr. Justice Aikens was did the Charterers "by clear and unequivocal words or acts abandon its right to insist on signature and elect to conclude a binding contract without a signature…? It does not matter if (the Charterers) had private reservations and intended that it should not be bound. What is important is the outward manifestation of its position".

There were various acts and correspondence relied upon by the Owners to illustrate that the Charterers had abandoned their right to insist on signature. These were:

-payment of the mobilisation fee 

-signing the on-hire statement 

-accepting the vessel for service 

-extending the departure date, which was signed by the Charterers 

-signing the off-hire statement 

-agreement by the Charterers to pay the demobilization fee

The second and third of these acts could not be considered to be unequivocal as these may have been done by the Charterers in response to a false notice given by the Owners on 1 October that they had received the agreement of the FMA that the vessel would remain in service for the winter season. However, after that date the Charterers, following meetings with the Owners, were aware that the FMA's approval had not been given, and, as such, the last three acts were the (only) relevant issues for determining whether there had been a clear and unequivocal election to abandon the requirement of a signature of all terms.

The request to extend the departure date under the charterparty and the off-hire statement both had reference to the charterparty dated 28 August 2001 and these were signed by the Charterers, as well as the Owners. As such, the Charterers were held to have waived the requirement of signature and were bound by the terms of the charterparty, with the effect that the arbitration clause was binding.

Was there an estoppel by convention which prevented Charterers denying that there was contract?

In the case of estoppel whilst there are similarities with the position under waiver, there are important differences. For a party to be estopped from insisting on his strict rights one party must either agree or conduct themselves in a such a manner that the other party believes that the other party will not insist on their strict legal rights. It is not necessary for the representing party to be aware of the rights in the first instance. In addition the other party must rely on the representation made, such that it would be unjust to allow the representor to go back on the representation.

It was held that there were various communications between the parties with the reference to the charterparty dated 28 August, and the Charterers performed the last three acts (mentioned above) with full knowledge that approval had not been obtained for the vessel to remain in service during the winter season. As such, it was assumed by both parties that they were operating under the terms of the charterparty and the Charterers were estopped by convention from denying that they were bound by it's terms.

In conclusion, this decision highlights that in spite of the terms of an agreement expressly and unequivocally requiring a certain condition to be fulfilled in order for there to be a binding contract, a party can find itself bound by its deed and words if these amount to a waiver or estoppel of their strict legal rights. To paraphrase Mr. Justice Aikens in this case, in relation to contract formation it is not where you think you stand that matters, but the outward manifestation of your position through words and conduct.

1.[2006] EWHC 1360 (Comm) 

2. The FMA was the Finnish Maritime Administration from which the Owners had chartered the vessel. The FMA had the option to recall the vessel during the winter months to assist with icebreaking. The Charterers wished to ensure that the vessel would not be recalled by FMA and required the Owners to procure the FMA's agreement to that effect. 

3. [1999] 2 Lloyd's Rep. 227 

4. [1988] 2 Lloyd's Rep. 583 

5. Mr. Justice Aikens at para.81. 

6. [1990] 1 Lloyd's Rep. 391