The Legal Effect of “Subject-to” in Charterparty Contracts

When negotiating charterparties, it is very common to make such negotiations “subject to” a variety of conditions. Justice Foxton in Nautica Marine Ltd v. Trafigura Trading (The Leonidas) [2020] EWHC 1986 (Comm) offered a valuable guidance on the legal effect of such clauses in charterparty contracts.

In the case, the owners entered into negotiations between 8-13 January 2016 to conclude a voyage charterparty for their crude carrier, the Leonidas, with Trafigura. These negotiations were initially subject to “Charterers’ Stem/Suppliers’/Receivers’/Management Approval” latest 17.00 Houston time, Tuesday 12 January, 2016. The loading ports were to include Aruba and St. Eustasius (collectively referred to as Statia). The intended loading terminal rejected the Leonidas on the basis that the vessel was too large to load at that particular berth (the vessel could have been able to load from the Statia SBM- another nearby terminal not chosen by the charterers).

The owners brought an action against Trafigura arguing that this was a performance condition, meaning that it is a condition which does not prevent a binding contract coming into existence, but if not satisfied the contract would cease to be binding. Building up on that, the owners argued that it was an implied term of the charterparty that Trafigura would take reasonable steps to satisfy the suppliers’ approval subject. It was maintained that Trafigura took no such steps to obtain that approval, or alternatively, that Trafigura bearing the burden of proof, would have to show that the suppliers’ approval would not have been obtained even if reasonable steps had been taken.

Foxton, J, held that the “Suppliers’ Approval Subject” was a pre-condition to a contract (condition precedent to contract) and, therefore, Trafigura was not required to take steps to obtain its suppliers’ approval. A few factors led him to conclude in this manner:

  • a “subject” is more likely to be a pre-condition than a performance condition where the subject involves the exercise of a personal or commercial judgment of one of the potential parties to a contract. Here, it was a commercial choice for Trafigura to determine who the relevant supplier would be and which terminals and berths/tanks within terminals, cargo would be loaded from;
  • the particular negotiating language of the parties referring to agreements as “on subjects” and “lifting” subjects, point towards a subject in the chartering context being more likely to be a pre-condition because it connotes that the subject is resolved by one or both parties removing it, rather than the subject being resolved automatically on the occurrence of an external event; and       
  • based on previous authority, the “Stem Subject” and “Management Approval Subject” were both pre-conditions; where “subjects” appear as a compendious phrase, it is more likely that they are all intended to have the same effect.

Obiter dictum, Foxton, J, considered how damages were to be assessed if the clause had been a performance condition. He held that because the alleged lost benefit (loss of profit under a concluded charterparty) was dependent on the decision of a third party (supplier) to approve the vessel, damages in that case had to be assessed on a “loss of chance” basis (Wellesley Partners v. Withers [2015] EWCA 1146)

Two points emerge from the judgment that have implications for the market. First, the judgment strongly indicates that a “subject to” clause in a charterparty will normally be construed as a condition precedent to a contract given that such clauses often involve the exercise of a personal or commercial judgment of one of the parties to the contract. Obviously, it is still possible that a “subject to” clause could be treated as a performance clause if it depends on the approval or performance of those other than the parties to the contract; e.g. “subject to the approval of the Ministry”. In that case, the question may arise whether or not one of the parties to the contract must act reasonably or in good faith in taking steps to ensure that the condition is lifted (See, The John S Darbyshire [1977] 2 Lloyd’s Rep 457). Second, there was a disagreement in the case as to whether the suppliers referred to in the subject were only terminals from which cargo was intended to be loaded or included the charterers’ contractual suppliers. Foxton, J was adamant that the phrase encompassed all those approvals which the charterer commercially wished to obtain on the supply side. This sounds sensible but naturally makes such conditions more challenging from the shipowners’ perspective.          

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