HAVE WE GOT A DEAL?

THE question is often asked, "Have we got a binding deal once we reach the recap stage?" In fact, a better way to look at the question would be, "When does one have a binding deal?" because, if an agreement is formed, it will usually be formed at an earlier stage than the recap. In most cases the recap will only be a repetition in full of the component terms of the agreement. Whether the agreement is "binding" depends on the terms of the agreement reached.

The legal principles

Under English law, the formation of a valid contract requires three elements-agreement, consideration, and an intention to create legal relations.

Consideration is a technical term for what is provided by a party to a bargain to gain the benefit of the other side of the bargain, and in virtually all ship sales that is the purchase price.

The intention to contract is not usually difficult to find where shipowners are exchanging offers through their brokers to buy a vessel. But it can be a source of misunderstanding, genuine or intentional, where one side claims it did not intend the terms reached so far to have binding effect: there remain further terms to be agreed before that will be so.

To have an agreement there must be an offer and acceptance, but the question is whether a purported agreement possesses sufficient certainty in its terms to be enforceable. It is perfectly possible to have a binding agreement where there remain certain points yet to be agreed. It is here, however, that the facts of each case differ so vitally. What was agreed, and what remains to be agreed, and what does the evidence show the court to have been the parties' intentions towards what had been agreed?

"The court's task is to review what the parties said and did and from that material to infer whether the parties' objective intentions as expressed to each other were to enter into a mutually binding contract" (per Mr Justice Bingham in Pagnan SpA -v-Feed Products Ltd [1987]).

The decided cases

The following examples illustrate the application of the legal principles to the facts of each case.

Sale and Purchase

In the Gladys [1994], a deal had been agreed up to a recap including the words "otherwise usual MSTC terms to be mutually agreed." The buyers claimed they had been entitled to discontinue dealing when, after the recap, they had decided that they didn't want to buy the ship because they had discovered that it was a reefer and not a tweendecker. The owners' case was that the parties intended to enter a binding contract without the final form of the memorandum of agreement (MoA) being agreed.

There was evidence before the court of a number of previous deals between the owning group and the buyers where the MoAs had all been very similar, although the buyers' evidence was that they were unaware that it was the same owning group at the time of the recap and that in any event individual additional clauses might vary from MoA to MoA.

The buyers contended that no final agreement was reached because that depended on the terms of the MoA being agreed, and that was never done. Having heard the evidence of the buyers and the brokers, the judge found that, although the matters to be agreed in order to finalise an MoA were only matters of detail, it was clear to him that neither party considered that they could be taken as read, and both appreciated that there would have to be further negotiations before the terms of the contract were to be regarded as agreed and binding. He therefore found in favour of the buyers.

The opposite result is, of course, possible depending on the facts. The sellers, for trading, in the Merak [1976] were held to be bound by the terms evidenced by telex exchanges. The court found that the only "subject" reserved was that of inspection of the vessel. The buyers had been unable to inspect at first and, against the background of a rising market, the sellers claimed that no binding contract had been formed.

The recap telex (if there was one) is not set out in the judgment, but it seems likely from the telex exchanges that it would have contained a clause simply stating in toto, "Norwegian Saleform revised 1966".

It was apparently not argued before the courts whether that left scope for disagreement on details. Indeed, the Court of Appeal held in this particular case that incorporation of the terms of NSF66 clarified the details of the brief terms agreed on telex, notably the terms under which an inspection would take place and the time by which the buyers must notify the sellers whether the ship was accepted or not.In the Great Marine No 2 [1990], the judge also found that a binding contract was made upon agreement of telex terms in which there were no "subjects" and which were not expressed to be subject to details. The judge commented that incorporation of NSF into the contract did not prevent a binding agreement being reached, notwithstanding that it was anticipated that the MoA would be drawn up and the standard terms amended so as to reflect the specific terms which had been agreed between the parties.

One of the key questions, then, is the "subjects" remaining in the recap. In the Nissos Samos [1985], another demolition sale case, a recap and indeed written contract terms had been agreed on telex and the sellers had given the brokers authority to sign the contract once it had been typed. The judge found that no "subject" had been reserved, as the buyers contended, by which the buyers could reject the ship.

Charter parties

The same principles applied in these cases apply equally to charter party cases. In the "Solholt" [1981] and the "Junior K" [1988] which dealt with the question of whether a binding contract exists where a vessel is fixed "subject to details" it was decided that such fixtures were conditional upon the final details of the charter parties being agreed.

Under English law, the formation of a valid contract requires three elements - agreement, consideration, and an intention to create legal relations.

The charter party case of Granit S.A. -v- Benship [1994] appeared to cause concern in some sectors of the shipping press as to whether some new principle had emerged which might affect the way charter parties are negotiated. The concern was entirely misplaced and the case is perfectly in line with all the cases before it. The case concerned whether a fixture for a ship TBN was agreed on the terms of a telex recap produced by the charterers' brokers which contained no reference to it being subject to charter party details or any similar wording, or whether, as the other side contended, the negotiations leading to the telex being sent ended with a conversation in which the words "subject further charter details" were used which should therefore have appeared in the recap. The charterers' broker said that there was no suggestion that such agreement as was reached was "subject to details".

It was common ground between the parties at the outset of the case that, had negotiations been expressly "subject to details," that would mean there was no binding contract. The judge preferred the evidence of the charterers' broker and in deciding firstly what was the agreement reached therefore found that the fixture was not "subject to details". Having so found, the judge then considered evidence as to what details would need to have been agreed to finalise a written charter party and the further evidence of those involved in the negotiations. Having done so, the judge decided secondly that on the evidence before him the parties had intended to make a binding bargain which was no less binding because there were minor matters to be ironed out in drawing up the charter party itself.

As in all the other cases on this subject it will be seen that this case was decided on its own facts and by applying establish legal principles.