Nautica Marine Ltd v Trafigura Trading LLC (The “Leonidas”) – English Commercial Court: Foxton J: [2020] EWHC 1986 (Comm): 28 July 2020

by · Published · Updated

VOYAGE CHARTER – APPROVAL OF A VESSEL – DAMAGES FROM BREACH OF CHARTER –  PRE-CONDITION OF CHARTER – PERFORMANCE CONDITION OF CONTRACT – IMPLIED OBLIGATIONS OF CHARTERER – PUTATIVE LOSS OF PROFITS – BREACH OF CHARTER

Nautica (Owner) negotiated a prospective voyage charter of the tanker “Leonidas” with Trafigura (Charterer) for a laden voyage carrying oil cargoes.  The charter was subject to obtaining suppliers’ approval of the vessel within a four-day deadline. When the deadline passed without Trafigura obtaining suppliers’ approval, the charter was abandoned. Nautica claimed damages for the charterer’s alleged breach of charter of the difference between the profit it would have gained on the prospective charter and the (lesser) profit made on the fixture entered.

Was a legally binding contract in effect?

Key to the case was whether a legally binding contract existed between the parties and, if so, was the charterer under a performance obligation to reasonably secure the suppliers’ approval of the vessel within the deadline.   

The owner alleged the charterer failed to take reasonable steps to secure the suppliers’ approval.  The judge focused on the legal principles governing whether a legally binding contract had been finalized.  The phrases “subject to contract” and “subject to details” were examined from a legal perspective and the judge confirmed that these phrases allowed either party to avoid entering contractual relations by either refusing to sign a written contract or reach agreement by a specific date.

Pre-Conditions vs Performance Conditions

The judge further explored the difference between pre-conditions and performance conditions as related to shipping contracts.  The court defined pre-conditions as items subject to approval or fulfillment by one of the two contracting parties.  These items must be completed for a contract to become legally binding.  If these pre-conditions are not met by the owner or charterer, the contract does not come into existence.

Alternatively, performance conditions were defined as items subject to approval or fulfillment by an entity other than one of the parties, and so do not prevent a binding contract coming into existence.  Failure to meet performance conditions by one of the parties could constitute a breach of contract

Critical to determining whether a subject is a pre-condition or a performance condition is whether the resolution of the subject depends upon the decision of a contracting party, or that of a third party. 

The case highlighted that, in the context of ship chartering, the lifting (removing) of subjects is typically considered a pre-condition requirement for a prospective fixture to become legally binding on the parties.  If, however, parties want a subject to be a performance condition, which requires the relevant party to take reasonable steps to meet the subject within a certain time frame, the parties must specifically agree to that condition in the prospective contract.

The Decision

The judge proceeded to examine the phrase “subject to suppliers’ approval” in the current case noting that this created a pre-condition since it had a specific and short deadline by which it had to be approved or lifted.

In addition, the judge noted stem, supplier and receiver approvals all contribute to the commercial desirability of the charterparty for the charterer.  To be financially beneficial for the charterer to charter the ship, these three conditions had to be met:

  1. Can the charterer procure a cargo for carriage on this vessel?
  2. Can the cargo be loaded on and discharged from the vessel? 
  3. Is the vessel acceptable to the suppliers and receivers? 

Further, the court found these conditions critical to the contract and different from performance conditions, such as obtaining import and export licenses.  It was, ultimately, for the charterer to determine whom its contractual suppliers would be.  This meant the charterer had no implied obligation to take reasonable steps to lift the subject before the deadline expired.  

Accordingly, the charterer was not liable to pay the owner’s damages for putative loss of profit.  The owner’s claim was dismissed.