When negotiating charterparties, parties tend to say the contract is ‘subject to’ something.

Care is needed when doing so because this could mean:

1. There is no binding contract; or
2. There is a binding contract, but it operates only when the ‘subject’ is fulfilled; or
3. There is a binding contract, but it actually falls away if the ‘subject’ is not fulfilled.

Some ‘subject to’ phrases are clearer than others.

No Binding Contract

The phrases “subject to details” (The Junior K – High Court/1958), “sub details” (Thoresen v Fathom – High Court/2004) and “subject to details/logical amendments” (The CPC Gallia – High Court/1994) are among the clearest, having been held to mean there is no contract. This is more briefly referred to as being “on subjects”: the parties are summarising their negotiations so far, setting out what remains to be done for there to be a binding contract, and putting each other under commercial (though not legal) pressure not to withdraw for reasons unrelated to the ‘subject’ such as a change in the market.

Similarly, the phrases “subject to board approval” (The Palladium – High Court, 2018) and “subject to stem” (Kokusai Kisen Kabushiki Kaisha v Johnson – High Court, 1921) have been held to mean there was no contract.

The phrase “subject to suppliers’ approval” was similarly held to mean there was no contract in The Leonidas (High Court, 2020) on the basis that (i) this encompassed the approvals the charterer commercially wished to obtain on the supply side; (ii) it was for the charterer to determine who its contractual supplier will be – it may be discussing with more than one potential cargo supplier or have a choice between loading a cargo it already owns or buying cargo from a third party, and it would be unreal to suggest the charterer was under an obligation to the owner to obtain approval from the intended supplier; and so (iii) there was no contract until the charterer lifted/waived the ‘subject’.

For the same reasons, the phrase “shipper/receivers approval” was similarly held to mean there was no contract by the Court of Appeal in late 2022 in The Newcastle Express.

Binding Contract

However, the phrase “sub review ownrs head cp btb” was said (non-bindingly) by the High Court not to prevent a binding contract from existing: there was merely to be an objective/mechanical review to ensure the charterparty was compatible with and permitted by the head bareboat charterparty (which it was).

It Depends

A phrase such as “subject to survey” generally requires all the exchanges to be considered to determine which of the three categories above applies. In The Entrancer (High Court, 1969) the phrase “subject to a satisfactory survey” was held to mean there was no contract. But in The Merak (High Court, 1976) this was disputed. In The Leonidas (2020), the High Court commented that where an agreement was “subject” to an event within a third party’s control, it was more likely to fall within category 2 above.

Conclusion

Some ‘subject to’ phrases are clearer than others. In every case, the whole contract needs to be considered along with whether the contract has begun to be performed. This may affect the analysis.

LCI Law have a wealth of experience in this area. If this type of question has arisen in a contract negotiation of yours, do ask us.

The English High Court has just decided in The Thorco Lineage not to follow its 14-year-old decision in The Limnos on carriers limiting their liability for bill of lading cargo claims.

In The Limnos (2008), 0.6% of the cargo had been damaged during its shipment by the vessel. But the whole cargo was treated in the market as a distressed cargo, so its receiver claimed its US$1.5 million total loss from the owner/carrier under the bill of lading.

The bill of lading incorporated the Hague-Visby Rules (HVR). The owner sought to limit its liability based on the 0.6% physically damaged quantity under Article IV.5(a)’s words emphasised in bold by us: “Unless the nature and value of such goods have been declared by the shipper before shipment and inserted in the bill of lading, neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with the goods in an amount exceeding 666.77 [Special Drawing Rights/SDRs] per package or unit or 2 [SDRs] per kilogram of gross weight of the goods lost or damaged, whichever is the higher.”. The cargo receiver said the limit should be a much higher figure, calculated on the whole cargo quantity – not just the physically lost/damaged part.

The High Court judge (Burton J) agreed with the owner:

1. In the phrase “goods lost or damaged” to which the limit related, the word “damaged” meant ‘physically damaged’, i.e. the 0.6% quantity.
2. The earlier phrase “loss or damage to or in connection with the goods” was different: there the “damage” was physical and the “loss” was economic. But the limit was not calculated based on that phrase.

In The Thorco Lineage, the same question arose. Cargo was shipped from the USA to Australia. The vessel suffered engine failure and grounded. Salvors were contracted. Some cargo was discharged in South Korea and some was transhipped by another vessel to Australia. The cargo receiver claimed US$8.4 million of which 3% of the claim was for the 7%-physically lost/damaged cargo and the balance (the vast majority of the claim) was for its paid salvage and on-shipment costs.

But the High Court judge (Sir Nigel Teare) disagreed with the decision in The Limnos (a High Court judge is not bound by the decision of another one), holding that:

1. The Court’s task was to ascertain the ordinary meaning of the words used (i) in their context; and (ii) in light of the HVR’s object and purpose.
2. There was force in the cargo receiver’s argument that the owner was re-writing Art IV.5(a), whose words in bold above could have included the words ‘physically or economically’ but did not do so.
3. But there was also force in the argument that the phrase “goods lost or damaged” could include economically damaged goods as part of its ordinary meaning. The cargo receiver would, given the expense it had incurred, describe its cargo as economically damaged, and support for this could also be found in the Oxford English Dictionary meaning of the words ‘damage’ and ‘damaged’. It gives effect to the context of carriage of goods by sea. It also gives effect to the apparent intention in the preceding words “loss or damage to or in connection with the goods” in Art IV.5(a) to limit liability for economic losses in connection with goods without physical damage – the HVR drafters could not have intended the limit to apply only to physically damaged goods. One would not expect “goods lost or damaged” to have a meaning resulting in liability for economic loss or damage, which is stated by the first phrase to be subject to limit, not to be limited after all. On the contrary, the two phrases are very closely linked.

The judge also expressed his (obiter dictum/non-binding) view that even if he had followed The Limnos, there was physical damage by reason of the maritime lien the salvor had had over the cargo (damaging the cargo owner’s title to the cargo) until it was given security for its salvage remuneration.

The decision in The Thorco Lineage will come as a pleasant surprise to cargo owners advancing claims for lost profit/expense arising out of loss/damage to cargo. Though it will also benefit shipowners in rarer cases where they will be assisted by limitation of liability and where they do so despite there being no cargo loss or damage at all (such as a claim for the cargo’s loss in value due to delay).

The decision is not being appealed to the Court of Appeal, so it is the final word on this – for now.

In 2020, the High Court of England & Wales groundbreakingly decided in The Eternal Bliss the owner of a ship delayed in discharging cargo could claim from the voyage charterer not just demurrage for the delay at the agreed USD daily rate but also damages for the resultant cargo deterioration/loss. In doing so, the judge said you do not need a separate breach to claim such a separate loss – the one breach in failing to load/discharge within the required time (laytime) suffices.

In 2021, the Court of Appeal overruled that, deciding you do need a separate breach to claim such a separate loss – demurrage is the sole remedy for failing to load/discharge within the laytime.

The Supreme Court has just granted permission to hear the owner’s appeal, and its decision will be awaited by the shipping and legal community with bated breath. The question arises often – we have handled several disputes raising the question the Supreme Court will answer.