Use of ‘subjects’ when negotiating charterparties – mind your language!

February 10, 2023
LCI Law Shipping News

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.

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