When is an agreement to agree enforceable?
The decision in Teekay Tankers Ltd v STX Offshore and Shipbuilding Co Ltd considers a number of important principles of English commercial law, including certainty of contract, implied terms, repudiation/renunciation of contracts, issue estoppel, arbitral confidentiality and quantification of damages.
However, the claim ultimately turned on whether an “Option Agreement” was void for lack of certainty, and therefore this article will focus on this issue.
The factual background is complex, but the essential facts are that Teekay and STX signed a series of agreements including: 1) a Letter of Intent, pursuant to which it was agreed that Teekay would purchase and STX would build four vessels; and 2) an Option Agreement, pursuant to which STX granted Teekay an option to purchase a further three sets of four vessels.
Teekay exercised its option to purchase the optional vessels, but the parties were unable to agree the terms of the individual shipbuilding contracts, and so individual ship building contracts were never signed.
Teekay eventually claimed that STX had repudiated or renounced the Option Agreement. Teekay brought a claim against STX for US$178.8 million for loss of profits it claimed it would have made if STX had complied with its obligations under the Option Agreement.
The Option Agreement
The dispute turned on whether the following clause in the Option Agreement was enforceable:
[4.1] The Delivery Dates for each [of the] Optional Vessels
shall be mutually agreed upon at the time of [Teekay’s] declaration
of the relevant option,
[4.2] but [STX] will make best efforts to have a delivery within
2016 for each [of the] First Optional Vessels, within 2017 for
each [of the] Second Optional Vessels and within 2017 for each
[of the] Third Optional Vessels.
Was the Option Agreement void for uncertainty?
It is often very difficult to say whether an agreement to agree is enforceable or unenforceable. When considering which side of the line an agreement to agree falls on, consideration needs to be given to the principles set out in the Mamidoil-Jetoil 2 and the B J Aviation3 cases.
Applying those principles which are relevant to clause 4 of the Option Agreement, the analysis goes like this:
1) each case must be decided on its own facts. The court said that previous cases were not relevant;
2) the language of obligation in clause 4 of the Option Agreement (e.g. “shall be…”) was of limited assistance to Teekay. It was common ground that the parties intended that the Option Agreement be binding, and Teekay accepted that this mutual intention was not an answer to STX’s uncertainty defence;
3) if the Option Agreement was unenforceable, it would give STX a windfall in the sense that STX would obtain a far better package of agreements than it was entitled to expect, and likewise it would deprive Teekay of a benefit that the parties envisaged that Teekay should obtain;
4) the parties had acted on the Option Agreement, because Teekay exercised its option to purchase the first set of optional vessels at a stage when there had been no suggestion that clause 4 rendered the Option Agreement unenforceable. Furthermore, Teekay had made an investment premised on the Option Agreement being enforceable, for Teekay had purchased the initial four vessels;
5) it was “understandable” 4 that the parties would prefer to have a degree of flexibility so that delivery dates could be fixed in the light of circumstances actually existing at the time the option was declared; and
6) there was no arbitration clause in the Option Agreement. In the Jetoil case, it was said that the presence of an arbitration clause may point towards a contract being certain. Had there been an arbitration clause in the Option Agreement, this would have given Teekay an “additional string to its bow. There was not, and so [Teekay] does not have that additional string.”5
In view of the above points, the court said that this was a case where the court should strive to give effect to the bargain made by the parties, if it was possible to do so.
Accordingly, the court had to consider whether one or both of the implied terms identified by Teekay could be implied into the Option Agreement to make clause 4 of the Option Agreement workable.
Could a term be implied into the Option Agreement?
Teekay argued that a term could be implied into the Option Agreement that the delivery date for each optional vessel would be:
(1) such date as STX offered; or
(2) an objectively reasonable date to be determined by the court
As to the first of these, the court said that this was “an example of a term fashioned with the benefit of hindsight6”. The court noted that it does not merely involve reading down the words “shall be mutually agreed upon” in clause 4. It is wholly different from the scheme which is apparent from clause 4.
As to the second, the court likewise held that the proposed term could not be implied into the Option Agreement.
As Teekay failed to identify any other way that the Option Agreement could be saved, it followed that STX’s uncertainty defence succeeded and Teekay’s claim failed.
In some instances, the law will imply a term if the parties do not make express provision. For example, in a sale of goods context, if no price is agreed in a sale contract, the law will imply a term that the buyer must pay a reasonable price7 and it will then fall to a court to determine what that price should be taking into account the circumstances of each particular case 8.
Nevertheless, this case serves as a reminder of the dangers of leaving essential terms to be agreed at a later date. If an essential contractual term is left for future agreement, some mechanism should be expressly agreed in advance to cover the possibility that agreement will not be reached.
If you require further information or advice regarding the contents of this article please contact William Stansfield whose details appear below.
1 EWHC 253 (Comm)
2Mamidoil-Jetoil Greek Pretroleum Co SA v Okta Crude Oil Refinery AD  2 Lloyd’s Rep 76
3B J Aviation Ltd v Pool Aviation Ltd  2 P & CR 25
4Para 185 of the judgment
5Para 186 of the judgment
6Para 190 of the judgment
7Sale of Goods Act 1979, s.8(2)
8Sale of Goods Act 1979, s.8(3)