Void for uncertainty

During the negotiation of a shipbuilding contract, it is common for parties to enter into an option agreement for the construction of additional vessels. 

Such an agreement will typically identify the terms of the contract for the optional vessels by reference to the original contract. The case of Teekay Tankers Ltd v. STX Offshore & Shipbuilding Co. Ltd [2017] EWHC 253 (Comm) concerns an option agreement in which, as is often the case, the key terms of the shipbuilding contract were agreed, except for the delivery date of the option vessels.  

Although the court considered a number of issues such as repudiation, estoppel and damages, the court’s findings as to whether the option agreement should be void for uncertainty and on an issue of confidentiality (in relation to arbitration awards disclosed in the proceedings) are of particular interest. 

In April 2013, STX Offshore & Shipbuilding Co. Ltd (the “yard”) and subsidiaries of Teekay Tankers Ltd (the “buyer”) signed shipbuilding contracts for four “firm” vessels (the “SBCs”). The parties also signed an option agreement which provided the buyer with the option to order three additional sets of up to four vessels.

The option agreement specified that the form and content of the agreements would be identical to the SBCs, the dates that the options had to be declared by, the contract price and the specification of the vessels. With regard to the delivery dates, the option agreement included a clause stating that:

“The delivery dates for each [of the] option vessels shall be mutually agreed upon at the time of [the buyer’s] declaration of the relevant option, but [the yard] will make best efforts to have a delivery within 2016 for each of the first option vessels, within 2017 for each [of the] second optional vessels and within 2017 for each [of the] third optional vessels.”

Under the SBCs, the buyer was entitled to rescind the contracts if the yard did not provide refund guarantees by May 20, 2013. The buyer agreed an extension to this date but, by August 2013, it became apparent that the yard’s banks would not issue the guarantees unless the terms of the SBCs were improved. 

Against this background, on October 2, 2013, the buyer exercised its option on the first set of optional vessels and requested the hull numbers and contract within 10 days, in accordance with the option agreement. The yard responded by citing the difficulties it would have with getting the refund guarantees issued. 

The contracts were not concluded within the (extended) time and, in November 2013, the buyer issued a claim letter for STX failing to enter into the contract for the first option. 

Shortly thereafter, the buyer exercised its option on the second set of four vessels and requested the contract within 10 days. 

Meanwhile, arbitration was commenced in relation to the SBCs. In each case, the tribunal found that the yard had repudiated the contracts, and awarded damages to the buyer.

Question of privacy

The buyer claimed that the yard had repudiated the option agreement and that Teekay Tankers was therefore entitled to terminate the agreement and to claim damages of approximately $178m to compensate for its loss of profits. 

The yard denied liability and argued that the option agreement was void for uncertainty, alternatively that it neither repudiated nor renounced the option agreement, alternatively that no damages were payable. 

The yard also advanced a counterclaim, complaining that the buyer had breached confidentiality by disclosing the arbitration awards and reasons in the proceedings.

The court held that the buyer was not liable for breach of confidence because the disclosure of the arbitration awards and reasons was in the interests of justice. The court was, however, persuaded that a small part of the hearing should be in private, but was keen to remind the parties that proceedings in the English court are, in the absence of good reason to the contrary, conducted in public. The appropriate course of action to take in order to protect confidentiality should be an application to the court. Without an appropriate order, persons who are not parties to the proceedings may, subject to certain limited exceptions, obtain from court records a copy of a statement of case.

The court found that the “background and context showed a joint intention…for the option agreement to be binding and enforceable”. However, the key question that the court had to address was whether the option agreement was void for uncertainty as there was no mutual agreement on the delivery date for the optional vessels. 

Void for uncertainty

The court considered at length the current state of the law with regard to agreements to agree and to implied terms – especially as to whether a term could be implied into the agreement to determine the delivery date. 

Although the court sought to “find an implied term which will save the option agreement”, it concluded that, on the express wording of the agreement, the “parties must be taken to have intended that either would remain free to agree or disagree about a proposed delivery date” and there was no room for an implied term in the absence of such agreement. Therefore, it was held that the option agreement was void for uncertainty. 

The court did, however, address what the position would have been had the option agreement not been void for uncertainty. In doing so, the court considered the correspondence between the parties regarding the option agreement and concluded that a “reasonable observer would conclude it to be clear that STX did not intend to fulfil its obligations under the option agreement”, which would have entitled the buyer to terminate the option agreement by reason of the yard’s renunciation and claim damages. 

This judgment was very lengthy, demonstrating that this was not a straightforward case and that it required detailed consideration by the court of several issues. 

It is apparent throughout the judgment that the court was striving to find that the agreement was binding, undoubtedly because, except for the delivery date, the option agreement was clear as to how the contracts for the optional vessels would operate. Therefore, this case serves as a useful reminder to include express terms dealing with key contractual issues in order to limit the risk that an agreement will be void for uncertainty. 

Despite there being a wealth of case law on agreements to agree (and implied terms), the parties did not identify any case law that specifically related to these circumstances. Given the current state of the market, similar issues relating to agreements to agree and implied terms in shipbuilding disputes may well come back again before the courts. 

Chris Kidd leads Ince & Co’s shipbuilding team, and frequently advises buyers and shipyards in relation to building, conversion and repair contracts as well as dispute resolution for conventional vessels and specialist offshore vessels and floating platforms. He can be contacted at chris.kidd@incelaw.com or +44 (0) 20 7481 0010.