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Option agreements: the importance of certainty

News / / Option agreements: the importance of certainty

It is not unusual for parties, during negotiations, to try and reach agreement for further work beyond the scope of the initial contract; most notably in the form of an option agreement. In the context of a shipbuilding dispute, the court has recently considered whether an option agreement was void for uncertainty: Teekay Tankers Ltd v STX Offshore & Shipbuilding Co. Ltd [2017] EWHC 253 (Comm).

Background

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”).

The Option Agreement specified the form and content of the agreements (to 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 regards to the delivery dates, the Option Agreement included a clause stating that:

“The Delivery Dates for each [of the] Optional 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 Optional 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 20 May 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 SBC were improved.

Against this background, on 2 October 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 time required under the Option Agreement and, in November 2013, the Buyer issued a claim letter for the Yard 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. The tribunal found that the Yard had repudiated the SBCs and awarded damages to the Buyer.

The issues before the court

The Buyer claimed that the Yard had repudiated the Option Agreement and that it was therefore entitled to terminate the agreement and to damages of approximately US$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 decision

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.

The court considered at length the current state of the law in regards 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 strived 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 damages.

Comment

As is evident from the length of the judgment, this was not a straightforward case and 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 Option 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 such as the delivery date in option agreements (or a mechanism for agreeing such terms), in order to limit the risk that such agreements will be void for uncertainty. 

Chris Kidd

Chris Kidd Head of Shipbuilding and Offshore Construction, Joint Head of Energy & Infrastructure, Partner

David Choy

David Choy Managing Associate

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