Introduction

Certainty is crucial for a contract to be enforceable.  In the absence of the parties’ agreement on the essential terms of the contract, or the use of an expression such as “to be agreed” in relation to an essential term of an agreement, this may prevent contract from coming into existence on the ground of uncertainty. This article explores the importance of certainty in a contract by looking into the recent English case of Teekay Tankers Ltd v STX Offshore & Shipbuilding Co. Ltd [2017] EWHC 253 (Comm).

Facts

This case concerns a dispute between a shipping company and a shipbuilder.  Teekay Tankers Ltd (the Plaintiff or “Teekay”) and STX Offshore & Shipbuilding Co Ltd (the Defendant or “STX”) entered into a contract under which STX would build four ships for Teekay. They also entered into an option agreement (the “Agreement”), under which Teekay has an option to order  3 additional sets of up to 4 vessels for each set (i.e. up to 12 additional vessels).  Teekay claimed that STX repudiated the Agreement and that Teekay was entitled to and did terminate the Agreement and claim damages of US $178.8 million to compensate it for the loss of profits that it would have made if STX had complied with its obligations under the Agreement. STX argued that the Agreement was unenforceable for uncertainty, in particular, there was no term to agree on the delivery dates, and thus Teekay is not entitled to the damages claimed.

Terms of the Agreement

The key focus rests on the interpretation of clause 4 of the Agreement - which concerns the delivery of the vessel. Clause 4 provides that: -

“[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.”

The words used in clause 4.1 state that whenever Teekay declares its exercise of an option for a particular vessel, the parties must reach mutual agreement upon the delivery date for that vessel. Those words also state that this mutual agreement must be reached at such time as Teekay makes its declaration. As to clause 4.2, it specifies that STX will “make best efforts” to have the delivery within certain periods of time.

Is there a certainty?

Looking at the facts as a whole, the court held that at the time when the Agreement was entered into between the parties, the background and context showed a joint intention for the Agreement to be binding and enforceable.  However, the intention itself to create a binding agreement is not sufficient.  If the parties have intended to leave some essential matter to be agreed between them in future, on the basis that either party will remain free to agree or disagree about that matter, then there is no bargain which the court can enforce.  

In this case, both parties agreed and the court held that the identification of delivery dates for relevant vessels is an essential matter of the Agreement.  Taken on their own, the words at clause 4.1 indicate that when concluding the Agreement the parties have not reached agreement on any specific method by which delivery dates are to be identified. What they have only agreed is that the delivery dates are to be "mutually agreed".  Hence, the essential term on delivery contains uncertainty and therefore the Agreement cannot be enforced.

Any Implied terms capable of forming part of the Agreement?

Teekay attempted to argue further that on the true construction and/or by way of terms implied to give the Agreement business efficacy, the Agreement does contain an effective mechanism for determination of the delivery dates in the absence of agreement of the parties.   Teekay submitted that the best efforts obligation created an obligation on STX to make best efforts to provide delivery dates within a specified period.  However, the court distinguished between agreement to use best efforts or best endeavours to achieve a particular result, and agreement to use best efforts or best endeavours to reach agreement upon an essential term in a contract.  By referring to clause 4, the Court rejected Teekay’s argument to characterise STX’s best efforts obligation as an obligation to provide the initial proposal for delivery date within a specified period.  Instead, the clause only provides the use of best effort on the part of the process of seeking to agree upon an essential term, which is very different from valid and enforceable obligations to use best efforts to achieve a result.  Hence, Teekay failed on this ground as well.

Accordingly, the Court ruled in favour of STX that the Agreement was void because of uncertainty.

Conclusion

This case highlights the importance of certainty in a contract.  Even though this case concerns the shipping industries, the same principle will be applicable to other industries or types of contracts.  It is always prudent to consult legal advice to make sure that a contract includes all the essential elements to ensure its certainty and thus enforceability.  Even if the parties wish to retain flexibility or any provision is to be made for agreement at a future date, it is advisable to set out clearly and with a sufficiently objective mechanism to allow the parties to ascertain what was intended.  While the court may try to give effect to contracts by implying terms to enable the contract to be carried out, say in commercial dealings between parties who are familiar with the trade in question, and where parties have acted in the belief that they had a binding contract, the court will not, however, imply a term into a contract where this would contradict any express contractual terms.  As illustrated in this case, the courts will not lightly save an agreement if it is uncertain, even if the parties do have a clear intention for the agreement to be legally binding at the first place.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.