“Subject to Review” clauses – time for a careful review
Toptip Holding Pte Ltd v. Mercuria Energy Trading Pte Ltd [23.11.2017]
The Singapore Court of Appeal recently held that a binding charter party was formed, notwithstanding the presence of a “subject to review” clause.
Toptip Holding Pte Ltd (Toptip) was the charterer. Mercuria Energy Trading Pte Ltd (Mercuria) was the disponent shipowner. As is the norm in the business, the charter party was negotiated through a broker.
After receiving the enquiry from the broker which contained the main terms, Mercuria replied on the following terms:
“MERCURIA WOULD LIKE TO OFFER FIRM BSS FOLLOWING TERMS:
OTHERWISE SUB REVIEW OF CHTRS PFMA CP WITH LOGICAL AMENDMENT” (the Offer)
Mercuria’s offer was accepted by Toptip. Thereafter the broker and Mercuria corresponded to work out the exact terms of the charter party. During their discussions, Mercuria proposed using a previous charter party (the Australian CP) Toptip entered into with Mercuria as a base for the current charter party and the broker proceeded to prepare a draft based on the Australian CP.
Before the charter party was signed, there was an issue as to whether the end receiver was prepared to accept this vessel. Eventually the end receiver indicated that it was prepared to accept the vessel. However, Mercuria wrote to Toptip saying “Owrs cannot accept chtrs cp after review, so subject failed on cp review…”
Toptip went on to source from a substitute charter. It turned out that Toptip eventually chartered the same vessel but from another disponent owner at a higher rate. It appears that Mercuria terminated the charter party with Toptip and chartered the same vessel to another party at a higher rate, and that party subsequently sub-chartered the same vessel to Toptip.
Firm offer capable of acceptance
The Court of Appeal held that, based on the wording of the Offer, it was a firm offer capable of acceptance and formed a binding contract. The main terms contained all the essential terms of the contract needed for a workable charter. The only issue that the court had to deal with was whether the subject to review clause in the Offer destroyed its apparent character as an offer.
The court considered the English case the Pacific Champ  and accepted that a binding contract can be formed notwithstanding the presence of such a clause. The question that the court had to deal with was whether the parties intended to defer legal relations until full details were agreed.
In this regard, the court gave a lot of weight to the wording of the Offer which states that it was an offer on firm basis. The court also gave significant weight to the wording of the acceptance of the offer when the broker replied to Mercuria saying that the offer was accepted.
Meaning of subject to review clause
Here, the Singapore Court of Appeal followed the decision in the Pacific Champ and held that the subject to review clause is a condition subsequent and not a condition precedent.
By making an offer where the source of the boilerplate terms should be the charterer’s pro forma charter party with logical amendments, it meant that Mercuria agreed that Toptip’s pro forma charter party boilerplate clauses are acceptable - so long as they are amended in a logical fashion to be consistent with the main terms that parties have already agreed.
The court went on to find that, on the facts, there was no reason to believe that Mercuria would find any of the terms of the draft charter party prepared by the broker to be objectionable.
The rationale is that the draft charter party was prepared based on the Australian CP, and that this was prepared following Mercuria’s suggestion. In the circumstances, Mercuria must have thought that the draft charter party (based on the Australian CP) was acceptable so long as the terms are consistent with the main terms.
While not expressly mentioned in the judgment, it appears that the rationale behind the decision was that Mercuria either waived the condition subsequent, or the facts as presented was such that there could not be any possibility of a breach of the condition subsequent.
It is not unusual to rely on the subject to review clause or other similar clauses as a get out of jail card. A common thinking amongst many operators is that so long as all subjects are not completely lifted in full, the charter party can be avoided. This case shows that this may not be true in all cases.
If a shipowner or charterer wants to ensure that a binding contract is to be deferred to at a later stage, this must be demonstrated by very clear wordings and conduct.
Key lessons learnt
- If you do not want to enter into a binding contract yet, always make sure you say so expressly and in clear language.
- Use of words like “subject” may not always mean that the contract is not formed yet.
- If your conduct shows that you regard the contract as a binding one, it is likely that the court will similarly regard it as a binding contract.