England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		09/03/2005

The Hon Mr Justice Langley :

Background

1. The Claim Form in this matter was issued on 25 January 2005. Particulars of Claim were served two days later. The Defence is dated 22 February. On 25 February, Cresswell J ordered an expedited trial to be heard on 2 March of the issue whether the claimant is entitled to the declaratory relief claimed in the Particulars of Claim.

The Claim

2. The claim relates to an Option Agreement for the purchase by the claimant from the defendant of an Oil Product Tanker ("the Option Vessel") to be built by the defendant on the terms of a Shipbuilding Contract ("the Option Contract") to be entered into upon exercise of the Option. The declaratory relief claimed in the Particulars of Claim reads:

"(1) A declaration that the claimant has validly exercised its Option under the terms of the Option Agreement dated 17 September 2003 as amended by the Addendum thereto dated 15 October 2003 by serving a notice on the defendant by fax dated 2 December 2004 declaring the exercise of its Option to purchase the Option Vessel; and/or

(2) A declaration that the Option Agreement dated 17 September 2003 as amended by the Addendum thereto dated 15 October 2003 remains in existence and binding on the defendant; and/or

(3) A declaration that the defendant is obliged to enter into the Option Contract as defined by the Option Agreement dated 17 September 2003 as amended by the Addendum thereto dated 15 October 2003."

The Contract for Hull No. 63

3. On 17 September 2003 the claimant (as Buyer) and the defendant (as Builder) entered into a shipbuilding contract under which the defendant agreed to design, complete and deliver to the claimant a Double Screw Diesel Engine Driven 4,200 deadweight tonnes Oil Product tanker, Hull No. 63.
4. The Contract for Hull No. 63 required the price of the vessel to be paid in five instalments. The currencies of payment were $US and Euros in equal proportions. The first instalment was "due and payable" upon the defendant issuing a commercial invoice and the claimant (or its bank) receiving a Refund Guarantee securing repayment of the instalment in stated circumstances. The Contract also provided that if any of the first four instalments were not paid by the claimant within 5 banking days after it became due the claimant would be deemed to be in default and if any default continued for a period of 10 days the defendant might, at its option, rescind the contract by giving a fax notice to that effect confirmed in writing upon dispatch of which "this Contract shall be forthwith rescinded and terminated".
5. Article XIX referred to Payment Guarantees to be provided by the claimant and Refund Guarantees to be provided by the defendant.
6. Addendum Number One to the Contract for Hull No. 63 was made on 13 October 2003. It revised the payment terms to require a "Preliminary Payment" of €320,000 to be made by the claimant "at the effectiveness of the Contract" the payment to be deducted from the first instalment of the purchase price. The first instalment itself was to be paid within 30 days of a notice from the defendant the notice to be given between 15 April and 15 May 2004. The Contract was to be effective on "fulfilment of all of the following conditions":

"Receipt of the Buyer of the refund guarantee for the Preliminary Payment.

Receipt of the Preliminary Payment by the Builder until (sic) 30 October 2003.

Approval of the Board of Directors of the Builder …."

7. Thus the Contract was amended to provide for a preliminary payment to be made by 30 October 2003 but the return of that payment was itself to be guaranteed in the same manner as the instalments of the price.

The Option Agreement

8. Also on 17 September 2003 the claimant and the defendant entered into the Option Agreement. It is the Option Agreement, and in particular the provisions of clauses 2 and 4, which give rise to the present dispute. The Option Agreement (referring to the claimant as the "Buyer" and the defendant as the "Seller") provides (so far as material and with my emphases) that:

"OPTION AGREEMENT

Dated ….

BETWEEN

…..

WHEREAS.

(A) The SELLER has entered into a Shipbuilding Contract (hereinafter called the Contract) … for designing and completing … One (1) unit …. Identified as the Shipyard's Hull No. 63.

(B) The SELLER has agreed to grant the BUYER an option for one (1) additional Vessel on the terms and conditions set out herein.

IT IS AGREED

1. The SELLER grants to the BUYER an option (the Option) to purchase one (1) additional Vessel (the Option Vessel), such Option Vessel to be identical to the Vessel as specified under the Contract.

2. Upon the exercise by the BUYER of the Option as per clause 4 below the SELLER shall enter into a Shipbuilding Contract (the Option Contract) for the Option Vessel.

3. The Option Contract and its Specification shall be in the same terms and conditions as agreed for the Vessel as per the Contract with the below mentioned amendments:

(a) The Contract price for the Optional Vessel shall be:

Five Million Four Hundred Seventy Thousand United States Dollars (US$ 5,470,000) plus

Four Million Eight Hundred Fifty Two Thousand Euros (€4,852,000)

(b) The Delivery Date for the Optional Vessel is agreed as follows:

Option Vessel shall be delivered to the BUYER after 16 months of effectiveness of its contract.

(c) The BUYER and the SELLER shall undertake to deliver the securities in the form referred to in Article XIX of the Contract to the BUYER and SELLER respectively promptly before effectiveness of the Option Contract.

4. The Option shall be declared by the BUYER by the service of notice latest within 6 months after effectiveness of Contract for Hull No 63. Simultaneously, the BUYER shall be required to pay one percent (1%) (Commitment Fee) of the Contract Price to the SELLER. In case the remaining fourteen percent (14%) of the Contract Price as the remaining part of the first instalment which shall become due upon notice of construction of the Vessel is not paid by BUYER, then the SELLER shall have the right to retain the commitment fee of 1% and this Option Agreement shall become null and void.

The SELLER has the option of not to commence construction of the Vessel prior to August 1, 2004.

If the Shipbuilding Contract for Hull No. 63 does not become effective ….

5. ….

6. The execution of the new Shipbuilding Contract, pursuant to this Option Agreement, shall take place on or before April 10, 2004.

7. This Option Agreement shall be governed by and construed in accordance with the laws of England and the parties hereto submit to the exclusive jurisdiction of the Courts of England."

The Addendum to the Option Agreement

9. On 15 October 2003 Addendum Number One to the Option Agreement was agreed. It extended the time for "declaration" of the Option by the claimant and for the obligation to commence construction of the vessel by the defendant. It provided:

"The Optional Vessel to be declared by Buyer within 6 months after the first instalment for the firm Vessel is received by Builder, and the Builder shall commence production within 9 months after declaration of the Option Vessel by Buyer and shall deliver the Option Vessel 16 months after commencement of its production."

The General Effect of the Option Agreement and Addendum

10. The drafting of the Option Agreement and the Addendum to it is not of the most elegant. But the general effect of the resulting agreement is not really in issue. It gave the claimant an option to buy an identical vessel to Hull 63 and to do so on the same terms save as provided in Clause 3 of the Option Agreement. The option could only be "declared" by the claimant in the 6 month period following payment of the first instalment of the price for Hull 63. In the event that payment was made on 16 June 2004 and so the option could be exercised at any time between 16 June and 15 December 2004. If it was not exercised by the later date the option fell away. The defendant had a period of up to 9 months following the exercise of the option before it was obliged to commence "production" of the vessel and 16 months after the commencement of production to deliver the vessel.
11. The defendant was obliged by Clause 2 "upon the exercise by the Buyer of the Option as per Clause 4" to enter into the contract to build the vessel. The payment of the 1% "commitment fee" under Clause 4 (which was a sum in the region of US$100,000) was not (in contrast to the equivalent provision in Addendum One of the Contract for Hull No. 63) the subject of any refund guarantee securing its re-payment to the claimant in the event of default by the defendant. The fee was to be forfeited, and the Option was to be "null and void", in the event the claimant did not pay the 14% balance of the first instalment of the price. That payment was to be made "upon notice of construction of the vessel" presumably to be given by the defendant but not further defined.

The Facts

12. On 26 November 2004 the defendant sent an e-mail to the claimant "since the declaration time is coming near". The point made was that the rise in the Euro against the US$ and the currency split in the proposed contract for the Option vessel was such as to make it "very difficult for us to complete the optional vessel with the current Euro parity" unless, in effect, the price or Euro proportion of it were to be re-negotiated. By a letter dated 2 December but sent on 3 December the claimant wrote to the defendant in terms which it is agreed complied fully with the first sentence of Clause 4 of the Option Agreement and the provisions of Clause 5 (on service of the declaration which I have not set out). The letter concluded by requesting the defendant to provide a copy of the Option Contract for the construction of the vessel, no doubt a reference to Clause 2 of the Option Agreement. The letter made no reference to nor did the claimant pay the 1% commitment fee referred to in the second sentence of Clause 4.
13. There followed exchanges in which the claimant pressed for the Option Contract or for any disputes to be identified and the defendant, in effect, sat on its hands. The last time for exercise of the Option Contract expired at midnight on 15 December 2004. Thereafter the defendant took the point which it is now for the court to resolve that without payment of the commitment fee the option had not been properly exercised and was now null and void. Although reference was made to the importance of payment of the fee to enable the defendant to hedge the currency risk and in the Defence (paragraph 18.4) to enabling the defendant to commence negotiations with suppliers, I think it is safe to assume that the defendant was content and indeed pleased to rely on the non-payment to escape from a contract which it believed no longer to be in its commercial interests. Otherwise there is no explanation for the fact that no request was made for payment before the Option expired. Indeed the claimant did tender payment when the point was taken and the payment was returned.

The Issues

14. Helpfully, the parties are agreed on the issues to be addressed. They are:

i) Does the requirement in the second sentence of Clause 4 of the Option Agreement that the Commitment Fee be paid "simultaneously" mean that it should be paid simultaneously with the service of the declaration of the Option referred to in the first sentence or simultaneously with the effective date of the Option Contract for the vessel?

ii) If payment is required to be simultaneous with the service of the declaration of the Option, was that requirement a condition precedent to the valid exercise of the Option?

iii) Alternatively, if the Option was validly exercised, was the requirement to pay a promissory condition of the resulting bilateral contract such that time for payment of the Commitment Fee was of the essence?

15. I shall address these issues in turn.
"SIMULTANEOUSLY"
16. Mr Davies, albeit with limited enthusiasm, submitted that in the context of the Agreements as a whole, payment of the Commitment Fee was not to be made until the Option Contract itself became effective with the consequence that repayment of the Fee would itself be secured by the defendant's Refund Guarantee. Whether or not that may have been what the claimant had intended, and had achieved expressly in Addendum Number One to the Contract for Hull No 63, in my judgment it plainly was not achieved in the Option Agreement. The word "simultaneously" is not connected to anything else in Clause 4 but service of the notice declaring the Option within the time limit (then of 6 months from an effective contract for Hull No. 63 and later, by Addendum Number One, of 6 months from payment of the first instalment under that contract) provided for. I agree with Mr Karia, for the defendant, no other construction is possible. Notice declaring the Option and payment of the Commitment Fee had to be done simultaneously, meaning at the same time.
WAS THE OPTION VALIDLY EXERCISED?
17. The Option Agreement was a unilateral contract. No obligations were imposed by it upon the claimant. It contained an offer by the defendant open to acceptance by the claimant provided the acceptance was in exact compliance with the terms of the offer: see Lord Denning MR in United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 WLR 74 at 81C and Lord Diplock in United Scientific Holdings Ltd v Burnley B.C. [1978] AC 904 at 928-9.
18. The question is therefore a short point of construction. Could the Option be exercised, and so the defendant's offer be accepted, without payment of the Commitment Fee at the same time as the relevant notice was served?
19. I have been referred to a number of authorities. They address differently worded provisions. On one side (relied upon by Mr Karia) the decisions in Lord Ranelagh v Melton (1864) 2 Drew & Sm. 278 and Hare v Nicoll [1966] 2 QB 130. But in each of those cases the relevant wording clearly expressed both notice and payment to be requirements for proper exercise of the option in question. The wordings were, respectively, "if … the lessees … should give three months notice … and should at the expiration of such notice pay ….", and "if the vendor shall … give notice … and on payment of ….". Mr Karia also referred me to West Country Cleaners v Saly [1966] 1 WLR 1485 where the option plainly required both notice and observance of the covenants in the lease if the tenant was to be able to exercise it.
20. On the other side, relied upon by Mr Davies, are the decisions in Millichamp v Jones [1982] 1 WLR 1422; Damon Compania Naviera SA v Hapag-Lloyd International SA (The Blankenstein) [1985] 1 WLR 435, and John Wilmott Homes Ltd v Read [1986] P & Cr 90. In Millichamp, the relevant agreement contained in clause 3 the provision for the option to be exercisable by notice and in clause 5 the provision that "upon exercise of the … option the intending purchasers shall pay to … stakeholders by way of deposit ….". Warner J held that payment of the deposit was not a condition precedent failure to fulfil which would prevent a bilateral contract coming into existence and the question was whether it constituted a sufficient breach to entitle the other party to treat that contract as discharged, in effect the third issue as I have set them out in this case. But, again, the wording was clear: clause 3 to exercise the option; clause 5 a separate obligation then to pay the deposit.
21. The Blankenstein was not an option case. The buyers were seeking to rely on their own failure to pay a deposit to escape from a contract. Unsurprisingly, they failed. Fox LJ (at page 446) expressly approved the decision of Warner J in Millichamp and decided that a provision for payment of the deposit was not a condition precedent to formation of a sale contract but "was a fundamental term of a concluded contract". Robert Goff LJ (at page 454) and Stephenson LJ (at page 457) agreed on this issue.
22. John Wilmott Homes (a decision of Whitford J) was a case on wording very similar to that in Millichamp with the same answer.
23. None of these authorities provide any real assistance in deciding the construction issue in this case. Here the payment obligation is expressed in a separate sentence. It can be said, as Mr Davies submitted, that it would have been easy to say expressly that the Option could only be exercised "by simultaneous notice and payment" or similar words. Nonetheless in my judgment, Mr Karia is right in submitting that simultaneous payment was a condition precedent to or a requirement for the proper exercise of the Option. The matter is one largely of impression but, insofar as analysis is available:

i) The entire and short agreement is an "Option Agreement" and so likely to address only matters material to its exercise and the resulting Option Contract should it be exercised.

ii) Clause 2 refers to "the exercise" of the Option "as per clause 4". Whilst it is true that Clause 4 contains, in the third and subsequent sentences, matters which do not relate to the exercise of the Option but to the consequences of payment of the Commitment Fee and circumstances in which the Option Agreement will be "null and void", the first two sentences do not use the word "exercise" but refer to the claimant "declaring" the Option and paying the fee.

iii) The word "simultaneously" is much stronger than, say, "upon giving notice". The notice and payment must be given and made at the same time and so, I think, usually as part of a single process in this case of exercising the Option.

iv) The language of "Commitment Fee" suggests that payment of the Fee is part of what is required to secure the commitment of the defendant to the bilateral contract which would come into existence upon exercise of the Option.

24. In the terms used in the authorities cited in paragraph 17 I do not think the offer contained in the Option could be accepted in exact compliance with its terms without payment of the Commitment Fee at the same time as the notice was served.
25. This conclusion is sufficient to dispose of the issues in favour of the defendant.
PROMISSORY CONDITION
26. There is strictly no need to consider this issue in view of my conclusion on the previous issue. I will however address it. To do so requires the conclusion that (contrary to this judgment) the payment of the Commitment Fee was not a condition precedent to or a requirement of a valid exercise of the Option. It stands as a separate obligation albeit one which by its terms is to be discharged at the same time as the notice is given under the first sentence of Clause 4.
27. On that hypothesis I do not find it an easy question whether or not the time for payment was of the essence of the obligation. The Commitment Fee was governed by Clause 4 of the Option Agreement. It provided security for the defendant only to the limited extent (and, in context, in a limited amount) in the event the claimant did not pay the 14% balance of the first instalment under the Option Contract. The 14% payment was itself only due for payment upon the defendant giving "notice of construction of the Vessel". That notice could in theory have been given at any time, but as the Option Agreement and Addendum Number One to it make clear it was not likely to be given for at least several months following what would have been the exercise of the Option by the notice of declaration. Moreover Clause 4 itself provided expressly only that non-payment of the 14% "upon notice of construction" would entitle the defendant not only to keep the Fee but to treat the Option as "null and void". No such express provision applied to non-payment of the 1%. The defendant was under an obligation "upon the exercise of the Option" to enter into the Option Contract (Clause 2) but I do not think time could be said to be of the essence of that obligation which could not sensibly be fulfilled at once.
28. There was therefore no real urgency. There was no reason for the defendant not to ask for payment and not to impose a final deadline if it mattered. Indeed it would have been open to the claimant to serve a notice exercising the option at any date between June and December 2004. If payment was a promissory condition entitling the defendant on breach to terminate the contract that could have been done in respect of a notice given in June not accompanied by payment. In a sense that would produce for the claimant a worse legal result than if payment were a condition precedent to exercise of the Option. The claimant would in such a case have had until December to get it right by giving a further notice and making payment. In agreement with Mr Davies, I think it was recognition of this anomaly which lay behind the plea in paragraph 18.3 of the Defence that it was "by failing to make the payment on 3 December 2004 (or alternatively at any time prior to the expiry of the Option at midnight on 15 December 2004)" that the claimant breached the alleged promissory condition.
29. On the other hand, an obligation to provide security on a specific occasion (simultaneously) expressed in strong terms is of obvious commercial significance and importance. In both Millichamp and The Blankenstein the courts held that the requirement to pay a deposit was as a general rule "a fundamental term" of the contract or, I think, in perhaps more current language, a promissory condition. However in Millicamp Warner J held (at page 1431) that failure to pay the deposit on time was not sufficient for the counterparty to treat the contract as repudiated without telling the other party that he was minded to do so and giving an opportunity to pay. Whitford J reached the same conclusion in John Wilmott Homes .
30. In Hare v Nicoll the fact that the subject matter of the agreement was shares in a private company "of a highly speculative nature liable to considerable fluctuation in value" was a key factor in the decision that the time of payment was of the essence (see per Willmer LJ at page 142, Danckwerts LJ at page 146 and Willis LJ at page 147). In The "Selene G" [1981] 2 Lloyd's Rep 180, on which Mr Karia placed particular reliance, Robert Goff J (at pages 185-6) in reaching the same conclusion emphasised the need for the sellers to know by payment of the deposit by the buyers that "they can safely proceed with the transaction" and the "very tight time scale" in that case between the stipulated time for payment of the deposit and for delivery of the ship. This case does not have the features either of a volatile asset or urgency.
31. Mr Karia also referred me to the numerous statements which can be found in authority to the effect that "in general" time was of the essence in mercantile contracts. But there are, as Mr Davies submitted, almost as many statements to the effect that it is only a general rule and indeed often departed from. The speeches in United Scientific Holdings and Bunge Corporation v Tradax Export S.A. [1981] 1 WLR 711 provide examples of both: in United Scientific Holdings at page 924 (Lord Diplock), page 938 (Lord Dilhorne), and page 950 (Lord Salmon), and in Bunge at pages 715-6 (Lord Wilberforce), at page 719 (Lord Lowry) and page 725 (Lord Roskill). Unsurprisingly, the answer depends on the nature of the contract and obligation in question in the particular case. The position is, I think, well summarised in Chitty on Contracts 29^th Ed, vol 1, para 12-037.
32. The factors to which I have referred are, to my mind, nicely balanced. Granted the receipt of notice purporting to exercise the option, and on the present hypothesis effective to do so, I do not think the defendant could have thought that there was even a remote chance that the claimant was not able or not intending to pay the Commitment Fee. The tactic was to wait until the deadline for exercise of the Option had passed not, despite Mr Karia's submissions, any concern to have immediate security or certainty to enable the defendant to secure slots at the yard and hedge currencies and the like. If it had been material, I would have decided that the failure to pay the Commitment Fee at the same time as the notice was given was not a failure which entitled the defendant without more to terminate the contract.
CONCLUSION
33. The claimant is not entitled to any of the declaratory relief it claims. I will hear the parties on any ancillary issues which cannot be agreed when this judgment is formally handed down.