Voyage Charters. Formation of contract. Last updated 06-Oct-2014

… a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not … .
Masters v Cameron (1954) 91 CLR 355

Agreement on all the essential terms

The parties’ agreement may be made in the course of written exchanges, e-mails, or during conversations and/or meetings, therefore so long as the parties have reached complete agreement, formal exchange of signed charterparty is unnecessary. As Lord Dunedin said in May v Butcher Ltd [1934] 2 KB 17 at p 21:

To be a good contract there must be a concluded bargain and a concluded bargain is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties. Because it may leave something which is still to be determined but then that determination must be a determination which does not depend upon the agreement of the parties.

Nowadays it is common, for parties to agree on all the essential terms necessary to bring about the conclusion of an oral contract. Quite often instead of oral communication, parties use email exchanges to come to agreement. Such agreement then to be followed by a written document, often described as a confirmation or recap, which will not only set out the essential terms but other terms common in the market. In such case the written document fulfils a dual function; it both confirms evidentially the making of the oral agreement but also supersedes the oral agreement in that it provides a document to which the parties thereafter look as the expression of their bargain. When no verbal communication preceded to recap a contract between the parties may be deemed to come into existence by conduct when the voyage was performed and the freight paid.

The contract is considered to be concluded when the fact is established that the two parties had come to a final and complete agreement, for, if not, there was no contract. At any stage of negotiations either party may retract; and though the parties may have agreed on all the cardinal points of the intended contract, yet, if some particulars essential to the agreement, such for example as "subject to" conditions, still remain to be settled afterwards, there is no contract. The parties, in such a case, are still only in negotiation.

Cooke’s Voyage Charters destinguish two categories of items which are "essential to the agreement" and which must therefore be settled before a binding contract exists:

i) terms which, if not settled (or expressly left open for future negotiation), render the entire agreement unworkable, for example such provisions of fundamental importance as loading and discharging ports, quantity of cargo and size of the ship; or term which was agreed but is too vague or uncertain to be enforceable (for example when a sale of a ship was agreed "subject to usual drydocking clause" and there being no such "usual" clause (Svenska Lloyd v Niagassas (1921) 8 Ll. L. Rep. 500), similarly "subject to war clause" (Bishop & Baxter v Anglo-Eastern [1944] KB 12).

ii) terms, the agreement upon which is regarded by the parties themselves as an essential prerequisite of the making contract. These are terms which parties expressly agree to settle before any agreement becomes legally binding and which usually shortened to SUBS.

There are several expressions in common use fulfilment of which is prerequisite of conclusion of charterparty: "Subject to details", "fixed subject to details", "Subject to logical amendments/alterations" and similar expressions; The Solholt [1981] 2 Lloyd’s Rep. 574; Star Steamship Society v Beogradska Plovidba (The Junior K) [1988] 2 Lloyd’s Rep. 583, per Steyn J. at p. 588:

The expression "subject to details" enables owners and charterers to know where they are in negotiations and to regulate their business accordingly. It is a device which tends to avoid disputes and the assumption of those in the shipping trade that it is effective to make clear that there is no binding agreement at that stage ought to be respected.

As it follows from the above formation of charterparty is usually done by means of verbal communications and electronic transmission, no signatures is necessary to give the contract a binding force. In any case question whether the parties are bound before the charter is signed will depend upon:

(i) whether they are ad idem;

(ii) whether on the true construction of the language used in the negotiations, including the use of phrases containing qualification words "subject to" it was the intention of the parties that they should be bound before they sign formal document.

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