Subjecting the Effective Date of a Shipbuilding Contract to an “Agreement to Agree” is unwise.


In shipbuilding contracts, the Parties may occasionally agree that the contact will only become effective provided certain contingent conditions are fulfilled; for example receipt of the first instalment, refund or payment guarantees. In such situation, subsequent communications between the parties must be carefully managed.

Thus in Covington Marine Corporation v Xiamen Shipbuilding [2005] EWHC 2912 (Comm), the parties agreed that a shipbuilding contract shall become effective from the date of its execution provided 5 conditions were fulfilled within a certain time. One of the conditions was that the parties must agree on the supplier of the main engine within ten banking days from the date of the contract. Three weeks after contract signing the Seller enter into contracts to build 3 vessels for other customers and refused to perform the contract. Buyer accept the repudiation.

During the arbitration, the Seller raised jurisdiction issues and denied that any binding contract had been concluded. One of the issues was whether the parties had reach agreement on the supplier of the main engines. The Buyers contended that the requisite agreement was achieved by exchange of letters between the brokers. However, the Arbitrators concluded that there was no agreement.

On appeal, the Court found that there was an agreement on the supplier of the main engine and held that Arbitrators’ decision and reasoning are wrong in law. However, the Court did commented obiter that it was “an agreement to agree” and that “It would not be a wrong or a breach of duty not to agree on the supplier of the main engine”.

To minimize opportunity for disputes or untimely cancellation of contracts  parties should limit contingent conditions for effective date of contract to three conditions; payment of the first instalment, provision of refund and payment guarantees. Subjecting the effective date of a contract to “an agreement to agree”, will potentially pave the way for contract failure, especially during sudden market downturn.

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