Shipbuilding Law - Option Agreement

Ravennavi S.p.A. v New Century Shipbuilding Company Ltd, [2007] EWCA Civ 58

Q: Whether Shipyard’s obligation in an option agreement to make available an earlier delivery date continues to exist after the option had been exercised, despite the execution of a formal shipbuilding contract which made no mention of any such obligation and contained an “entire agreement” clause.

FACTS:
By an Option Agreement dated 12th December 2003 the shipyard had granted the Buyer an option, to be exercised by 31st January 2004, to purchase two new crude and product tankers for delivery by 31st October and 31st December 2007 respectively.

Clause 4 (ii) of the option provided, inter alia, that ‘Should the Sellers could find any possibility to anticipate delivery of the optional vessel(s) (for instance a previously booked berth becomes free), then the SELLER will grant the BUYER or its nominee the earlier delivery position for the optional vessel(s).’

Further, Clause 5 provides that: ‘On receipt of BUYER’S notice referred to in Clause 3, a Shipbuilding Contract …shall be deemed signed and automatically in effect for the OPTIONAL VESSEL between the SELLER and the BUYER or its nominee as aforesaid on the terms of the Shipbuilding Contract dated 13th February 2003 [and its addendum] duly amended as per Clause 1.3 here above. After declaring the OPTION and on or before 1 (one) month after such declaration, the BUYER shall procure that . . . itself executes formally the Option Shipbuilding Contract(s) as BUYER, for the construction and delivery of the OPTIONAL VESSEL(S) substantially in the form of the Shipbuilding Contracts dated 13th February 2003 [and its addenda] duly amended as per Clause 1.3 here above.’

Following the exercise of the option on or about 28th January 2004, the parties subsequently entered into two shipbuilding contracts, each dated 28th February 2004. The terms of the contracts were essentially similar to those of the contract of 13th February 2003, save for price, delivery dates etc. 

However, there were no provision corresponding to Clause 4(ii) of the Option Agreement and the Entire Agreement clause in Article XIX.4 of the contract of 13th February 2003 reappeared as Article XIX.4 in each of the new contracts. The Shipbuilding Contract dated 13th February 2003 contained articles on the description and class of the vessel, price and terms of payment, supervision and inspection of construction, trials, delivery date and warranties of quality etc.

The Entire Agreement clause in Article XIX.4 read as follows:

‘This Contract contains the entire agreement and understanding between the parties hereto and supersedes all prior negotiations, representations, undertakings and agreements on any subject matter of this Contract prior to signing of the Contract.’

The buyer subsequently discovered that the shipyard was offering to build vessels for delivery dates earlier than those set out in the option. A dispute arose whether the yard had failed to perform its obligation to make earlier delivery dates available when it became possible for it to do so.

HELD:
By the Judge at first instance that on the true construction of the Option Agreement, Clause 4(ii) did give rise to a continuing obligation, but that it was extinguished upon the parties’ entering into the shipbuilding contracts by virtue of the operation of Article XIX.4.

On appeal, the Court of Appeal [by a unanimous decision], concluded to the effect that Clause 4(ii) is to be construed as obliging the shipyard to offer the buyer any earlier date for delivery that might become available prior to the exercise of the option with a view to incorporating that earlier date, first, into the informal shipbuilding contract that was to come into effect on the exercise of the option itself, and subsequently, into the formal contract that was to be executed thereafter.

In arriving at its decision, the appellate court were of the view that it was essential to construe Clause 4(ii) in the context of the Option Agreement as a whole, as well as in the light of the previous course of dealing between the parties and established shipbuilding practices of which both may be taken to have been aware.

It also found that the option was for an order for one or two vessels for delivery on agreed dates, terms and price. As the terms which the shipyard was willing to be bound was identified in the terms of the shipbuilding contract of 13th February 2003, (as varied by Clause 1.3 of the Option Agreement), it forms part of the context in which Clause 4(ii) of the Option Agreement falls to be construed.

‘When entering into the Option Agreement, therefore, the parties were clearly contemplating that, if it resulted in the formation of a shipbuilding contract and the subsequent execution of a formal written contract, that contract would, unless amended, provide for a fixed delivery date and would contain an entire agreement clause purporting to ensure that its terms alone governed the parties’ relationship.’ Per Lord Justice Moore-Bick at c19. *[2007] EWCA Civ 58.


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