Re: BAKRI NAVIGATION COMPANY LIMITED
And: SHIP "GOLDEN GLORY" GLORIOUS SHIPPING S.A. (OWNERS OF)
No. G199 of 1991
FED No. 306
Shipping and Navigation - International Arbitration
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
IN ADMIRALTY
Gummow J.(1)
CWDS
Shipping and Navigation - negotiations for sale of tanker conducted by
brokers in London and Tokyo - whether contract formed - whether then varied -
effect of "recaps" and "subjects".
International Arbitration - whether arbitration agreement rendered
inoperative by subsequent agreement and by giving and acceptance of
undertakings to the Court - whether stay of proceedings should not be ordered.
International Arbitration Act 1974
Tanning Research Laboratories Inc. v O'Brien (1990) 169 CLR 332
De Bussche v Alt (1878) 8 Ch D 286
Reardon Smith Line v Hansen-Tangen (1976) 3 All ER 570
Codelfa Construction Pty Ltd v State Rail Authority of N.S.W. (1982) 149 CLR
337
The "Blankenstein" (1985) 1 Lloyd's Rep 93
Godecke v Kirwan (1973) 129 CLR 629
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd
(1979) 144 CLR 596
Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537
Tallerman and Co. Pty Limited v Nathan's Merchandise (Victoria) Pty Limited
(1957) 98 CLR 93
Dan v Barclays Australia Limited (1983) 57 ALJR 442
Buhrer v Tweedie (1973) 1 NZLR 517
Paczy v Haendler and Natermann GmbH (1981) 1 Lloyd's Rep 302
Kruidenier (London) Ltd v The Egyptian Navigation Co. (1980) 2 Lloyd's Rep
166
HRNG
SYDNEY
#DATE 5:6:1991
Counsel and solicitors for the plaintiff: Mr J.C. Campbell QC and
Mr N.C. Hutley instructed
by Messrs Michell Sillar
McPhee Meyer.
Counsel and solicitors for the defendant: Mr A.J. Sullivan QC and
Mr J.W.J. Stevenson
instructed by Messrs
Ebsworth and Ebsworth.
ORDER
The questions for separate decision be answered as follows:
(1) Is there a concluded agreement between Bakri Navigation Co.
Limited and Glorious Shipping S.A. for the sale of the ship
'Golden Glory' upon the terms alleged by Bakri Navigation
Co. Limited?
ANSWER: Yes. (2) If "yes" to (1), does this proceeding involve the
determination of a matter which, in pursuance of that
agreement, is capable of settlement by arbitration, within
the meaning of s. 7 of the International Arbitration Act
1974 ("the Act")?
ANSWER: Yes. (3) Should the proceeding, as to whole or part, and, if
so, as
to which part, be stayed by order under sub-s. 7 (2) of the
Act, and the parties referred to arbitration?
ANSWER: No. (4) Is the Court required by sub-s. 7 (5) not to make an
order
it otherwise would make under sub-s. 7 (2) of the Act?
ANSWER: Yes.
Note: Settlement and entry of Orders is dealt with by Order 36 of the Federal
Court Rules.
JUDGE1
This proceeding was commenced on 27 April 1991. The plaintiff seeks a
declaration that it has a binding contract for the sale to it of the ship
"Golden Glory" and an order for the specific performance of that contract.
The ship was arrested on 28 April 1991 in Port Botany. The defendant, the
owners of the ship, applied for release of the ship from the arrest, and that
application was heard by me on 1 and 2 May 1991. On 2 May 1991, after
delivering oral reasons for judgment, I ordered that the application for
release stand over to the next day for the giving of undertakings and the
making of orders in accordance with those reasons.
2. In the events that have since happened, the terms of the orders made 3 May
1991 have assumed a particular importance. I therefore set them out in full:
"UPON the Defendant by its counsel undertaking to the Court:
(a) That the Defendant will take all steps on its part as are
properly necessary to prepare these proceedings for trial on
15, 16 and 17 May 1991;
(b) That the Defendant will not, without the prior written
consent of the Plaintiff, sell, transfer title to, mortgage
or otherwise encumber in any manner whatsoever the ship or
any interest in the ship 'Golden Glory' pending the
determination of these proceedings (including any appeals to
the Federal Court of Australia or otherwise, and including
any applications for special leave to appeal that might be
taken therefrom to the High Court of Australia);
(c) That it will comply (subject to its rights to seek variation
or discharge thereof, and to appeal therefrom) with any
Orders made against it in these proceedings;
AND NOTING that the Defendant has procured the delivery to the
Sydney solicitors for the Plaintiff of a Deed in the form of
Exhibit D on the application filed in these proceedings on 1 May
1991, and that arrangements satisfactory to the Marshal and as set
out in Exhibit E on that application have been made for the
payment of the fees and expenses of the Marshal in connection with
the custody of the said ship while it was under arrest,
THE COURT ORDERS that the ship 'Golden Glory' be released from
arrest."
It will be necessary later in these reasons to refer in more detail to Exhibit
D ("the Deed of Undertaking") but it should now be noted that it contains a
covenant by the defendant to the plaintiff to comply with the above
undertakings given to this Court.
3. Directions also were given to have the matter ready for hearing on 15 May
1991. At the hearing, I heard some of the evidence going to the availability
of specific performance. But it became apparent that if the Court found for
the plaintiff as to the existence of a contract in the terms propounded by it,
the defendant would contend first, that the contract contained an arbitration
agreement within the meaning of sub-s. 3 (1) of the International Arbitration
Act 1974 ("the Arbitration Act") and secondly, that the procedure for
arbitration under that agreement was governed by English law, which would
answer the description in para. 7 (1) (a) in the statute of "the law of a
Convention country". Upon that footing, the defendant would apply for a stay
of the balance of the proceeding. Subject to the imposition of such
conditions, if any, as it thought fit, the Court would be obliged by sub-s. 7
(2) to impose such a stay.
4. To this the plaintiff responded by contending that no such stay should be
ordered because (i) there was no "arbitration agreement" of the relevant
description and, (ii) even if there were, sub-s. 7 (5) of the Arbitration Act
applied. This states:
"7 (5) A court shall not make an order under subsection (2)
if the court finds that the arbitration agreement is
null and void, inoperative or incapable of being
performed."
In particular, the plaintiff wished to submit that the terms of the
undertakings given to the Court on 3 May 1991 as a step to procure the release
of the ship from arrest, and the terms of the deed, Exhibit D, were
inconsistent with the continued existence of the arbitration agreement alleged
by the defendant. This was said to be because their clear import was an
acceptance by the defendant of a situation whereby the proceeding between it
and the plaintiff would be disposed of in its entirety in this Court.
(However, the plaintiff expressly disavowed any further argument which would
assert that the claim to specific performance was not a matter the
determination of which was "capable of settlement by arbitration" within the
meaning of sub-s. 7 (2) of the Act because such a claim was susceptible of
determination exclusively by the exercise of judicial power; cf. Tanning
Research Laboratories Inc. v O'Brien (1990) 169 CLR 332 at 351-352, per Deane,
Gaudron JJ.).
5. In these circumstances, the Court made orders for the decision of the
following questions separately and in advance of any other questions in the
proceeding:
"(1) Is there a concluded agreement between Bakri Navigation Co.
Limited and Glorious Shipping S.A. for the sale of the ship
'Golden Glory' upon the terms alleged by Bakri Navigation
Co. Limited?
(2) If 'yes' to (1), does this proceeding involve the
determination of a matter which, in pursuance of that
agreement, is capable of settlement by arbitration, within
the meaning of s. 7 of the International Arbitration Act
1974 ('the Act')?
(3) Should the proceeding, as to whole or part, and, if so, as
to which part, be stayed by order under sub-s. 7 (2) of the
Act, and the parties referred to arbitration?
(4) Is the Court required by sub-s. 7 (5) not to make an order
it otherwise would make under sub-s. 7 (2) of the Act?"
6. What follows are the reasons for judgment on those separate questions. It
will be apparent that questions (2), (3) and (4) are closely interrelated, and
that the threshold issue is that presented by question (1), namely the
existence, or otherwise, of a concluded agreement for the sale of the ship.
The applicable law in answering question (1) has been treated as the common
law as in force in the State of New South Wales.
The Parties and the Brokers
7. The plaintiff, Bakri Navigation Co. Limited ("Bakri") is a corporation
formed under the laws of the Kingdom of Saudi Arabia. The defendant, Glorious
Shipping S.A. ("Glorious") is a corporation formed under the laws of the
Republic of Panama. The beneficial owners of the shares in the defendant are
Mr Hideshi Doi and his sons Mr Hidekazu Doi and Mr Kazunobu Doi, each of whom
is a citizen and resident of Japan. Mr Hideshi Doi has been President since
1961 of a Japanese corporation, Sanko Unyu KK ("Sanko"). Mr Hidekazu Doi, who
gave evidence in the present proceeding, is President of the defendant and
since 1986 has also been Managing Director of Sanko. He agreed in
cross-examination that Glorious was set up as a "one ship company" so as to
acquire the use of the Panamanian flag of convenience.
8. The ship "Golden Glory" was built in Japan and launched in November 1981.
Its port of registry is Panama in the Republic of Panama. The ship was
acquired by the defendant in about February 1988. It has stainless steel tanks
suitable for the carriage of oil, molasses and chemicals. On 28 June 1988,
Glorious entered into a time charter party of the ship for 7 years to a
Japanese corporation Eiyu Kaiun Co. Ltd ("Eiyu Kaiun"). Eiyu Kaiun time
chartered the ship to another Japanese corporation, which in turn chartered it
to Dorval Tankships Pty Ltd.
9. The evidence includes details of negotiations for the sale of the ship
conducted from late January 1991 until mid-April 1991. The position of
Glorious is that negotiations for the sale by it of the vessel were then
broken off, whilst Bakri contends that by that stage there was already in
existence a concluded agreement which Bakri remains, on its part, ready and
willing to perform.
10. No less than four ship broking firms participated in the negotiations.
They were Far East Shipping and Trading Co. Limited ("FEST"), Seascope
Shipping Limited ("Seascope"), Cairnhope Shipping Co. Limited ("Cairnhope")
and Portshire Limited ("Portshire"). Seascope, Cairnhope and Portshire are
based in London and FEST in Tokyo. Those with principal carriage of the
matter for the respective brokers were Mr Noda and Mr Obata (FEST), Mr Staffan
Bulow and Mr Julian Kinross (Seascope), Mr Paul Messenger (Cairnhope), and Mr
Jeremy Liddell (Portshire). At the trial, Mr Messenger and Mr Liddell gave
evidence. No evidence was given by any representative of FEST or Seascope.
Portshire acted in the negotiations on behalf of Bakri, the proposed buyer of
the ship. FEST acted for Glorious, the proposed seller of the ship. At the
trial, there was initially a denial by Glorious as to the nature and scope of
the authority of FEST. But, in address, counsel for Glorious took the
position that whilst it did not concede the point, it did not seek to refute
the propositions, which I accept, put by counsel for Bakri in support of the
existence of FEST's authority to bind Glorious in all relevant respects.
11. Mr Liddell gave evidence that it is well known in the European ship
broking market that Seascope is a broker which does all, or at least the vast
majority, of the business which FEST does in Europe. The evidence also
indicates that it is not unusual in a transaction such as the present for
there to be a string of brokers interposed between the two principals. Whilst
FEST acted with the authority of the defendant and Portshire with the
authority of the plaintiff, in their submissions counsel for both parties
accepted that neither Seascope nor Cairnhope was directly in a comparable
position. Counsel for the defendant described the role of these two brokers
as "middle men" with no additional authority from either principal to bind it
in respect of any material that was passed backwards and forwards along the
chain of communication; cf. De Bussche v Alt (1878) 8 Ch D 286. I accept that
submission. The evidence also indicates that in such situations brokers,
including intermediaries and middle-men, receive commission for their part in,
as Mr Messenger put it, "developing and negotiating the transaction".
The Trade
12. In dealing with a commercial contract, the court should know the
commercial purpose of the alleged contract, something which presupposes
knowledge, inter alia, of the market in which the parties are operating; see
Reardon Smith Line v Hansen-Tangen [1976] 3 All ER 570 at 574 per Lord
Wilberforce; Codelfa Construction Pty Ltd v State Rail Authority of N.S.W.
(1982) 149 CLR 337 at 350 per Mason J. Counsel for the plaintiff submitted
that the evidence of industry practice might be taken into account, in
particular, in assessing the submission that the circumstance that the parties
contemplated that an agreement reached by them would be followed by the
execution of a memorandum of agreement, did not prevent the immediate creation
of a concluded contract. I accept that the intention of the parties should be
ascertained from the terms of the relevant documents in the objective
framework of facts within which the alleged contract came into existence,
including the practices in the trade.
13. Further, a significant element in the negotiations which the plaintiff
contends gave rise to a concluded contract, was provided by faxes and telexes
relayed along the chain of communication between Portshire at one end and FEST
at the other. Various abbreviations and terms are used in that material which
have a meaning that is not immediately apparent, but which is well understood
between ship brokers. I have received evidence from Mr Messenger and Mr
Liddell with respect to those usages and related practices in the trade. It
is best to turn to this before coming to the terms of the negotiations in
question.
14. A "recap" telex is one which sets out the terms which have been agreed
between the parties. The "recap" may either be "clean" or it may be expressed
to be subject to certain conditions or events (described as "subjects"). A
"clean recap" means that the parties are in agreement, and the recap telex
then summarises the terms agreed as a result of previous communications. If
the parties have not reached that stage, and they are not yet ready to
consider themselves bound, the "recap" will contain "subjects". This may be
for various reasons. For example, the seller may need to have the agreement
approved by a third party such as a bank holding a mortgage on the ship, or
the buyer may not yet have inspected the ship to ensure that it is in good
condition. Further "recaps" may contain a "subject" providing for approval to
be given by a company board within a certain period, thereby giving that party
time to reflect before formally committing itself.
15. The brokers act on the footing that where the terms summarised in a
"recap" include "subjects", the terms of the recap will not reflect a binding
agreement unless and until each party lifts all of that party's outstanding
"subjects". Of course, the effect in law of a "recap" before it is lifted is
for the Court to decide. The understanding in the trade is that in a case
where a "recap" contains, for example, two subjects, one on the buyer's side
and one on the seller's side, the seller has the right to withdraw until such
time as it declares that its subject is lifted, and the buyer has the right to
withdraw at any time until it declares that its subject has been lifted; as
soon as each party declares its outstanding subject lifted, that party is
regarded as committed to the sale or purchase of the ship.
16. When a clean recap has been achieved, the brokers then set out the
principal terms in a Memorandum of Agreement ("MOA") which adapts as
appropriate the provisions of a set of standard terms, for example that known
as the "Norwegian Saleform". It would be impractical for the brokers
continually to send draft versions of the MOA up and down the chain of
brokers; accordingly, the terms are agreed between the parties (and recapped
as I have described), then a memorandum of agreement is drawn up reflecting
the terms agreed and incorporating the standard terms. It is rare for the MOA
to be drawn up before all subjects have been lifted. In most instances, the
MOA will be drawn up subsequently and will reflect the consensus reached
pursuant to the earlier exchange of telexes.
17. The circumstances that the clean recap precedes, and contemplates, the
completion of the MOA is not inconsistent with the proposition that at this
earlier stage the parties have entered into contractual arrangements. The
English Court of Appeal so held upon the particular facts before it in The
"Blankenstein" (1985) 1 Lloyd's Rep 93 at 97-98, 104-105. In a given case,
the execution of a formal contract may be, not a condition of the existence of
a binding agreement, but a condition of the performance of an agreement by
which the parties are immediately bound: Godecke v Kirwan (1973) 129 CLR 629
at 639-640 per Walsh J. Further, the law implies a duty requiring each party
to co-operate in the doing of acts which are necessary to the performance by
that party, or by the parties, of fundamental obligations under their
contract: Secured Income Real Estate (Australia) Ltd v St Martins Investments
Pty Ltd (1979) 144 CLR 596 at 607, per Mason J.
18. The understanding in the trade is that when there is a "clean recap",
either initially, or because all subjects have been lifted, it is thereafter
not open to a party to fail to proceed. Mr Messenger said he had no
experience of a party seeking to "get out of" such an engagement. Mr Liddell
gave evidence to the same effect. Nevertheless, litigation does from time to
time arise. A recent example is The "Blankenstein" (supra) where the English
Court of Appeal held that a concluded agreement had been reached by exchange
of telexes between the brokers, with a "clean recap", in advance of the
execution of a formal memorandum of agreement in the Norwegian Saleform. The
Court (supra at 98, 104-105) had regard to evidence that the shipping market
would regard the "clean recap" as giving rise to a "binding" contract of sale.
19. What is the legal character to be given to "subjects" at a stage where as
yet there is no clean recap? No doubt there can be no universal proposition
applicable to all cases. In Perri v Coolangatta Investments Pty Ltd (1982)
149 CLR 537 at 551, Mason J. said:
"There is an obvious difference between the condition which is
precedent to the formation or existence of a contract and the
condition which is precedent to the obligation of a party to
perform his part of the contract and is subsequent in the sense
that it entitles the party to terminate the contract on
non-fulfilment. In the first category the transaction creates
no rights enforceable by the parties unless and until the
condition is fulfilled. In the second category there is a
binding contract which creates rights capable of enforcement,
though the obligation of a party, or perhaps of both parties, to
perform depends on fulfilment of the condition and non-fulfilment
entitles him to terminate."
Further, as Mason J. also pointed out, supra at 552, the law tends to favour a
construction which leads to the result that a stipulation of such a character
is a condition precedent to performance rather than a condition precedent to
the formation or existence of a contract, that is to say, that there is a
binding contract which makes the stipulated circumstance a condition precedent
to the duty to perform; further, the party for whose protection such a
condition is inserted may waive it. It will be necessary further to consider
these principles as they apply to the present facts, after I have dealt with
those facts.
The Recap
20. The story begins on 25 January 1991 when Mr Noda, of FEST, informed
Seascope that whilst the "Golden Glory" was not yet officially for sale, FEST
had been requested by the owner "to check market price privately". Mr Bulow
of Seascope approached Mr Messenger of Cairnhope. Cairnhope had on previous
occasions acted in relation to purchases by Portshire for Bakri, and Mr
Messenger told Mr Liddell of Portshire that he had been approached on behalf
of the owners of the "Golden Glory", a ship which might interest Portshire's
client Bakri. He said that the ship was a 12,000 deadweight ton chemical, oil
and molasses carrier with stainless steel tanks. Mr Liddell then came back to
Mr Messenger with a request for further information, and on 28 January 1991
this was sought by Cairnhope from Seascope by the first of a series of telexes
and faxes passing between the brokers. It is unnecessary to describe the
terms of those communications.
21. Eventually, on 19 February 1991, FEST sent to Seascope a telex (document
190212 in the Agreed Bundle). In reading that telex, it should be borne in
mind that the practice in the trade is that a broker will describe commission
payable to the buyer and other brokers between him and the buyer as commission
payable "your end"; with offers passing in the other direction, that is to say
from the buyer to the seller, a broker on passing the offer on to the next
broker will in that offer describe commission as being payable "our end".
This includes the commission sought for the buyer and all brokers up to and
including the buyer.
22. The text of the telex of 19 February 1991 from FEST to Seascope, so far
as is material, was as follows:
"RECAP AS FOL:
M/T 'GOLDEN GLORY' - A/C BAKRI NAVIGATION CO, LTD.
1. PRICE USD13.10 MIL CASH LESS 4 PCT AT YOUR END.
10 PCT DEPOSIT TO BE LODGED IN JOINT A/C OF BUYERS AND
SELLERS WITHIN THREE WORKING DAYS OF SIGNING MOA AND ALL
SUBJECTS LIFTED, AT THE JAPAN CREDIT BANK, HEAD OFFICE.
THE REMAINING 90 PCT UPON DELIVERY AGAINST DELIVERY
DOCUMENTS MUTUALLY AGREED.
CLOSING IN TOKYO.
2. THE VESSEL TO BE DELIVERED CHARTER FREE AT SAFE PORT, SAFELY
BERTHED ALONGSIDE, OR AT A SAFE ANCHORAGE, ALWAYS SAFELY
AFLOAT IN JAPAN/SINGAPORE RANGE IN SELLERS OPTION, LAYCAN 26
MAY/25 JUNE 1991, TO BE NARROWED, WITH 25 JUNE 1991
CANCELLING DATE IN BUYERS OPTION.
3. VESSEL TO BE DELIVERED PRESENT CLASS MAINTAINED FREE OF
RECOMMENDATIONS AND FREE OF AVERAGE DAMAGE AFFECTING CLASS.
VESSEL TO BE DELIVERED WITH ALL NATIONAL/INTERNATIONAL
TRADING AND SAFETY CERTIFICATES TO BE CLEAN, VALID AND
UNEXTENDED FOR A MINIMUM PERIOD OF THREE MONTHS FROM TIME OF
DELIVERY. CONTINUOUS SURVEY CYCLES ON HULL AND MACHINERY TO
BE FULLY UP TO DATE AT TIME OF DELIVERY. VSL TO BE
DELIVERED IN SUBSTANTIALLY THE SAME CONDITION AS WHEN
INSPECTED, FAIR WEAR AND TEAR EXCEPTED. DELIVERY WITH ALL
TANKS CLEAN AND GASFREE.
4. USUAL DRYDOCKING CLAUSE ACCORDING TO CLAUSE SIX OF NORWEGIAN
SALE FORM 1987 WITH BUYERS RIGHT TO ATTEND AND ARRANGE
PAINTING OF VESSELS UNDERWATER PARTS IN DRYDOCK AND TO
UNDERTAKE OTHER MINOR WORKS AT BUYERS EXPENSE INCLUDING
OVERHAULING SEA VALVES AND LOWER ANCHOR/CHAINS (LABOUR,
PAINT AND ANY EXTRA TIME REQUIRED FOR THIS PURPOSE TO BE FOR
BUYERS ACCOUNT).
5. VESSEL TO BE DELIVERED WITH EVERYTHING BELONGING TO HER ON
BOARD, ASHORE AND ON ORDER INCLUDED IN THE SALE INCLUDING
NAVAIDS AND WIRELESS EQUIPMENT AND SPARE PARTS TO MINIMUM
CLASS REQUIREMENTS SUBJECT TO PROVISIONS OF CLAUSE SEVEN OF
MOA.
BUYERS SHALL TAKE OVER REMAINING BUNKERS AND UNBROACHED
LUBEOILS AND PAY NET CONTRACT PRICE AT PORT AND DATE OF
DELIVERY.
EXCLUDED FROM SALE:-
A/ HIRE EQUIPMENT I.E. 5 BUTTERWORTH MACHINES
B/ MASTERS/OFFICERS PERSONAL EFFECTS
C/ SLOP CHEST
D/ CHARTERERS PROPERTY I.E. TANK CLEANING DETERGENTS
6. OTHERWISE TERMS TO BE MUTUALLY AGREED BASED ON NORWEGIAN
SALE FORM 1987.
ARBITRATION IN LONDON.
7. SUBJECT INSPECTION OF VESSEL AND VESSELS RECORDS, DECLARABLE
7 DAYS AFTER COMPLETING INSPECTION/S. BUYERS UNDERTAKE TO
INSPECT VSL AT EARLIEST OPPORTUNITY.
8. THIS TRANSACTION TO BE KEPT STRICTLY PRIVATE AND
CONFIDENTIAL. OWNERS WARRANT THAT VESSEL IS NOT
BOYCOTTED/BLACKLISTED BY ARAB LEAGUE.
AFTER MOA SIGNED AND 10 PCT DEPOSIT LODGED BUYERS RIGHT TO
PLACE UP TO 2 REPS ONBOARD VESSEL UNTIL TIME OF DELIVERY FOR
FAMILIARISATION PURPOSES.
10. SUBJECT TO BUYERS BOARD APPROVAL DECLARABLE 10 RUNNING DAYS
AFTER RECAP OF MAIN TERMS.
11. SUBJECT TO SELLERS BOARD APPROVAL DECLARABLE WITHIN 20
RUNNING DAYS AFTER RECAP OF MAIN TERMS.
12. SUBJECT TO CHARTERERS APPROVAL DECLARABLE WITHIN 20 RUNNING
DAYS AFTER RECAP OF MAIN TERMS.
END OF RECAP"
The name of the seller's bank in clause 1 of the FEST telex, it was later
clarified, should have read "NIPPON CREDIT BANK LIMITED", rather than "JAPAN
CREDIT BANK". FEST went on in the telex to comment that Seascope should
obtain the buyer's acceptance to the recap while FEST would obtain the
seller's reconfirmation the next day, the hope of FEST being that the
"countdown" would start from 20 February. Seascope passed the text of the
telex on to Cairnhope (by telex from it to Cairnhope) and Cairnhope in turn
did so by telex to Portshire. The immediate response by telex from the
buyer's side on the same day, 19 February, was that there had been
insufficient time to study the recap in detail and to provide "FORMAL
CONFIRMATION" but that "BUYERS OPINION OF RECAP IS JUST THAT - I.E. TERMS HAVE
BEEN AGREED AND RECAP IS MERELY A SUMMARY".
23. On the next day, 20 February 1991, Seascope sent a telex to FEST
(document 200201) stating:
"SELLERS RECONFIRM RECAP PER OTLX YDAY MTIME
WAITING BUYERS RECONFIRMATION. COUNT STARTING
FROM THE DATE WHEN RECAP RECONFIRMED . . ."
Then, later on the same day, London time, Cairnhope sent a telex to Seascope
(document 200217):
"BUYERS CONFIRM RECAP IN ORDER - THOUGH PLEASE
CLARIFY SELLERS BANK AS ONE GIVEN IN RECAP IS
DIFFERENT TO THAT PREVIOUSLY MENTIONED AND
BUYERS HAVE TO CHECK STATUS OF CORRESPONDABILITY
(??) WITH THEIR BANK."
24. In my view, there was thereby concluded a contract between Glorious and
Bakri for the sale and purchase of the ship. It included a term that
arbitration be in London in accordance with the provisions of the Norwegian
Saleform. This is so, even though the MOA, which was to be based on the
Norwegian Saleform 1987, had yet to be drawn up. I have referred to the
applicable principles when discussing The "Blankenstein", supra, and Godecke v
Kirwan, supra. But the recap was not a clean recap, having four subjects, two
on each party's side. The subjects are to be regarded as conditions
precedent, in the sense discussed by Mason J. in Perri's Case, supra, to the
obligation to perform and complete the transaction of sale and purchase.
Consistently with the practice in the industry, a party would be bound to
proceed to completion only when that party had declared its outstanding
subjects to be lifted, or had otherwise waived or treated them as satisfied.
25. Further, the contract which came into existence in the manner I have
described, was, like any other contract, susceptible to subsequent variation
by further agreement between the parties, in the sense described by Taylor J.
in Tallerman and Co. Pty Limited v Nathan's Merchandise (Victoria) Pty Limited
(1957) 98 CLR 93 at 144. His Honour then approved the following passages from
Salmond and Williams on "Contracts", 2nd ed., 1945, p 489, as to the manner in
which an agreement by way of variation operates:
"Partial rescission is not the extinction of the
contract but the variation of it.
. . .
A contract may be varied (1) by way of partial
rescission without the substit-ution of new
terms in place of those rescinded, or (2) by way
of partial rescission with the substitution of
new terms for those rescinded, or (3) by the
addition of new terms without any partial
rescission at all."
See also Dan v Barclays Australia Limited (1983) 57 ALJR 442 at 448-449.
26. This is what happened in the present case. In at least two instances
there was an agreed mutual abandonment of existing rights with replacement or
conferment of new rights. First, on 14 March 1991, the provision in clause 1
for the price was varied so as to be US$12.98m; thus, there was an agreed
partial rescission with substitution of a new term. Agreement also was
reached in March to maintain the current time charter to permit one Australian
round voyage. It was agreed that this was to be provided for in a "side
agreement" to the MOA whereby, upon delivery to Bakri, the ship would be
entered into a charter from Bakri to Glorious for one Australian round voyage
for a duration of approximately 60 days, to which the provisions of the time
charter dated 28 June 1988 would apply with some modifications.
27. Consistently with the principles set out above, Bakri and Glorious might
also effect a variation of the contract as regards the terms of a "subject"
which at the time of the variation had yet to be lifted by the party for whom
it had been included; the newly agreed subject would then stand until lifted.
This is what befell clause 7 of the recap.
The "Subjects" in the "Recap"
28. As I have said, the recap telex was not "clean". It contained four
"subjects", two on the buyer's side (clauses 7 and 10) and two on the seller's
side (clauses 11 and 12). Clause 12 referred to the charterer's approval; I
have earlier referred to the time charter to Eiyu Kaiun. Clause 10 was lifted
by Bakri on 3 March 1991. Clauses 11 and 12 were lifted by Glorious on 15
March 1991. It should be noted that the lifting of subjects by both buyer and
seller was preceded by various exchanges but communicated in clear (if
abbreviated) terms. Thus, the lifting of clause 10 was communicated to FEST by
stating: "BAKRI LIFT THEIR BOD APPROVAL AND ARE OUTRIGHT IN THAT RESPECT . .
.", and the lifting of the subjects in clauses 11 and 12 was communicated by
FEST stating that Glorious "NOW DECLARED SUBJECT BOARD/CHRTRS APPROVAL
LIFTED".
29. The buyer's "subject" in clause 7 gave rise to difficulties which became
the focus of this litigation. This "subject" had two elements, the inspection
of the ship's records and the inspection of the ship itself. The first of
these was lifted on 5 March 1991 when Seascope notified FEST "BUYERS LIFT
THEIR CLASS RECORDS INSPECTION SUBJECT". But in the period before Glorious,
as it would have it, broke off negotiations on 16 April 1991, there was no
communication by which, in terms, Bakri lifted the balance of the subject in
clause 7. What happened was as follows.
30. Inspection was an important matter to Bakri. It had never purchased a
tanker without first inspecting all the tanks and in the present case
inspection was particularly important because the ship was a chemical tanker
with stainless steel tanks. FEST was apprised of this concern, in direct
terms, on 4 April 1991. Earlier, a partial inspection was carried out on 23
February 1991 when the vessel was in Newcastle, in Australia. On 5 March
1991, Seascope notified FEST that there was a balance of 5 stainless steel
tanks and three wing tanks which had not been inspected, and that it had been
told that Bakri would require inspection of each and every tank. Bakri sought
a proposal by Glorious of a new amendment to the recap which would reflect its
concern. A proposed amendment was provided by FEST to Seascope on 8 March
1991 (document 080302). FEST suggested an amendment of clause 7 of the recap
so as to read:
"THE FIRST VSLS INSPECTION HAS BEEN COMPLETED IN
AUSTRALIA ON FEBRUARY 23, 1991 AND ACCEPTED BY
THE BUYERS EXCEPT TANKS 1C 3-6C 4P+S 5P, ALL WBT
(DBL BOTTOM) AND COFFERDAMS.
SUBJECT TO 2ND VSLS INSPECTION TO BE CARRIED OUT
ON OR AROUND MARCH 27, 1991 AT MUKAISHIMA
DOCKYARD, DECLARABLE WITHIN 5 RUNNING DAYS AFTER
THE INSPECTION COMPLETED. THE SELLERS SHALL
RENDER MAXIMUM COOPERATION FOR SUCH INSPECTION
BUT NOT TO INTERFERE THE SELLERS WORKS/
OPERATIONS.
CLASS RECORDS HAS BEEN INSPECTED AND ACCEPTED BY
THE BUYERS."
31. On the same day, Seascope responded "RECAP OK". By this means there was
a variation of the contract, as regards clause 7 of the recap. But that was
not to be the end of the matter. The procedure specified in the new subject
did not prove practicable. The result was a further proposal.
Physical Inspection of the Ship
32. Inspections in Japan in late March, as stipulated in the new subject in
clause 7, and with Mr Kazunobu Doi in attendance together with a
representative of Bakri, were unsuccessful. A partial reason for this was
difficulties in communication between Glorious and the time charterer. For
its part, Glorious accepted that it would be best to have no outstanding
matters left after physical delivery of the ship to Bakri. The question was
one of reaching a mutually acceptable modus vivendi so that the matter might
proceed to settlement. It will be recalled that, save for physical
inspection, the other subjects had all been lifted by 15 March. On 4 April
1991, after detailing difficulties of Glorious with the charterer, FEST
indicated in a telex to Seascope (document 040403) that Glorious, like Bakri,
did "NOT WANT MATTERS OPEN AFTER (delivery)". FEST continued:
"UNDER THE CIRCUMSTANCES, PRACTICAL SOLUTION IS
STILL (1) TO CARRY OUT DELY IN DRYDOCK REGION
MAY 26/JUNE 25 WITH RESERVATION TO INSPECT 345C
AND (2) TO CARRY OUT INSPECTION 345C UPON REDELY
OF VESSEL UNDER TC BACK.
(The reference to redelivery is to delivery on
termination of the additional time charter for
one more round voyage to Australia which had
been agreed upon between the parties.)
IN THIS CONNECTION, UPON DELY OF THE VSL, THE
SELLERS SHALL ISSUE 'LETTER OF UNDER-TAKING' TO
THE EFFECT THAT THE SELLERS SHALL UNDERTAKE ANY
REPAIR CENTER TANKS 3/4/5 AT THEIR TIME/COST, IF
ANY DEFECTS FOUND BUT NOT LIMITED TO PITTING/
CRACKING/RUST/-DECOLOURATION.
ANY DISPUTE IN THIS CONNECTION TO BE BROUGHT
INTO NK SURVEYOR AS UMPIRE.
ALL CARGO TANKS OTHER THAN 345C HAVE BEEN
INSPECTION AND ACCEPTED.
PLS AGREE."
On 8 April telexes passed along the line of brokers indicating that the
wording suggested by FEST in document 040403 was acceptable to Bakri. In
particular, on that day, Seascope sent to FEST a telex (document 080411) which
included the following:
"PLEASED TO ADVISE SELLERS LAST FOUND ACCEPTABLE
TO BUYERS AND THEREFORE DEAL NOW CONFIRMED.
ONE PROVISO THAT MUST BE REGISTERED IS THAT
WORDING FOR 'LETTER OF UNDERTAKING' HAS TO BE
APPROVED BY BUYERS LAWYERS WHICH SURE SELLERS
CAN APPRECIATE.
KINDLY DRAW UP MOA AND SEND OVER TO US FOR
BUYERS APPROVAL.
. . .
NOTE BUYERS LAWYERS ARE LIKELY BE SINCLAIR
ROCHE.
LETTER OF UNDERTAKING AS AGREED WILL BE FROM
PARENT COMPANY LETTERHEAD AND KINDLY SEND OVER
PROPOSAL OF SAME SOONEST.
ALTHO BAKRI HAVE TAKEN A FEW DAYS TO BE ABLE
ACCEPT SELLERS TOUGH CONDITIONS ABOUT NO
INSPECTION OF THE LAST TANKS THEY HAVE AT LAST
DONE IT AND WE ASK YOU TO KINDLY PROVIDE ALL
ABOVE NECESSARY WORDINGS ETC SOONEST POSSIBLE,
EVEN PRIOR OUR OPENING TOMORROW IF POSSIBLE.
THANK YOU FOR EVERYTHING SOFAR AND LET'S NOW
CLEAR UP THESE SMALL LITTLE DETAILS PROMPTLY.
ALSO KINDLY THANK SELLERS FOR THEIR PATIENCE
OVER THE LAST FEW DAYS."
33. Counsel for Bakri submitted that the words in the first paragraph
particularly "and therefore deal now confirmed" showed that the parties now
accepted that their contract for sale and purchase of the ship was freed from
any outstanding subject in clause 7 and that, in lieu thereof, it was now a
term of the agreement that upon delivery of the ship by Glorious, it would
issue a letter of undertaking in the terms specified. But counsel for
Glorious emphasised that whilst in document 080411 Seascope indicated that the
suggested wording from FEST in document 040403 had been found acceptable to
the buyer, and stated "and therefore deal now confirmed", nevertheless the
buyer introduced new material into the equation. This was done by the
references to the approval of the letter of undertaking by the buyer's
lawyers, and to the letter of undertaking as coming from the parent of
Glorious in a form to be proposed promptly by FEST.
34. The telex which is document 080411 was transmitted from London at 5.48
p.m. on 8 April 1991. The use of the phrase "as agreed" in the statement in
the sixth paragraph "LETTER OF UNDERTAKING AS AGREED WILL BE FROM PARENT
COMPANY LETTERHEAD . . ." is a reference to communications which had passed
between some of the parties in the period after document 040403 had been
passed from Seascope to Cairnhope on 4 April 1991. On receipt of the FEST
proposal, through the medium of Mr Bulow of Seascope, Mr Messenger of
Cairnhope told Mr Bulow that FEST could not be serious if they were just
talking about a guarantee from a single ship owning Panamanian company, and
that Glorious would have to give a bank guarantee or a guarantee from its
financiers. Mr Bulow then had a conversation with Mr Noda. He told Mr Noda
that Bakri could never accept a letter of undertaking from a Panamanian one
ship company as it would have no assets and be completely cleared out on the
sale of the ship. Mr Noda told him that the letter of undertaking would be
given in the parent company name. Then, on 8 April 1991, before sending the
telex from Seascope to FEST (document 080411), Mr Bulow told Mr Messenger that
the seller had confirmed that "the letter of guarantee" would come from the
parent company.
35. In my view, the events which took place between 4 and 8 April 1991 are to
be construed as giving rise to a contractual variation. In place of the
buyer's replacement subject as to inspection of the ship, set out in document
080302, the parties now agreed to be bound, without any further or other
condition precedent to their obligations to perform the subsisting contract
for sale and purchase of the ship. But that contract was varied so as to
include a term whereby upon delivery of the ship, a letter of undertaking
would be issued by the parent company of Glorious, to the effect specified in
document 040403. The form of the undertaking was to be approved by Bakri's
lawyers before it was issued, i.e. before delivery of the ship. The
circumstance that the terms of the undertaking to be given to Bakri required
prior approval of its solicitors, did not mean that the parties had not
achieved forthwith a contractual variation of their bargain. In Godecke v
Kirwan, supra at 645-646, Gibbs J. collected and discussed authorities
illustrative of the proposition that it is no objection that the power to
determine terms, even essential terms, to be incorporated in a contract is
left to the solicitors for one of the parties. Here, rather less was
involved, namely the approval of the wording of the undertaking proffered from
the seller's side, as reflecting the intentions of both the parties indicated
in the telexes, documents 080403 and 080411. In the meantime, the preparation
of the MOA (and side agreement) was to continue, with the tender of drafts by
Glorious to Bakri.
36. On 9 April 1991, Tokyo time, FEST sent to Seascope a fax including a
draft of the MOA, side agreement and letter of undertaking. The letter of
undertaking was as follows:
"WE, GLORIOUS SHIPPING S.A., PANAMA SHALL
UNDERTAKE ANY REPAIR TO THE CENTER CARGO TANKS
NO. 3/4/5 AT OUR TIME AND COST IF ANY DEFECTS
ARE FOUND, BUT NOT LIMITED TO PITTING, CRACKING,
RUST, AND DECOLORATION WHEN THE ABOVE-MENTIONED
TANKS ARE INSPECTED AT TIME OF REDELIVERY OF THE
VESSEL UNDER THE SIDE AGREEMENT EXECUTED BY AND
BETWEEN YOUR GOODSELVES ACTING AS OWNERS AND