Implied terms: Teekay Tankers Ltd v STX Offshore and Shipbuilding Co Ltd [2017] EWHC 253 (Comm)

Whether the court will imply essential terms to give effect to the parties’ intention to enter into a legally binding agreement.

The facts

A subsidiary of the claimant entered into shipbuilding contracts for the construction of four tankers with the defendant builder. The parties also entered into an option agreement which provided for the claimant to have the option to order three additional sets of up to four vessels. A dispute later arose between the parties as to the fulfillment and termination of the shipbuilding contracts and the option agreement.

The defendant submitted that the option agreement was too uncertain to be enforced because it provided for delivery dates for the vessels to be mutually agreed by the parties and for the defendant to make best efforts to have a delivery within 2016 for the first option vessels and 2017 for the rest. The claimant argued that the option agreement could be rendered suffciently certain by the implication of a term that, (1) failing agreement, the delivery date would be the date that the defendant offered, having used its best efforts, in 2016 or 2017, or the earliest date thereafter; or, (2) that the delivery date would be an objectively reasonable date determined by the court.

The decision

The court found that, although the parties had clearly intended the option agreement to be binding, it had to give effect to the bargain made by the parties if it was possible to do so. Further, the option agreement did not stand alone – it was part of a package with the shipbuilding contracts.

The first way of putting the implied term would involve replacing the requirement for agreement with a scheme under which the claimant had to accept the date put forward by the defendant.

The second way of putting the implied term was not simply that delivery should be within a reasonable time, as the identification of a specific date was integral to the shipbuilding contracts. The contrasting interests of the parties would preclude a delivery date on the basis of what would be “reasonable”. The reference to the use of the defendant’s “best efforts” was part of a process of seeking to agree upon an essential term (ie the date for delivery), and that was different from a valid obligation to use best efforts to achieve a particular result.

Since neither of the alleged implied terms was capable of forming part of the option agreement, the court concluded that it was too uncertain to be enforced. There was merely an agreement to agree on an essential term.

Why is this important?

This case shows that the court will not try to save an agreement that would be unenforceable for uncertainty by implying a term that offends the express language of the agreement.

Any practical tips?

Always seek to agree essential terms! When it comes to delivery dates, an implied term that the delivery day will be identified by reference to what is reasonable will be inconsistent with express terms that deal with the agreement or identification of a delivery date.