CONTENTS
Whether or not an obligation or a term is a condition precedent for a contract to be entered into can be a difficult subject under English law. Recently we came across this issue in relation to a sale of a vessel and, given that it arose out of standard wording in Saleform 2012, consider it of wider interest to our Membership.
One of our members had negotiated a sale contract on the well-known and frequently used Norwegian Saleform 2012. The parties were represented by their brokers and a string of e-mail correspondence reflected the terms on an accept/except basis, until meetings of mind were reached, and a recap was circulated from the sellers` broker to the buyers` broker.
The sellers signed the MOA and sent it to the buyers for their signature, however, a signed MOA from the buyers was never returned. The question then arose whether the buyers were bound by the background general principle under English law that the agreement is deemed to be reached when all essential terms are agreed, or whether the signature on the MOA was a condition precedent for a contract being validly entered into.
As some of you may be aware, clause 2 of Saleform 2012 was amended from the previous 1993-version. In the 1993 Saleform, the deposit shall be paid within an agreed number of banking days from the date of the MOA, which effectively would be from the date the recap of the MOA was agreed.
In the redrafting to what is now Saleform 2012, clause 2 was revised to provide that the deposit will be payable (i) three banking days from signature and exchange of the original MOA and (ii) on receipt of confirmation in writing from the Deposit Holder that the Deposit account has been opened.
Legal authority and commentary
As early as April 2012, two experienced maritime lawyers, including one of the authors of the book “Sale of Ships: The Norwegian Saleform”[1] Paul Herring, commented in an article that it is possible that the revised Clause 2 would lead to arguments that the agreement is not binding until signature and exchange of the MOA, “though this was presumably not the intention of the drafters”.
This was similarly addressed by Herring in Sale of Ships[2] where he comments as follows:
“However the provisions of clause 2 Saleform 2012 may have the effect of preventing a binding contract from arising until signature…”. “The new wording may lead to arguments that the agreement is not binding- and that the deposit period does not start to run- until the MOA has been put into printed form, signed and exchanged however long this takes and however much delay there is. This may not have been the intention of those who drafted the 2012 Form.”
It is a basic principle of English contract law that, absent any qualifications made by the parties to the contrary, there is no requirement that contracts should be in writing or that any documents affording written evidence of an agreement should have been signed by the parties. It then follows that if one of the parties wished to be legally bound only upon the signature of a written MOA which incorporated all of the agreed terms, buyers or their representatives would have to make this clear to sellers through the course of offers and counter-offers. Normally this is done with the words “subject to contract” or “subject to details”.
Even though we at Nordisk were of the opinion that clause 2 construed correctly did not include a condition precedent for the agreement to be entered into, we acknowledge that the buyers, possibly emboldened by the comments in Sale of Ships[3], thought this could be a successful defence. Our research did not reveal any case-law directly on the point under the new Saleform 2012, but the buyers` view would clearly change what was intended to be an innominate term into a condition precedent, which would represent a radical and fundamental change on how MOAs operate. We therefore instructed Counsel from 20 Essex Street chambers to provide a second opinion.
Counsel concurred fully with our rationale and provided some convincing considerations by reference to legal precedence, which, to our minds, should settle the subject.
Almost precisely the same “condition precedent” type argument as fuelled by “Sale of Ships” was run and was rejected by the Court of Appeal in “The Blankenstein”[4] (albeit based on the earlier Saleform 1966 contract). The wording in that contract was amended so that it read, as in the Saleform 2012, that the relevant deposit clause was expressly linked to the timing of signature.
On the facts of that case, the relevant MOA was not signed and clause 2 of that MOA provided that the deposit was to be paid “on signing this contract”. Both the Court of first instance and the Court of Appeal held that a binding contract had indeed come into existence when a relevant recap offer had been accepted as between the respective brokers involved.
The Court of Appeal held that there was nothing on the facts of the case which led to the conclusion that the parties had intended that the negotiations were not to have contractual force until a formal document had been signed. The Court stated that the mere fact that the parties intended that there should be a formal contract in the agreed standard form signed by the parties did not of themselves reveal any such intention. The Court concluded that the relevant “acceptance” message relied upon would be “regarded in the shipping market as giving rise to a binding contract of sale not requiring a signed memorandum to validate it”.
The Court expressly rejected the argument that the parties` signatures and the payment of the deposit by the buyers were “conditions precedent” to the formation of the contract itself. Fox LJ summarised what should be the guiding view on Saleform 2012 also:
“In the absence of a special provision it does not seem to me to carry with it any implication that it is a condition precedent to the existence of contractual relations…. The provision for payment of the deposit was not a condition precedent to the formation of the contract. It was in my view a fundamental term of the concluded contract.”
However, the Court did find that since the MOA had not been signed and signature was the express trigger for payment of the deposit, this meant that the particular obligation to pay the deposit had not yet been triggered. In practice this did not, and for the Saleform 2012 also will not, actually affect the end result for the sellers.
The Court commented that once the MOA had been concluded between the brokers, the “parties became bound to sign the MOA incorporating the agreed terms within a reasonable time”. On the facts, the Court held that two weeks had elapsed since the conclusion of the MOA and this amounted to the expiration of a “reasonable” time for the buyers` signature.
Both we and Counsel concur with the view taken by the Court of Appeal, it would be anathema to basic English law principles to allow the buyers to avoid their liability for payment of the deposit and the consequences which follow from that, as a direct result of their own failure or refusal to sign the MOA.
Finally, and by way of ‘comfort’, the Court of Appeal in The Blankenstein, also cited with approval the reasoning in The Selene G[5]. In that case, the buyers did not pay the deposit and the sellers rescinded. It was held by Mr Justice Robert Goff that the obligation to pay the deposit was an essential term of the contract. It was not suggested in that case that the payment of the deposit was a condition precedent to the existence of the contract.
Conclusion
We can therefore now safely conclude that signature of the MOA under the Saleform 2012 is a contractual term that obliges buyers to sign the contract, but it does not constitute a condition precedent for the contract to be validly entered into, unless the parties have expressly included such conditions in the negotiation phase as subjects to contract.
In the next edition we will consider what the consequences of a buyer failing to sign a MOA within a reasonable time.
[1] by Malcolm Strong and Paul Herring,
[2]Ibid, 3rd Edition
[3] Ibid
[4] [1985] 1 Lloyd`s Rep 93
[5] [1981] 2 Lloyds Rep 180
By Egil André Berglund