UK: "The Masters Of Their Contractual Fate" – How Not To Get Trapped Into A Contract Before You Are Ready To Commit

A recent High Court decision, Proton Energy Group SA v Orlen Lietuva [2013] EWHC 2872, serves as a timely reminder of the care parties must take when negotiating new deals so as not to become bound when they do not yet wish to be.

The Facts

The claimant, Proton Energy Group SA, is a Swiss company trading oil and gasoline related products. The defendant, Orlen Lietuva, is a Lithuanian petroleum refining company.

On 11 June 2012, Proton sent an "INDICATIVE OFFER" to Orlen for the sale of 25,000mt of an oil blend, attaching specifications and details of the carrying vessel. The offer was expressed to be valid until close of business the following day with "all other terms and conditions as per seller's standard CIF contract". On the same day, Orlen indicated an interest in the offer, but on 12 June 2012 confirmed that "unfortunately, this vessel cannot be accepted by" the terminal.

On 14 June 2012, Proton sent a "FIRM OFFER" offering to sell the same product, again with "all other terms and conditions as per seller's standard CIF contract", and stating that "Seller shall issue and send contract within a timely manner". This time, the offer was valid for that day only and stated that "we would appreciate your kind reply in respect of this timing".

In a separate email on the same day, Proton confirmed to Orlen that the vessel would be changed to one acceptable to Orlen and requested "confirmation on coordination of conditions is needed urgently, and then let's move towards the contract. We are looking forward for the comments".

Orlen responded at 1 p.m. that day with four comments on the contract terms. Proton agreed to three of the comments but, in relation to price, stated that "Contractual price is fixed as per the confirmed offer. All other contractual terms not indicated in the offer shall be as discussed and mutually agreed between parties upon contract negotiations". Orlen's one word response a few minutes later was "Confirmed".

In the days following Orlen's "Confirmed" email, the parties negotiated the written contract. Three drafts of the written contract were sent by Proton to Orlen, on 20, 22 and 27 June, each beginning with the sentence "WE ARE PLEASED TO CONFIRM OUR SALE OF OIL BLEND CONCLUDED ON 14TH JUNE 2012 ON THE BELOW TERMS AND CONDITIONS OF CONTRACT". Orlen did not object to the inclusion of these words in any of the drafts.

By the last week in June, relations between the parties had become sour. Orlen failed to open a letter of credit on 26 June 2012 as required by the "contract" and, on 29 June 2012, Orlen sent Proton a letter terminating "negotiations". Proton alleged that Orlen was in repudiatory breach of the binding contract as a consequence.

Application for summary judgment1

This dispute first reached a hearing at the English High Court on 25 February 2013, when Proton sought summary judgment on the basis that the alleged "contract was formed between the parties on 14 June (or, alternatively, at the very latest 27 June 2012)".

Requirements for a binding contract

In his judgment, Mr Gavin Kealey QC helpfully reiterated the legal principles applicable to the question of whether a legally binding contract has been concluded, as set out by Lord Clarke in RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co [2010] 1 WLR 753. In summary, the Judge stated that:

  • Whether there is a binding contract between the parties and, if so, upon what terms, depends upon what they have agreed.
  • To establish this, the Court must look at what was communicated between them by words or conduct and consider whether objectively they intended to create legal relations and agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations.
  • A contract may still be concluded even where certain terms of economic or other significance to the parties have not been finalised, if an objective appraisal of their words and conduct shows that they did not intend agreement on those terms to be a precondition to a binding contract.

The Judge's findings

Mr Kealey QC stated that there were "powerful objectively ascertainable indications" present in this case that a legally binding contract had been concluded. For example, the use of "FIRM OFFER" was the use of language of intended commitment. The short timescale allowed for acceptance "did not admit of languid negotiation" and the "sense of urgency" in the parties' communications indicated an intention to be bound and to bind.

The parties' conduct post-14 June, nominating and accepting a vessel, as well as the use of the sentence beginning "WE ARE PLEASED TO CONFIRM..." at the top of each draft contract, reinforced this view.

Nevertheless, some behaviour was not consistent with a legally binding contract having been concluded. For example, Orlen referred to three "main changes" to the draft contract, without which it stated that "this contract will not be concluded".

Use of expert evidence

In the event, the Judge declined to grant the application for summary judgment, not on the basis of any of the above, but for the reason that Orlen had, unusually, put forward expert evidence to address the question of "whether reasonable participants in the market for crude oil mix would understand that a binding contract was concluded between the parties on 14th June 2012". Orlen's expert was said to have "considerable experience in the technical, commercial and contractual aspects of the international oil and gas industry".

Orlen's expert's evidence was that:

  • The oil trading market was divided into segments: exchange based, "over the counter" – paper and physical, speculation and refinery supply. Different considerations regarding the conclusion of contracts applied to different markets.
  • Proton's "FIRM OFFER" is known in the oil industry as a recap.
  • A recap is not binding in cases involving sales to a national oil company, of which Orlen was considered to be one, nor in cases where parties are entering into a "one-off" sale to a refinery.

Accordingly, the "FIRM OFFER" made by Proton to Orlen "would not have been understood by reasonable market participants as creating a binding contract" but would have been considered as "subject to contract".

The Judge declined to answer, nor did he need to answer, the question of whether the expert's evidence was correct. He stated that "there is certainly a logic and plausibility to [the] evidence", though recognised that "it may prove, on examination at trial, to be wrong". However, it presented enough of an argument that Orlen would have a "real as opposed to fanciful prospect of success at trial" and the application (for immediate summary judgment) was therefore dismissed.

The Trial

The matter proceeded to a full hearing before His Honour Judge Mackie QC.

The expert evidence

Although the admission of expert evidence had been "highly material" at summary judgment stage, in the event the Judge found such evidence to be of "little assistance", as what Orlen's expert "had to say of relevance was within the experience of most Commercial judges".

The evidence of the claimant's expert sharply contradicted that of Orlen's expert. Proton's expert stated that "in the overwhelming number of cases, oil deals are concluded over the telephone or, more often these days, by yahoo or email" and that "there is no special rule relating to refining companies" or distinction between physical and paper deals.

The Court preferred this evidence as it was "more consistent with logic and the experience of the Court", stating that "experience suggests that the word Recap is often used to confirm a deal, a contract, but each case turns on its own facts".

Accordingly, the expert evidence "adds nothing" and the Court referred back to the well-known principles of English law and its own knowledge and experience.

The use of experts

The use of expert evidence in a case such as this is highly unusual and, as it turned out, of little help to the Judge. The only area in which it seems that expert evidence may be helpful in such a case is where there is a clear "custom and usage" relevant to that particular market, where it is not likely to be within the experience of most Commercial Court judges.2

Was there a contract?

The Court's final decision was that "a contract came into existence on 14 June". The deal was a "classic spot deal where the speed of the market requires that the parties agree the main terms and leave the details, some of which may be important, to be discussed and agreed later".

Conclusion

This case serves as a notable reminder of the care which must be taken by parties when negotiating the terms of a deal so as not to become bound before they mean to be. While the Court recognised that much business is undertaken by "lay business people from different jurisdictions" who "will not always conduct all aspects of their dealings to fit the conventions of English contract law", their overall language here was "that of commitment".

Where a party is happy to agree to some terms but does not wish to be bound to the deal at that stage, it must ensure that it states so clearly in its oral and written communications with its counterparty. Clear wording such as "firm offer" should be avoided if a party does not intend to be bound. A "subject to contract" tag is always sufficient to avoid a binding contract provided it is consistently used on all communications. Equally, where a party does wish it and its counterparty to be bound, language such as "firm and binding offer" and a clear follow-up message "confirming the deal" should be used so that there can be no doubt of the parties' intentions to bind and be bound. Finally, if a party does not intend to be bound by any terms received from its counterparty during any stage of negotiations, it should raise an objection without delay.

Footnotes

1. A claimant is entitled to summary judgment where the defendant "has no prospect of successfully defending the claim or issue; and (b) there is no other compelling reason why the claim or issue should be disposed of at trial" (CPR 24.2). There must be a real, as opposed to a fanciful or imaginary, prospect of successfully defending the claim.

2. As a side note, the Court also commented on the importance of a law firm fully disclosing any prior connections it had with its client's expert. While it is common for law firms to instruct the same expert or firm of experts in a number of cases where similar issues are being discussed, if the relationship between the two is closer than usual, e.g., the law firm is regularly paid by the expert's firm to speak at seminars, it may be prudent to choose a different expert.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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