Negotiating Charter Parties: Construction and Interpretation of Contracts or Parties’ Intentions?

Article written by Divya T

With security concerns escalating in the Red Sea and affecting the Black Sea, coupled with the effects of climate change on the Panama Canal and supply chain disruptions posing threats to globalisation, changes in the negotiation of charter parties are becoming increasingly common. The High Court’s decision to grant summary judgment in favour of the owners, Southeaster, in the case of Southeaster Maritime Ltd v Trafigura Maritime Logistics Pte. Ltd. (MV Aquafreedom) [2024] EWHC 255 (Comm), tilted the odds against the charterers, Trafigura.

The negotiations between the owner and charterers centred around finalising the outstanding terms related to charter rates, the loading of Kazak origin oil cargo onto the oil tanker, and maintaining the vessels’ CII rating for the forty-eight-month charter party. Preliminary negotiations were conducted via email and WhatsApp, with the recap outlining two subjects(subs) that were disputed – considered condition precedent by the owners and condition subsequent by the charterers for the charter party to be considered valid. Until all subs were satisfied, the charter party was not deemed to come into existence, and all terms had to be agreed upon and reviewed by both parties, as well as approved by the charter’s management.

The crux of the matter ultimately hinged on the legal construction of the contract, with a focus on whether the claims made by both parties were realistic, relying on factual assertions put forth by each party. This depended heavily on the construction of the recap terms and subs and whether they were agreed upon by both parties. In addition to negotiating outstanding terms, the parties also negotiated various clauses from the charter party, including the wording of the trading area clause; loading procedures for clean petroleum products on board the crude oil carrier; applicable Baltic and International Maritime Council (BIMCO) sanctions; dry docking notice periods; Emission Trading System (ETS) clause length, and CII Operations clause rating, which is a clause designed to assist owners and charterers with implementing International Maritime Organisation’s (IMO) new carbon intensity regulations. These negotiations indicated that the charter party was still under negotiation, with not all terms agreed upon. Deeming the charterers’ agreement to all terms suggested by the owners as invalid later on, as the charterers were made aware of the owners’ second thoughts about entering into any sort of charter party.

The invalidity of the charterers’ agreement raises questions of contract interpretation and the parties’ intentions, as pointed out by Mr. Holroyd, barrister at 7 KIng’s Bench Walk, experienced in shipping arbitrations. The court must balance the factual background with the implications of rival constructions, and closely examine the language of the contract, following principles developed by Rainy Sky SA v Kookmin Bank [2011] UKSC 50; Arnold v Britton [2015] UKSC 36; and Wood v Capita Insurance Services Ltd [2017] UKSC 24,  over a decade. Considering this and the fact that not all terms were agreed upon by both parties, the subs were deemed as conditions subsequent; therefore, no contract (charter party) was concluded, and thus, the subs could not be lifted (as alleged) by the charterers. WhatsApp communications were considered valid and official, contrary to the claims of the charterers that they were not.

In light of these considerations, the court allowed the owners’ application for summary judgment. This decision comes as a relief for ship owners predominantly, and it serves as a lesson for charterers to bear in mind that a charter party only comes into existence when a fixture recap is signed, not during the negotiations or any preceding stage.