Commercial Court decides that an option agreement with delivery dates to be specified is void for uncertainty

This case could be of interest in a climate where new orders are increasing with options often being requested for more ships to follow.

In April 2013 Teekay Tankers (“Teekay”) entered into an option agreement with STX Offshore & Shipbuilding (“STX”) for the construction and delivery of up to three lots of ships, at Teekay’s option.  The options were to be exercised within set windows with the delivery date to be mutually agreed at the time of Teekay triggering the option.  Further under the option agreement, STX was to use its “best efforts” to give delivery dates within 2016/2017 for respectively the first/second and third option.

Teekay attempted to exercise the first and second option but no delivery dates were ever mutually agreed nor any optional contracts concluded.  Subsequently, Teekay sought compensation for the loss of profits, asserting that STX had repudiated or renounced the option agreement, entitling Teekay to terminate it.  The case was heard before Mr Justice Walker in the Commercial Court in February 2017.

The judge said that it was clear that both parties had intended the option agreement to be binding and enforceable.  However, the commitment of STX to use “best efforts” to give delivery dates within 2016/2017 was at best aspirational.   However, the term was simply too vague, since there was no way of establishing what criteria were to apply if Teekay gave notice to exercise the options and the parties could not agree dates.

This particular option agreement contained no arbitration clause.  Obiter, the judge held that if there had been one, Teekay would have had an additional string to its bow.  To ensure the effectiveness of enforcing options of this kind, it would seem good practice to insert a dispute resolution clause in the option agreement to the effect that an arbitration or third party decision will be binding in the absence of detailed arrangements in the contract.

The full citation of this case is Teekay Tankers Ltd v STX Offshore & Shipbuilding Co Ltd [2017] EWHC 253 (Comm) (15 February 2017).

The moral of the story is when asking for an option, make sure that there is sufficient clarity about when the option is to be exercised and what the basic terms of the contract will be in terms of the price, delivery and main terms.   At a minimum, the parties should always ensure that there is a dispute resolution clause in the option agreement so that if there is a dispute then they can refer the same to a panel of arbitrators.

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