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The legal effect of “subject to”

The legal effect of subject to | BDM Blog | BDM Law

​Some say that the annoying thing about the law is that what seems perfectly clear at first glance seldom is once lawyers get hold of it!

By way of example, the phrase “subject to” is commonly used in contractual negotiations. The assumption is that the contract itself does not come into effect until the “subjects” have been dealt with. This is often known as clearing subjects or lifting subjects. Once those subjects are cleared or lifted the parties are deemed to have entered into a contract. In legal terminology these are known as pre-conditions or condition precedents to the formation of a contract.

Except that in some circumstances, they may not in fact be conditions precedent! They may instead be deemed to be performance conditions. The difference is stark. A performance condition does not prevent a contract from coming into existence. It merely excuses performance if that particular condition is not fulfilled. Furthermore, in certain circumstances, a term can be implied that reasonable steps should be taken to satisfy the performance condition. In other words, if one of the terms is “subject to the approval of the vessel by the Terminal” and only one of the parties can apply for that approval, it may be implied that said party should exercise good faith and act reasonably to make the application.

Against this background it is worth reading the decision of Foxton J in The Leonidas (1). In that case it was held that the subjects (“subject to Charterers’ Stem/Suppliers’/Receivers’/Management Approval latest 1700 Houston time Tuesday 12 January 2016”) were in fact conditions precedent and that, in those circumstances, the Charterers (Trafigura) were not required to take reasonable steps to obtain their suppliers’ approval. The factors that led him to make that determination were:

  • The fact that the subjects involved the exercise of a personal or commercial judgment of one of the potential parties to the contract. In this case, it was up to Trafigura to determine who the relevant supplier would be and from which terminals and berths/tanks within terminals cargo would be loaded;
  • The language used i.e. “on subjects” and “lifting” subjects supported the fact that this was more likely to be a condition precedent that required some action to be taken rather than the subject being resolved automatically on the occurrence of an external event e.g. the approval from a third party; and
  • Previous authorities indicated that the “Stem Subject” and “Management Approval Subject” were both pre-conditions.

Foxton J sets out the law very nicely such that this case is now the starting point for anyone faced with the argument that “subject to” means something other than a condition precedent. His judgment also gives us a nice overview of the leading cases on loss of chance because if the term had in fact been regarded as a performance condition, the issue would have been whether the third party supplier would have approved the vessel.

(1)  Nautica Marine Ltd v. Trafigura Trading (The Leonidas) [2020] EWHC 1986 (Comm)

 

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