Jetoil v. Okta
Note: this decision has now been upheld on appeal. To read the appeal judgment, click here
TEN-YEAR CONTRACT: PRICE DETERMINED ONLY FOR INITIAL TWO-YEAR PERIOD: WHETHER CONTRACT ENDED ON EXPIRY OF INITIAL PERIOD: ‘AGREEMENT TO AGREE’: IMPLIED TERMS TO GIVE CONTRACT EFFICACY FOR FULL TERM: DISPUTE RESOLUTION MECHANISM
In the context of a long-term commercial agreement between parties who have had a long familiarity with the subject matter of the agreement and with each other, the courts are willing to imply terms, where that is possible, to enable the contract to be carried out - particularly where the parties have acted in the belief that there is a binding contract. In this case, the contract provided that it ‘shall be valid for 10 years’ but specified the price only for the first two years, and did not set out any mechanism for determining the price for the remaining period. The court held that the contract was nevertheless valid for the full ten-year period and that a term should be implied into the contract that the price should be ‘a reasonable one’, to be determined - in the absence of agreement between the parties - in arbitration, as provided for in the contract.
DMC Category Rating: Developed
The 1993 contract between the parties contained the following clauses:
"1 The Refinery wants and Jetoil accepts to [handle] via its
Salonica installations thequantities of not heated crude oil that the Refinery will buy and process for
account in Skopje Refinery.
Okta maintained that the judge at first instance had been right in finding that the 10-year term mentioned in clause 7 was not binding. It was only a maximum. The continued existence of the contract beyond 31.12 1994 was dependent upon further agreement between the parties as to the handling fee for future years. Once it became impossible to agree the fee, the contract came to an end.
In addition Okta argued that the effect of clause 1 was that Jetoil agreed to handle as much or as little crude oil as the Refinery was prepared to allow it to handle. In other words, the Refinery had an option to put oil into the Jetoil facility at Salonica, but not an obligation. Jetoil’s position was that, on the contrary, the Refinery was obliged to allow Jetoil to handle all the crude oil that the Refinery buys and processes for its own account, in other words, that Jetoil had an exclusive contract for the handling at Salonica of the Refinery’s entire own account crude oil purchases.
As regards the proper construction of clause 7 – the 10-year contract
period – the court reviewed the relevant authorities and drew from them the
Measuring the present case against these criteria, the court held that:
1. The context is that of a long-term commercial agreement between parties who have had long familiarity with the subject matter of the agreement and with each other.
2. The agreement in question undoubtedly arises out of a contract…. This is not, therefore, one of those cases where the initial issue is whether the parties have ever reached the stage of contractual relations……once a contract exists, it not only needs to be construed for its terms, but the courts will seek to make it work, as the parties must have intended, in accordance with its terms, that it should.
3. The parties have provided that their contract is ‘valid for 10 years’ as from signature. This language is….particularly strong. It is the language of legal effectiveness. It is not the language of mere projection…..[The annex, in clause 5,] not only contemplates a longer term still, but distinguishes that longer term from the ‘ten years initial contract term’….. If the initial contract term is ten years, then I do not see how it can be said that the initial contract term is only valid until 31.12 1994.
4. It follows that if the effect of clause 3 is to cut down the contract to a period ending with 1994, this cannot be so as a matter of construction, but because the agreement is incomplete or uncertain beyond that period. The authorities suggest, however, that at any rate in principle, there is no difficulty in implying a term that the fee should be a reasonable one.
5. The contract does not expressly state that the fee after the end of 1994 is ‘to be agreed’. It is simply silent as to what is to happen in that period. Therefore, this case is simply not presented with the difficulties which arise, in the face of ‘to be agreed’ language, where it is uncertain whether there is any contract at all. It cannot be said….that the statutory implication of a reasonable price, or an implication that the fee should be such reasonable fee as the arbitrator may decide, is excluded by express agreement that the parties were to agree that figure.
6. There is no evidence that the resolution of a reasonable fee would cause any difficulty at all. On the contrary, the evidence is the other way. In practice, these parties…..had managed to agree a handling fee throughout the best part of 20 years up to 1999……[There had been contracts of a similar type between the parties dating back to 1979]…. Thus, although it is true to say that the contract itself contained no mechanism or guidance (other than the arbitration clause) as to how a reasonable fee would be derived, I do not consider that the contract should fail on that ground. Contractually derived criteria or guidance may be of assistance in finding an implied term for a reasonable price; but the authorities indicate that the courts are well prepared to make the implication even in their absence.
8. The presence of an arbitration clause…. is not without its effect. It is a contractual mechanism for resolving ‘Any dispute…. which cannot be amicably resolved’….. It seems to me apposite to deal with a lacuna which, in common with other contracts which have to provide for future events, commercial practicalities lead parties to leave unresolved at the time of contract."
For all these reasons, the court held that the 1993 contract was a binding agreement for a minimum of 10 years, and reasonable terms for the handling fee after the end of 1999 neededto be found. Judgment was given in favour of Jetoil.
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