Note: this decision has now been upheld on appeal. To read the appeal judgment, click here
DMC/S&T/11/01
Mamidoil-Jetoil Greek Petroleum Company SA v. Okta Crude Oil Refinery AD
English Court of Appeal: Judgment delivered by Rix LJ
[2001 CIV 406]: March 2001
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
Facts
The claimants, Jetoil, contracted with Okta, a refinery in Macedonia, to
handle Okta’s crude oil imports brought in tanker vessels to the Jetoil
facilities in the port of Salonica in north eastern Greece and to put the cargo
into rail wagons for onward carriage to Okta’s refinery in Skopje. The
handling was carried out under the terms of a contract agreed in March 1993 but
the fee for handling services was agreed only up to 31.12 1994. This contract
was operated successfully by the parties until the end of 1999. Disagreements
then arose, because in 1999, the Okta refinery had come under the control of a
consortium headed by the Hellenic Petroleum group, which owned Jetoil’s
commercial rivals in Salonica. Thus the refinery wished to switch their custom
for crude oil handling at Salonica from Jetoil to their group company.
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
its own
account in Skopje Refinery.
2. [Handling] under this agreement means receiving the Crude Oil from the
vessel,storing in tanks and loading on Rail wagons supplied by the Refinery with
destination Skopje Refinery.
3. The [handling] fee is fixed to US$4.00 per metric tonne for the period
1.11.92 until 31.12.94……..
7. This agreement is valid for 10 years starting from the date of the
Signature."
The contract also contained an annex providing:
"1. The ten years initial contract term can be amended by mutual
agreement for another ten years or for an indefinite period….
5. Any dispute arising under or in connection with this agreement and
which cannot be amicably solved shall be referred to arbitration in London,
English law will apply."
The Issues
Jetoil maintained, contrary to the finding of the judge at first instance,
that the ten-year term in clause 7 of the contract was binding and that the
handling fee for the period beyond 31 December 1994, in the absence of agreement
between the parties, would have to be fixed as a reasonable fee by the court.
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.
The Judgment
As regards the proper construction of clause 1, the court held that the
Jetoil interpretation was the correct one – both on the wording of the clause
and in the commercial context. Clause 1 contained an obligation on the part of
the Refinery to allow Jetoil to handle the total of the Refinery’s own account
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
following conclusions:
(i) Each case must be handled on its own facts and on the
construction of its own agreement. Subject to that:
(ii) Where no contract exists, the use of an expression such as ‘to be
agreed’ in relation to an essential term is likely to prevent any contract
coming into existence, on the ground of uncertainty. This may be summed up
by the principle that ‘you cannot agree to agree’.
(iii) Similarly, where no contract exists, the absence of agreement on
essential terms of the agreement may prevent any contract coming into
existence, again on the ground of uncertainty.
(iv) However, particularly in commercial dealings between parties who are
familiar with the trade in question, and particularly where the parties have
acted in the belief that they had a binding contract, the courts are willing
to imply terms, where that is possible, to enable the contract to be carried
out.
(v) Where the contract has come into existence, even the expression ‘to
be agreed’ in relation to future executory obligations is not necessarily
fatal to its continued existence.
(vi) Particularly in the case of contracts for future performance over a
period. where the parties may desire or need to leave matters to be adjusted
in the working out of their contract, the courts will assist the parties to
do so, so as to preserve rather than destroy bargains, on the basis that
what can be made certain is itself certain.
(vii) This is particularly the case where one party has either already
had the advantage of some performance which reflects the parties’
agreement on a long-term relationship, or has had to make an investment
premised on that agreement.
(viii) For these purposes, an express stipulation for a reasonable or
fair measure or price will be a sufficient criterion for the courts to act
on. But even in the absence of express language, the courts are prepared to
imply an obligation in terms of what is reasonable.
(ix) [Omitted]
(x) The presence of an arbitration clause may assist the courts to hold a
contract to be sufficiently certain or to be capable of being rendered so,
presumably as indicating a commercial and contractual mechanism, which can
be operated with the assistance of experts in the field, by which the
parties, in the absence of agreement, may resolve their dispute."
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.
7. (Omitted)
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 needed
to be found. Judgment was given in favour of Jetoil.