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Re Bakri Navigation Company Limited v Ship "Golden Glory"

Glorious Shipping SA (Owners Of) [1991] FCA 235 (5 June
1991)
FEDERAL COURT OF AUSTRALIA

Re: BAKRI NAVIGATION COMPANY LIMITED

And: SHIP "GOLDEN GLORY" GLORIOUS SHIPPING S.A. (OWNERS OF)
No. G199 of 1991
FED No. 306
Shipping and Navigation - International Arbitration

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
IN ADMIRALTY
Gummow J.(1)

CATCHWORDS

Shipping and Navigation - negotiations for sale of tanker conducted by brokers in London and
Tokyo - whether contract formed - whether then varied - effect of "recaps" and "subjects".

International Arbitration - whether arbitration agreement rendered inoperative by subsequent

agreement and by giving and acceptance of undertakings to the Court - whether stay of proceedings
should not be ordered.

International Arbitration Act 1974

Tanning Research Laboratories Inc. v O'Brien [1990] HCA 8; (1990) 169 CLR 332

De Bussche v Alt (1878) 8 Ch D 286

Reardon Smith Line v Hansen-Tangen (1976) 3 All ER 570

Codelfa Construction Pty Ltd v State Rail Authority of N.S.W. [1982] HCA 24; (1982) 149 CLR
337

The "Blankenstein" (1985) 1 Lloyd's Rep 93

Godecke v Kirwan [1973] HCA 38; (1973) 129 CLR 629

Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51;
(1979) 144 CLR 596

Perri v Coolangatta Investments Pty Ltd [1982] HCA 29; (1982) 149 CLR 537

Tallerman and Co. Pty Limited v Nathan's Merchandise (Victoria) Pty Limited [1957] HCA 10;
(1957) 98 CLR 93

Dan v Barclays Australia Limited (1983) 57 ALJR 442

Buhrer v Tweedie (1973) 1 NZLR 517

Paczy v Haendler and Natermann GmbH (1981) 1 Lloyd's Rep 302

Kruidenier (London) Ltd v The Egyptian Navigation Co. (1980) 2 Lloyd's Rep 166

HEARING

SYDNEY
5:6:1991

Counsel and solicitors for the plaintiff: Mr J.C. Campbell QC and

Mr N.C. Hutley instructed

by Messrs Michell Sillar
McPhee Meyer.

Counsel and solicitors for the defendant: Mr A.J. Sullivan QC and

Mr J.W.J. Stevenson
instructed by Messrs
Ebsworth and Ebsworth.

ORDER

The questions for separate decision be answered as follows:

(1) Is there a concluded agreement between Bakri Navigation Co.
Limited and Glorious Shipping S.A. for the sale of the ship
'Golden Glory' upon the terms alleged by Bakri Navigation
Co. Limited?
ANSWER: Yes. (2) If "yes" to (1), does this proceeding involve the
determination of a matter which, in pursuance of that
agreement, is capable of settlement by arbitration, within
the meaning of s. 7 of the International Arbitration Act
1974 ("the Act")?
ANSWER: Yes. (3) Should the proceeding, as to whole or part, and, if

so, as

to which part, be stayed by order under sub-s. 7 (2) of the

Act, and the parties referred to arbitration?
ANSWER: No. (4) Is the Court required by sub-s. 7 (5) not to make an

order
 it otherwise would make under sub-s. 7 (2) of the Act?
ANSWER: Yes.

Note: Settlement and entry of Orders is dealt with by Order 36 of the Federal Court Rules.

DECISION

This proceeding was commenced on 27 April 1991. The plaintiff seeks a declaration that it has a
binding contract for the sale to it of the ship "Golden Glory" and an order for the specific
performance of that contract. The ship was arrested on 28 April 1991 in Port Botany. The defendant,
the owners of the ship, applied for release of the ship from the arrest, and that application was heard
by me on 1 and 2 May 1991. On 2 May 1991, after delivering oral reasons for judgment, I ordered
that the application for release stand over to the next day for the giving of undertakings and the
making of orders in accordance with those reasons.

2. In the events that have since happened, the terms of the orders made 3 May 1991 have assumed a
particular importance. I therefore set them out in full:

"UPON the Defendant by its counsel undertaking to the Court:

(a) That the Defendant will take all steps on its part as are
properly necessary to prepare these proceedings for trial on
15, 16 and 17 May 1991;
(b) That the Defendant will not, without the prior written
consent of the Plaintiff, sell, transfer title to, mortgage
or otherwise encumber in any manner whatsoever the ship or
any interest in the ship 'Golden Glory' pending the
determination of these proceedings (including any appeals to
the Federal Court of Australia or otherwise, and including
any applications for special leave to appeal that might be
taken therefrom to the High Court of Australia);
(c) That it will comply (subject to its rights to seek variation
or discharge thereof, and to appeal therefrom) with any
Orders made against it in these proceedings;
AND NOTING that the Defendant has procured the delivery to the
Sydney solicitors for the Plaintiff of a Deed in the form of
Exhibit D on the application filed in these proceedings on 1 May
1991, and that arrangements satisfactory to the Marshal and as set
out in Exhibit E on that application have been made for the
payment of the fees and expenses of the Marshal in connection with
the custody of the said ship while it was under arrest,
THE COURT ORDERS that the ship 'Golden Glory' be released from
arrest."

It will be necessary later in these reasons to refer in more detail to Exhibit D ("the Deed of
Undertaking") but it should now be noted that it contains a covenant by the defendant to the plaintiff
to comply with the above undertakings given to this Court.

3. Directions also were given to have the matter ready for hearing on 15 May 1991. At the hearing, I
heard some of the evidence going to the availability of specific performance. But it became apparent
that if the Court found for the plaintiff as to the existence of a contract in the terms propounded by it,
the defendant would contend first, that the contract contained an arbitration agreement within the
meaning of sub-s. 3 (1) of the International Arbitration Act 1974 ("the Arbitration Act") and
secondly, that the procedure for arbitration under that agreement was governed by English law,
which would answer the description in para. 7 (1) (a) in the statute of "the law of a Convention
country". Upon that footing, the defendant would apply for a stay of the balance of the proceeding.
Subject to the imposition of such conditions, if any, as it thought fit, the Court would be obliged by
sub-s. 7 (2) to impose such a stay.

4. To this the plaintiff responded by contending that no such stay should be ordered because (i) there
was no "arbitration agreement" of the relevant description and, (ii) even if there were, sub-s. 7 (5) of
the Arbitration Act applied. This states:

"7 (5) A court shall not make an order under subsection (2)
if the court finds that the arbitration agreement is
null and void, inoperative or incapable of being
performed."

In particular, the plaintiff wished to submit that the terms of the undertakings given to the Court on 3
May 1991 as a step to procure the release of the ship from arrest, and the terms of the deed, Exhibit
D, were inconsistent with the continued existence of the arbitration agreement alleged by the
defendant. This was said to be because their clear import was an acceptance by the defendant of a
situation whereby the proceeding between it and the plaintiff would be disposed of in its entirety in
this Court. (However, the plaintiff expressly disavowed any further argument which would assert
that the claim to specific performance was not a matter the determination of which was "capable of
settlement by arbitration" within the meaning of sub-s. 7 (2) of the Act because such a claim was
susceptible of determination exclusively by the exercise of judicial power; cf. Tanning Research
Laboratories Inc. v O'Brien [1990] HCA 8; (1990) 169 CLR 332 at 351-352, per Deane, Gaudron
JJ.).

5. In these circumstances, the Court made orders for the decision of the following questions
separately and in advance of any other questions in the proceeding:

"(1) Is there a concluded agreement between Bakri Navigation Co.

Limited and Glorious Shipping S.A. for the sale of the ship
'Golden Glory' upon the terms alleged by Bakri Navigation
Co. Limited?
(2) If 'yes' to (1), does this proceeding involve the
determination of a matter which, in pursuance of that
agreement, is capable of settlement by arbitration, within
the meaning of s. 7 of the International Arbitration Act
1974 ('the Act')?
(3) Should the proceeding, as to whole or part, and, if so, as
to which part, be stayed by order under sub-s. 7 (2) of the
Act, and the parties referred to arbitration?
(4) Is the Court required by sub-s. 7 (5) not to make an order
it otherwise would make under sub-s. 7 (2) of the Act?"

6. What follows are the reasons for judgment on those separate questions. It will be apparent that
questions (2), (3) and (4) are closely interrelated, and that the threshold issue is that presented by
question (1), namely the existence, or otherwise, of a concluded agreement for the sale of the ship.
The applicable law in answering question (1) has been treated as the common law as in force in the
State of New South Wales.
The Parties and the Brokers

7. The plaintiff, Bakri Navigation Co. Limited ("Bakri") is a corporation formed under the laws of
the Kingdom of Saudi Arabia. The defendant, Glorious Shipping S.A. ("Glorious") is a corporation
formed under the laws of the Republic of Panama. The beneficial owners of the shares in the
defendant are Mr Hideshi Doi and his sons Mr Hidekazu Doi and Mr Kazunobu Doi, each of whom
is a citizen and resident of Japan. Mr Hideshi Doi has been President since 1961 of a Japanese
corporation, Sanko Unyu KK ("Sanko"). Mr Hidekazu Doi, who gave evidence in the present
proceeding, is President of the defendant and since 1986 has also been Managing Director of Sanko.
He agreed in cross-examination that Glorious was set up as a "one ship company" so as to acquire
the use of the Panamanian flag of convenience.

8. The ship "Golden Glory" was built in Japan and launched in November 1981. Its port of registry is
Panama in the Republic of Panama. The ship was acquired by the defendant in about February 1988.
It has stainless steel tanks suitable for the carriage of oil, molasses and chemicals. On 28 June 1988,
Glorious entered into a time charter party of the ship for 7 years to a Japanese corporation Eiyu
Kaiun Co. Ltd ("Eiyu Kaiun"). Eiyu Kaiun time chartered the ship to another Japanese corporation,
which in turn chartered it to Dorval Tankships Pty Ltd.

9. The evidence includes details of negotiations for the sale of the ship conducted from late January
1991 until mid-April 1991. The position of Glorious is that negotiations for the sale by it of the
vessel were then broken off, whilst Bakri contends that by that stage there was already in existence a
concluded agreement which Bakri remains, on its part, ready and willing to perform.

10. No less than four ship broking firms participated in the negotiations. They were Far East
Shipping and Trading Co. Limited ("FEST"), Seascope Shipping Limited ("Seascope"), Cairnhope
Shipping Co. Limited ("Cairnhope") and Portshire Limited ("Portshire"). Seascope, Cairnhope and
Portshire are based in London and FEST in Tokyo. Those with principal carriage of the matter for
the respective brokers were Mr Noda and Mr Obata (FEST), Mr Staffan Bulow and Mr Julian
Kinross (Seascope), Mr Paul Messenger (Cairnhope), and Mr Jeremy Liddell (Portshire). At the trial,
Mr Messenger and Mr Liddell gave evidence. No evidence was given by any representative of FEST
or Seascope. Portshire acted in the negotiations on behalf of Bakri, the proposed buyer of the ship.
FEST acted for Glorious, the proposed seller of the ship. At the trial, there was initially a denial by
Glorious as to the nature and scope of the authority of FEST. But, in address, counsel for Glorious
took the position that whilst it did not concede the point, it did not seek to refute the propositions,
which I accept, put by counsel for Bakri in support of the existence of FEST's authority to bind
Glorious in all relevant respects.

11. Mr Liddell gave evidence that it is well known in the European ship broking market that
Seascope is a broker which does all, or at least the vast majority, of the business which FEST does in
Europe. The evidence also indicates that it is not unusual in a transaction such as the present for there
to be a string of brokers interposed between the two principals. Whilst FEST acted with the authority
of the defendant and Portshire with the authority of the plaintiff, in their submissions counsel for
both parties accepted that neither Seascope nor Cairnhope was directly in a comparable position.
Counsel for the defendant described the role of these two brokers as "middle men" with no additional
authority from either principal to bind it in respect of any material that was passed backwards and
forwards along the chain of communication; cf. De Bussche v Alt (1878) 8 Ch D 286. I accept that
submission. The evidence also indicates that in such situations brokers, including intermediaries and
middle-men, receive commission for their part in, as Mr Messenger put it, "developing and
negotiating the transaction".
The Trade

12. In dealing with a commercial contract, the court should know the commercial purpose of the
alleged contract, something which presupposes knowledge, inter alia, of the market in which the
parties are operating; see Reardon Smith Line v Hansen-Tangen [1976] 3 All ER 570 at 574 per
Lord Wilberforce; Codelfa Construction Pty Ltd v State Rail Authority of N.S.W. [1982] HCA 24;
(1982) 149 CLR 337 at 350 per Mason J. Counsel for the plaintiff submitted that the evidence of
industry practice might be taken into account, in particular, in assessing the submission that the
circumstance that the parties contemplated that an agreement reached by them would be followed by
the execution of a memorandum of agreement, did not prevent the immediate creation of a concluded
contract. I accept that the intention of the parties should be ascertained from the terms of the relevant
documents in the objective framework of facts within which the alleged contract came into ex istence,
including the practices in the trade.

13. Further, a significant element in the negotiations which the plaintiff contends gave rise to a
concluded contract, was provided by fax es and telex es relayed along the chain of communication
between Portshire at one end and FEST at the other. Various abbreviations and terms are used in that
material which have a meaning that is not immediately apparent, but which is well understood
between ship brokers. I have received evidence from Mr Messenger and Mr Liddell with respect to
those usages and related practices in the trade. It is best to turn to this before coming to the terms of
the negotiations in question.

14. A "recap" telex is one which sets out the terms which have been agreed between the parties. The
"recap" may either be "clean" or it may be ex pressed to be subject to certain conditions or events
(described as "subjects"). A "clean recap" means that the parties are in agreement, and the recap telex
then summarises the terms agreed as a result of previous communications. If the parties have not
reached that stage, and they are not yet ready to consider themselves bound, the "recap" will contain
"subjects". This may be for various reasons. For ex ample, the seller may need to have the agreement
approved by a third party such as a bank holding a mortgage on the ship, or the buyer may not yet
have inspected the ship to ensure that it is in good condition. Further "recaps" may contain a
"subject" providing for approval to be given by a company board within a certain period, thereby
giving that party time to reflect before formally committing itself.

15. The brokers act on the footing that where the terms summarised in a "recap" include "subjects",
the terms of the recap will not reflect a binding agreement unless and until each party lifts all of that
party's outstanding "subjects". Of course, the effect in law of a "recap" before it is lifted is for the
Court to decide. The understanding in the trade is that in a case where a "recap" contains, for
ex ample, two subjects, one on the buyer's side and one on the seller's side, the seller has the right to
withdraw until such time as it declares that its subject is lifted, and the buyer has the right to
withdraw at any time until it declares that its subject has been lifted; as soon as each party declares
its outstanding subject lifted, that party is regarded as committed to the sale or purchase of the ship.

16. When a clean recap has been achieved, the brokers then set out the principal terms in a
Memorandum of Agreement ("MOA") which adapts as appropriate the provisions of a set of
standard terms, for ex ample that known as the "Norwegian Saleform". It would be impractical for the
brokers continually to send draft versions of the MOA up and down the chain of brokers;
accordingly, the terms are agreed between the parties (and recapped as I have described), then a
memorandum of agreement is drawn up reflecting the terms agreed and incorporating the standard
terms. It is rare for the MOA to be drawn up before all subjects have been lifted. In most instances,
the MOA will be drawn up subsequently and will reflect the consensus reached pursuant to the
earlier ex change of telex es.

17. The circumstances that the clean recap precedes, and contemplates, the completion of the MOA
is not inconsistent with the proposition that at this earlier stage the parties have entered into
contractual arrangements. The English Court of Appeal so held upon the particular facts before it in
The "Blankenstein" (1985) 1 Lloyd's Rep 93 at 97-98, 104-105. In a given case, the ex ecution of a
formal contract may be, not a condition of the ex istence of a binding agreement, but a condition of
the performance of an agreement by which the parties are immediately bound: Godecke v Kirwan
[1973] HCA 38; (1973) 129 CLR 629 at 639-640 per Walsh J. Further, the law implies a duty
requiring each party to co-operate in the doing of acts which are necessary to the performance by that
party, or by the parties, of fundamental obligations under their contract: Secured Income Real Estate
(Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596 at 607, per
Mason J.
18. The understanding in the trade is that when there is a "clean recap", either initially, or because all
subjects have been lifted, it is thereafter not open to a party to fail to proceed. Mr Messenger said he
had no experience of a party seeking to "get out of" such an engagement. Mr Liddell gave evidence
to the same effect. Nevertheless, litigation does from time to time arise. A recent example is The
"Blankenstein" (supra) where the English Court of Appeal held that a concluded agreement had been
reached by exchange of telexes between the brokers, with a "clean recap", in advance of the
execution of a formal memorandum of agreement in the Norwegian Saleform. The Court (supra at
98, 104-105) had regard to evidence that the shipping market would regard the "clean recap" as
giving rise to a "binding" contract of sale.

19. What is the legal character to be given to "subjects" at a stage where as yet there is no clean
recap? No doubt there can be no universal proposition applicable to all cases. In Perri v Coolangatta
Investments Pty Ltd [1982] HCA 29; (1982) 149 CLR 537 at 551, Mason J. said:

"There is an obvious difference between the condition which is

precedent to the formation or existence of a contract and the
condition which is precedent to the obligation of a party to
perform his part of the contract and is subsequent in the sense
that it entitles the party to terminate the contract on
non-fulfilment. In the first category the transaction creates
no rights enforceable by the parties unless and until the
condition is fulfilled. In the second category there is a
binding contract which creates rights capable of enforcement,
though the obligation of a party, or perhaps of both parties, to
perform depends on fulfilment of the condition and non-fulfilment
entitles him to terminate."

Further, as Mason J. also pointed out, supra at 552, the law tends to favour a construction which
leads to the result that a stipulation of such a character is a condition precedent to performance rather
than a condition precedent to the formation or existence of a contract, that is to say, that there is a
binding contract which makes the stipulated circumstance a condition precedent to the duty to
perform; further, the party for whose protection such a condition is inserted may waive it. It will be
necessary further to consider these principles as they apply to the present facts, after I have dealt
with those facts.
The Recap

20. The story begins on 25 January 1991 when Mr Noda, of FEST, informed Seascope that whilst the
"Golden Glory" was not yet officially for sale, FEST had been requested by the owner "to check
market price privately". Mr Bulow of Seascope approached Mr Messenger of Cairnhope. Cairnhope
had on previous occasions acted in relation to purchases by Portshire for Bakri, and Mr Messenger
told Mr Liddell of Portshire that he had been approached on behalf of the owners of the "Golden
Glory", a ship which might interest Portshire's client Bakri. He said that the ship was a 12,000
deadweight ton chemical, oil and molasses carrier with stainless steel tanks. Mr Liddell then came
back to Mr Messenger with a request for further information, and on 28 January 1991 this was
sought by Cairnhope from Seascope by the first of a series of telexes and faxes passing between the
brokers. It is unnecessary to describe the terms of those communications.

21. Eventually, on 19 February 1991, FEST sent to Seascope a telex (document 190212 in the
Agreed Bundle). In reading that telex, it should be borne in mind that the practice in the trade is that
a broker will describe commission payable to the buyer and other brokers between him and the buyer
as commission payable "your end"; with offers passing in the other direction, that is to say from the
buyer to the seller, a broker on passing the offer on to the next broker will in that offer describe
commission as being payable "our end". This includes the commission sought for the buyer and all
brokers up to and including the buyer.
22. The tex t of the telex of 19 February 1991 from FEST to Seascope, so far as is material, was as
follows:

"RECAP AS FOL:
MJ T 'GOLDEN GLORY' - AJ C BAKRI NAVIGATION CO, LTD.
1. PRICE USD13.10 MIL CASH LESS 4 PCT AT YOUR END.
10 PCT DEPOSIT TO BE LODGED IN JOINT AJ C OF BUYERS AND
SELLERS WITHIN THREE WORKING DAYS OF SIGNING MOA AND ALL
SUBJECTS LIFTED, AT THE JAPAN CREDIT BANK, HEAD OFFICE.
THE REMAINING 90 PCT UPON DELIVERY AGAINST DELIVERY
DOCUMENTS MUTUALLY AGREED.
CLOSING IN TOKYO.
2. THE VESSEL TO BE DELIVERED CHARTER FREE AT SAFE PORT, SAFELY
BERTHED ALONGSIDE, OR AT A SAFE ANCHORAGE, ALWAYS SAFELY
AFLOAT IN JAPANJ SINGAPORE RANGE IN SELLERS OPTION, LAYCAN 26
MAYJ 25 JUNE 1991, TO BE NARROWED, WITH 25 JUNE 1991
CANCELLING DATE IN BUYERS OPTION.
3. VESSEL TO BE DELIVERED PRESENT CLASS MAINTAINED FREE OF
RECOMMENDATIONS AND FREE OF AVERAGE DAMAGE AFFECTING
CLASS.
VESSEL TO BE DELIVERED WITH ALL NATIONALJ INTERNATIONAL
TRADING AND SAFETY CERTIFICATES TO BE CLEAN, VALID AND
UNEL TENDED FOR A MINIMUM PERIOD OF THREE MONTHS FROM TIME
OF
DELIVERY. CONTINUOUS SURVEY CYCLES ON HULL AND MACHINERY TO
BE FULLY UP TO DATE AT TIME OF DELIVERY. VSL TO BE
DELIVERED IN SUBSTANTIALLY THE SAME CONDITION AS WHEN
INSPECTED, FAIR WEAR AND TEAR EL CEPTED. DELIVERY WITH ALL
TANKS CLEAN AND GASFREE.
4. USUAL DRYDOCKING CLAUSE ACCORDING TO CLAUSE SIL OF
NORWEGIAN
SALE FORM 1987 WITH BUYERS RIGHT TO ATTEND AND ARRANGE
PAINTING OF VESSELS UNDERWATER PARTS IN DRYDOCK AND TO
UNDERTAKE OTHER MINOR WORKS AT BUYERS EL PENSE INCLUDING
OVERHAULING SEA VALVES AND LOWER ANCHORJ CHAINS (LABOUR,
PAINT AND ANY EL TRA TIME REQUIRED FOR THIS PURPOSE TO BE FOR
BUYERS ACCOUNT).
5. VESSEL TO BE DELIVERED WITH EVERYTHING BELONGING TO HER ON
BOARD, ASHORE AND ON ORDER INCLUDED IN THE SALE INCLUDING
NAVAIDS AND WIRELESS EQUIPMENT AND SPARE PARTS TO MINIMUM
CLASS REQUIREMENTS SUBJECT TO PROVISIONS OF CLAUSE SEVEN OF
MOA.
BUYERS SHALL TAKE OVER REMAINING BUNKERS AND UNBROACHED
LUBEOILS AND PAY NET CONTRACT PRICE AT PORT AND DATE OF
DELIVERY.
EL CLUDED FROM SALE:-
AJ HIRE EQUIPMENT I.E. 5 BUTTERWORTH MACHINES
BJ MASTERSJ OFFICERS PERSONAL EFFECTS
CJ SLOP CHEST
DJ CHARTERERS PROPERTY I.E. TANK CLEANING DETERGENTS
6. OTHERWISE TERMS TO BE MUTUALLY AGREED BASED ON NORWEGIAN
SALE FORM 1987.
ARBITRATION IN LONDON.
7. SUBJECT INSPECTION OF VESSEL AND VESSELS RECORDS,
DECLARABLE
 7 DAYS AFTER COMPLETING INSPECTIONJ S. BUYERS UNDERTAKE TO
INSPECT VSL AT EARLIEST OPPORTUNITY.
8. THIS TRANSACTION TO BE KEPT STRICTLY PRIVATE AND
CONFIDENTIAL. OWNERS WARRANT THAT VESSEL IS NOT
BOYCOTTEDJ BLACKLISTED BY ARAB LEAGUE.
AFTER MOA SIGNED AND 10 PCT DEPOSIT LODGED BUYERS RIGHT TO
PLACE UP TO 2 REPS ONBOARD VESSEL UNTIL TIME OF DELIVERY FOR
FAMILIARISATION PURPOSES.
10. SUBJECT TO BUYERS BOARD APPROVAL DECLARABLE 10 RUNNING
DAYS
AFTER RECAP OF MAIN TERMS.
11. SUBJECT TO SELLERS BOARD APPROVAL DECLARABLE WITHIN 20
RUNNING DAYS AFTER RECAP OF MAIN TERMS.
12. SUBJECT TO CHARTERERS APPROVAL DECLARABLE WITHIN 20
RUNNING
DAYS AFTER RECAP OF MAIN TERMS.
END OF RECAP"

The name of the seller's bank in clause 1 of the FEST telex , it was later clarified, should have read
"NIPPON CREDIT BANK LIMITED", rather than "JAPAN CREDIT BANK". FEST went on in the
telex to comment that Seascope should obtain the buyer's acceptance to the recap while FEST would
obtain the seller's reconfirmation the nex t day, the hope of FEST being that the "countdown" would
start from 20 February. Seascope passed the tex t of the telex on to Cairnhope (by telex from it to
Cairnhope) and Cairnhope in turn did so by telex to Portshire. The immediate response by telex from
the buyer's side on the same day, 19 February, was that there had been insufficient time to study the
recap in detail and to provide "FORMAL CONFIRMATION" but that "BUYERS OPINION OF
RECAP IS JUST THAT - I.E. TERMS HAVE BEEN AGREED AND RECAP IS MERELY A
SUMMARY".

23. On the nex t day, 20 February 1991, Seascope sent a telex to FEST (document 200201) stating:

"SELLERS RECONFIRM RECAP PER OTLL YDAY MTIME

WAITING BUYERS RECONFIRMATION. COUNT STARTING
FROM THE DATE WHEN RECAP RECONFIRMED . . ."

Then, later on the same day, London time, Cairnhope sent a telex to Seascope (document 200217):

"BUYERS CONFIRM RECAP IN ORDER - THOUGH PLEASE

CLARIFY SELLERS BANK AS ONE GIVEN IN RECAP IS
DIFFERENT TO THAT PREVIOUSLY MENTIONED AND
BUYERS HAVE TO CHECK STATUS OF CORRESPONDABILITY
(??) WITH THEIR BANK."

24. In my view, there was thereby concluded a contract between Glorious and Bakri for the sale and
purchase of the ship. It included a term that arbitration be in London in accordance with the
provisions of the Norwegian Saleform. This is so, even though the MOA, which was to be based on
the Norwegian Saleform 1987, had yet to be drawn up. I have referred to the applicable principles
when discussing The "Blankenstein", supra, and Godecke v Kirwan, supra. But the recap was not a
clean recap, having four subjects, two on each party's side. The subjects are to be regarded as
conditions precedent, in the sense discussed by Mason J. in Perri's Case, supra, to the obligation to
perform and complete the transaction of sale and purchase. Consistently with the practice in the
industry, a party would be bound to proceed to completion only when that party had declared its
outstanding subjects to be lifted, or had otherwise waived or treated them as satisfied.
25. Further, the contract which came into existence in the manner I have described, was, like any
other contract, susceptible to subsequent variation by further agreement between the parties, in the
sense described by Taylor J. in Tallerman and Co. Pty Limited v Nathan's Merchandise (Victoria)
Pty Limited [1957] HCA 10; (1957) 98 CLR 93 at 144. His Honour then approved the following
passages from Salmond and Williams on "Contracts", 2nd ed., 1945, p 489, as to the manner in
which an agreement by way of variation operates:

"Partial rescission is not the extinction of the

contract but the variation of it.
...
A contract may be varied (1) by way of partial
rescission without the substit-ution of new
terms in place of those rescinded, or (2) by way
of partial rescission with the substitution of
new terms for those rescinded, or (3) by the
addition of new terms without any partial
rescission at all."

See also D an v Barclays Australia Limited (1983) 57 ALJR 442 at 448-449.

26. This is what happened in the present case. In at least two instances there was an agreed mutual
abandonment of existing rights with replacement or conferment of new rights. First, on 14 March
1991, the provision in clause 1 for the price was varied so as to be U S$ 12.98m; thus, there was an
agreed partial rescission with substitution of a new term. Agreement also was reached in March to
maintain the current time charter to permit one Australian round voyage. It was agreed that this was
to be provided for in a "side agreement" to the MOA whereby, upon delivery to Bakri, the ship
would be entered into a charter from Bakri to Glorious for one Australian round voyage for a
duration of approximately 60 days, to which the provisions of the time charter dated 28 June 1988
would apply with some modifications.

27. Consistently with the principles set out above, Bakri and Glorious might also effect a variation of
the contract as regards the terms of a "subject" which at the time of the variation had yet to be lifted
by the party for whom it had been included; the newly agreed subject would then stand until lifted.
This is what befell clause 7 of the recap.
The "Subjects" in the "Recap"

28. As I have said, the recap telex was not "clean". It contained four "subjects", two on the buyer's
side (clauses 7 and 10) and two on the seller's side (clauses 11 and 12). Clause 12 referred to the
charterer's approval; I have earlier referred to the time charter to Eiyu Kaiun. Clause 10 was lifted by
Bakri on 3 March 1991. Clauses 11 and 12 were lifted by Glorious on 15 March 1991. It should be
noted that the lifting of subjects by both buyer and seller was preceded by various exchanges but
communicated in clear (if abbreviated) terms. Thus, the lifting of clause 10 was communicated to
FEST by stating: "BAKRI LIFT THEIR BOD APPROVAL AND ARE OU TRIGHT IN THAT
RESPECT . . .", and the lifting of the subjects in clauses 11 and 12 was communicated by FEST
stating that Glorious "NOW D ECLARED SU BJECT BOARD / CHRTRS APPROVAL LIFTED ".

29. The buyer's "subject" in clause 7 gave rise to difficulties which became the focus of this
litigation. This "subject" had two elements, the inspection of the ship's records and the inspection of
the ship itself. The first of these was lifted on 5 March 1991 when Seascope notified FEST
"BU Y ERS LIFT THEIR CLASS RECORD S INSPECTION SU BJECT". But in the period before
Glorious, as it would have it, broke off negotiations on 16 April 1991, there was no communication
by which, in terms, Bakri lifted the balance of the subject in clause 7. What happened was as
follows.
30. Inspection was an important matter to Bakri. It had never purchased a tanker without first
inspecting all the tanks and in the present case inspection was particularly important because the ship
was a chemical tanker with stainless steel tanks. FEST was apprised of this concern, in direct terms,
on 4 April 1991. Earlier, a partial inspection was carried out on 23 February 1991 when the vessel
was in Newcastle, in Australia. On 5 March 1991, Seascope notified FEST that there was a balance
of 5 stainless steel tanks and three wing tanks which had not been inspected, and that it had been told
that Bakri would require inspection of each and every tank. Bakri sought a proposal by Glorious of a
new amendment to the recap which would reflect its concern. A proposed amendment was provided
by FEST to Seascope on 8 March 1991 (document 080302). FEST suggested an amendment of
clause 7 of the recap so as to read:

"THE FIRST VSLS INSPECTION HAS BEEN COMPLETED IN

AUSTRALIA ON FEBRUARY 23, 1991 AND ACCEPTED BY
THE BUYERS EL CEPT TANKS 1C 3-6C 4PM S 5P, ALL WBT
(DBL BOTTOM) AND COFFERDAMS.
SUBJECT TO 2ND VSLS INSPECTION TO BE CARRIED OUT
ON OR AROUND MARCH 27, 1991 AT MUKAISHIMA
DOCKYARD, DECLARABLE WITHIN 5 RUNNING DAYS AFTER
THE INSPECTION COMPLETED. THE SELLERS SHALL
RENDER MAL IMUM COOPERATION FOR SUCH INSPECTION
BUT NOT TO INTERFERE THE SELLERS WORKSJ
OPERATIONS.
CLASS RECORDS HAS BEEN INSPECTED AND ACCEPTED BY
THE BUYERS."

31. On the same day, Seascope responded "RECAP OK". By this means there was a variation of the
contract, as regards clause 7 of the recap. But that was not to be the end of the matter. The procedure
specified in the new subject did not prove practicable. The result was a further proposal.
Physical Inspection of the Ship

32. Inspections in Japan in late March, as stipulated in the new subject in clause 7, and with Mr
Kazunobu Doi in attendance together with a representative of Bakri, were unsuccessful. A partial
reason for this was difficulties in communication between Glorious and the time charterer. For its
part, Glorious accepted that it would be best to have no outstanding matters left after physical
delivery of the ship to Bakri. The question was one of reaching a mutually acceptable modus vivendi
so that the matter might proceed to settlement. It will be recalled that, save for physical inspection,
the other subjects had all been lifted by 15 March. On 4 April 1991, after detailing difficulties of
Glorious with the charterer, FEST indicated in a telex to Seascope (document 040403) that Glorious,
like Bakri, did "NOT WANT MATTERS OPEN AFTER (delivery)". FEST continued:

"UNDER THE CIRCUMSTANCES, PRACTICAL SOLUTION IS

STILL (1) TO CARRY OUT DELY IN DRYDOCK REGION
MAY 26J JUNE 25 WITH RESERVATION TO INSPECT 345C
AND (2) TO CARRY OUT INSPECTION 345C UPON REDELY
OF VESSEL UNDER TC BACK.
(The reference to redelivery is to delivery on
termination of the additional time charter for
one more round voyage to Australia which had
been agreed upon between the parties.)
IN THIS CONNECTION, UPON DELY OF THE VSL, THE
SELLERS SHALL ISSUE 'LETTER OF UNDER-TAKING' TO
THE EFFECT THAT THE SELLERS SHALL UNDERTAKE ANY
REPAIR CENTER TANKS 3J 4J 5 AT THEIR TIMEJ COST, IF
ANY DEFECTS FOUND BUT NOT LIMITED TO PITTINGJ
CRACKINGJ RUSTJ -DECOLOURATION.
 ANY DISPUTE IN THIS CONNECTION TO BE BROUGHT
INTO NK SURVEYOR AS UMPIRE.
ALL CARGO TANKS OTHER THAN 345C HAVE BEEN
INSPECTION AND ACCEPTED.
PLS AGREE."

On 8 April telex es passed along the line of brokers indicating that the wording suggested by FEST in
document 040403 was acceptable to Bakri. In particular, on that day, Seascope sent to FEST a telex
(document 080411) which included the following:

"PLEASED TO ADVISE SELLERS LAST FOUND ACCEPTABLE

TO BUYERS AND THEREFORE DEAL NOW CONFIRMED.
ONE PROVISO THAT MUST BE REGISTERED IS THAT
WORDING FOR 'LETTER OF UNDERTAKING' HAS TO BE
APPROVED BY BUYERS LAWYERS WHICH SURE SELLERS
CAN APPRECIATE.
KINDLY DRAW UP MOA AND SEND OVER TO US FOR
BUYERS APPROVAL.
...
NOTE BUYERS LAWYERS ARE LIKELY BE SINCLAIR
ROCHE.
LETTER OF UNDERTAKING AS AGREED WILL BE FROM
PARENT COMPANY LETTERHEAD AND KINDLY SEND OVER
PROPOSAL OF SAME SOONEST.
ALTHO BAKRI HAVE TAKEN A FEW DAYS TO BE ABLE
ACCEPT SELLERS TOUGH CONDITIONS ABOUT NO
INSPECTION OF THE LAST TANKS THEY HAVE AT LAST
DONE IT AND WE ASK YOU TO KINDLY PROVIDE ALL
ABOVE NECESSARY WORDINGS ETC SOONEST POSSIBLE,
EVEN PRIOR OUR OPENING TOMORROW IF POSSIBLE.
THANK YOU FOR EVERYTHING SOFAR AND LET'S NOW
CLEAR UP THESE SMALL LITTLE DETAILS PROMPTLY.
ALSO KINDLY THANK SELLERS FOR THEIR PATIENCE
OVER THE LAST FEW DAYS."

33. Counsel for Bakri submitted that the words in the first paragraph particularly "and therefore deal
now confirmed" showed that the parties now accepted that their contract for sale and purchase of the
ship was freed from any outstanding subject in clause 7 and that, in lieu thereof, it was now a term of
the agreement that upon delivery of the ship by Glorious, it would issue a letter of undertaking in the
terms specified. But counsel for Glorious emphasised that whilst in document 080411 Seascope
indicated that the suggested wording from FEST in document 040403 had been found acceptable to
the buyer, and stated "and therefore deal now confirmed", nevertheless the buyer introduced new
material into the equation. This was done by the references to the approval of the letter of
undertaking by the buyer's lawyers, and to the letter of undertaking as coming from the parent of
Glorious in a form to be proposed promptly by FEST.

34. The telex which is document 080411 was transmitted from London at 5.48 p.m. on 8 April 1991.
The use of the phrase "as agreed" in the statement in the six th paragraph "LETTER OF
UNDERTAKING AS AGREED WILL BE FROM PARENT COMPANY LETTERHEAD . . ." is a
reference to communications which had passed between some of the parties in the period after
document 040403 had been passed from Seascope to Cairnhope on 4 April 1991. On receipt of the
FEST proposal, through the medium of Mr Bulow of Seascope, Mr Messenger of Cairnhope told Mr
Bulow that FEST could not be serious if they were just talking about a guarantee from a single ship
owning Panamanian company, and that Glorious would have to give a bank guarantee or a guarantee
from its financiers. Mr Bulow then had a conversation with Mr Noda. He told Mr Noda that Bakri
could never accept a letter of undertaking from a Panamanian one ship company as it would have no
assets and be completely cleared out on the sale of the ship. Mr Noda told him that the letter of
undertaking would be given in the parent company name. Then, on 8 April 1991, before sending the
telex from Seascope to FEST (document 080411), Mr Bulow told Mr Messenger that the seller had
confirmed that "the letter of guarantee" would come from the parent company.

35. In my view, the events which took place between 4 and 8 April 1991 are to be construed as
giving rise to a contractual variation. In place of the buyer's replacement subject as to inspection of
the ship, set out in document 080302, the parties now agreed to be bound, without any further or
other condition precedent to their obligations to perform the subsisting contract for sale and purchase
of the ship. But that contract was varied so as to include a term whereby upon delivery of the ship, a
letter of undertaking would be issued by the parent company of Glorious, to the effect specified in
document 040403. The form of the undertaking was to be approved by Bakri's lawyers before it was
issued, i.e. before delivery of the ship. The circumstance that the terms of the undertaking to be given
to Bakri required prior approval of its solicitors, did not mean that the parties had not achieved
forthwith a contractual variation of their bargain. In Godecke v Kirwan, supra at 645-646, Gibbs J.
collected and discussed authorities illustrative of the proposition that it is no objection that the power
to determine terms, even essential terms, to be incorporated in a contract is left to the solicitors for
one of the parties. Here, rather less was involved, namely the approval of the wording of the
undertaking proffered from the seller's side, as reflecting the intentions of both the parties indicated
in the telex es, documents 080403 and 080411. In the meantime, the preparation of the MOA (and
side agreement) was to continue, with the tender of drafts by Glorious to Bakri.

36. On 9 April 1991, Tokyo time, FEST sent to Seascope a fax including a draft of the MOA, side
agreement and letter of undertaking. The letter of undertaking was as follows:

"WE, GLORIOUS SHIPPING S.A., PANAMA SHALL

UNDERTAKE ANY REPAIR TO THE CENTER CARGO TANKS
NO. 3J 4J 5 AT OUR TIME AND COST IF ANY DEFECTS
ARE FOUND, BUT NOT LIMITED TO PITTING, CRACKING,
RUST, AND DECOLORATION WHEN THE ABOVE-MENTIONED
TANKS ARE INSPECTED AT TIME OF REDELIVERY OF THE
VESSEL UNDER THE SIDE AGREEMENT EL ECUTED BY AND
BETWEEN YOUR GOODSELVES ACTING AS OWNERS AND
OURSELVES ACTING AS CHARTERERS, A TRUE COPY OF
WHICH IS PER HERETO ATTACHED.
ANY DISPUTE THEREFROM SHALL BE BROUGHT INTO NK
SURVEYOR AS A UMPIRE."

These terms reflected those suggested in document 040403, but were ex pressed as an undertaking by
Glorious, rather than its parent. Accordingly, late in the same day, London time, Seascope responded
(document 090416) with a telex to FEST as follows:

"MANY THANKS FAL AND APPRECIATE VERY MUCH YR

HARD WORK IN THE OFFICE UNTIL VERY LATE HOURS.
WHEN WE DISCUSSED LETTER OF UNDERTAKING ON THE
PHONE NODA SAN TOLD ME THAT OWNERS WOULD GIVE
SAME IN PARENT COMPANY NAME AS BUYERS CAN NEVER
ACCEPT SAME ON PANAMANIAN ONE SHIP COMPANY AS
THIS WILL HAVE NO ASSETS AND COMPLETELY CLEARED
OUT ON SALE OF THE VESSEL. THIS IS VERY
IMPORTANT POINT SO PLS TRY TO RECONFIRM THIS
PRIOR TO OUR OPENING."
At 7.11 a.m., London time, on the next day, 10 April 1991, Seascope sent a telex to FEST (document
100410) as follows:

"DID YOU OBTAIN RECONFIRMATION THAT LETTER OF

UNDERTAKING WILL BE FROM OWNERS PARENT COMPANY?"

There was a quick response from FEST in Tokyo. Later in the morning of 10 April 1991, Mr Bulow
received from Mr Obata a fax (document 100419) stating:

"Thanks your telex yesterday (i.e. document

090416) and today, (i.e. document 100410), we
hereby attached (sic) typed draft of M.O.A.,
Side Agreement and Undertaking Letters of the
captioned vessel."

The accompanying documents were then passed on to the other London brokers. There were two
undertakings. The first was from Glorious in the terms previously set out from document 090407.
The second was a letter of undertaking stating:

"We, SANKO UNYU CO., LIMITED, as mother company

of GLORIOUS SHIPPING S.A., Panama, hereby
warrant about their performance to cover the
undertakings per their letter addressed BAKRI
NAVIGATION CO., LTD., Jeddah or its fully
subsidiary company dated April, 1991
relating to sale and purchase of M/T GOLDEN
GLORY."

At that stage, the buyer had received the draft text of the undertaking which would be provided on
delivery of the vessel, in accordance with the agreement for sale and purchase, initially made on 20
February 1991 and later varied, on 8 April, in the manner I have described. But there was now a
delay in settling the draft documents to be provided in implementation of the agreement for sale and
purchase.

37. On 15 April 1991, Seascope sent a telex to Cairnhope (document 150403) stating:

"SELLERS ARE EXPRESSING THEIR ASTONISHMENT OVER

HAVING NO REPLY WHATSOEVER FROM BAKRI FOR A WEEK
NOW. THEY WOULD VERY MUCH LIKE TO HAVE THIS
MATTER ALL CLEARED SOONEST POSSIBLE AND ARE
ASKING FOR THE BUYERS REPLY WITHIN JAPANESE
CLOSING TIME TODAY.
THE CONTRACT, SIDE LETTER AND ADDENDUM WERE ALL
DRAWN UP VERY QUICKLY BY THE SELLERS SIDE AND WE
WOULD EXPECT PROMPT REPLY FROM THE BUYERS ON
SAME.
WE ARE RECEIVING A LOT OF PRESSURE FROM THE
SELLERS WHO SEE NO POINT IN LEAVING ANY LOOSE
ENDS. ALSO IT WOULD BE IN BAKRI'S INTEREST TO
GET CONTRACT SIGNED AND DEPOSIT UP ORDER GET HIS
REPS ONBOARD."

The steps referred to in the last paragraph were those in clauses 1 and 8 of the recap of 19 February
1991. On 15 April 1991, FEST sent a telex to Seascope (document 150406) stating:
 "AWAITING ANY BUYERS COMMENTS FOR DRAFT OF MOA,
SIDE AGREEMENT AND U/L."

The reference to "U/L" is to be read as "Letters of Undertaking". At this stage, then, the seller was
pressing the buyer to deal with the outstanding "loose ends". On the same day, Cairnhope responded
to Seascope (document 150407):

"PLEASE EXPRESS TO SELLERS BUYERS APOLOGIES FOR

NOT YET REPLYING OVER DRAFT M.O.A. THIS HAS
BEEN CAUSED BY HEAVY COMMITMENTS ON OTHER URGENT
BUSINESS, AND ALL THIS TAKING PLACE OVER RAMADAN
RELIGIOUS PERIOD WHICH AS SELLERS MAY KNOW DOES
DELAY BUSINESS IN MUSLIM AREAS. TODAY IS
SIGNIFICANT IN BEING LAST DAY OF RAMADAN.
BUYERS HAVE COMMENCED REVIEWING THE RELEVANT
DETAILS AND WE EXPECT THEIR FORMAL REPLY
TOMORROW.
KINDLY REQUEST SELLERS TO KEEP PATIENT, AND
BUYERS WILL BE REVERTING ASAP.
(AS BROKERS WOULD COMMENT THAT BUYERS TEND TO
VIEW MOA DETAILS AS FORMALITIES. HENCE WHEN TIME
SHORT SUCH MATTERS DON'T ALWAYS GET THEIR TOP
PRIORITY. HOWEVER, PLEASE BE ASSURED WE ARE
DOING ALL WE CAN TO PUSH THIS ALONG. CERTAINLY
THIS DELAY MUST NOT BE MISINTERPRETED WRONGLY.
PLEASE KEEP SELLERS PATIENT -)"

This message was relayed, on the same day, by telex from Seascope to FEST. On the morning of 16
April 1991, London time, Seascope sent a telex to Cairnhope (document 160402) stating:

"OWNERS THANK YOU FOR YR TELEX YESTERDAY WITH

EXPLANATION FOR LONG DELAYS AND ARE EXPECTING
YOUR REPLY WITHIN TODAY WITHOUT FAIL."

At this stage, one might have expected the sale and purchase to proceed uneventfully to completion.
The parties were not conducting their affairs on the footing, as counsel for Glorious would have it,
that there was outstanding a "conditional counter offer" by Bakri and in the meantime no contractual
relations between them. They were dealing with outstanding "formalities" to consummation of their
contract by completion of the sale and purchase of the ship pursuant to the recap of 19 February and
subsequent variations thereof. Then, on 16 April 1991, FEST sent a telex (document 160405) in
which events took an abrupt turn. The telex read:

"VERY REGRET TO ADVISE YOU THAT THE SELLERS HAVE

NOW DECLINED TO PURSUE THIS NEGOTIATION WITH
BAKRI BECAUSE DELAYED RESPONSE OF BAKRI TO MOA
DRAFTS AND WORDINGS OF UNDERTAKING ETC NOW
CAUSED GREAT SUSPISION (sic) OF THE CREDITORS
WHO OFFICIALLY INSTRUCTED SELLERS TO DISCONTINUE
NEGOTIATION/TRANSACTION.
WE HAVE TRIED TO PERSUADE THE SELLERS TO BE
PATIENT BECAUSE OF RAMADAN ETC BUT THOSE PARTIES
SUCH AS CREDITORS/CHRTRS WERE TOTALLY UPSET AND
THEIR CONCLUSION NOT RESTORED.
UNDERSTAND THE VESSEL TO BE KEPT EMPLOYED BY THE
 PRESENT CHRTRS."

38. Finally, on 19 April 1991, Messrs Sinclair Roche and Temperley, London solicitors for Bakri,
sent a fax directed to Mr Hidekazu Doi in Tokyo which included the following paragraph:

"Our clients have informed us that they have

completed their review of the draft MOA and
after conforming the same to the agreed terms
are arranging ex ecution thereof as well as
payment of the 10N deposit. We in turn have
reviewed the draft letters of Undertaking, as
drafted by yourselves and would ask that these
be issued without delay . . . (W)ould you please
confirm by close of business in London on Monday
22nd April 1991 that you are preparing the
documentation referred to in Clause 8 of the
MOA, failing which our clients must reserve
their right to take such further steps as they
think necessary to protect their position,
including arrest of the Vessel, without further
reference to Sellers. We await hearing from you
accordingly."

As I have indicated, the ship was arrested on 28 April 1991.

Conclusions as to Question (1)

39. At the trial, various issues were agitated, but by the time addresses were taken, the area of
dispute upon question (1) had been narrowed considerably. As I understood the defendant's
submissions, it was denied that the recap of 19 February 1991 and the "reconfirmation" by Bakri on
20 February gave rise to any contract at all between the parties. I have given what in my view is the
correct characterisation in law of those dealings between the parties, and I reject the defendant's
submission in that regard. It was upon the footing that there was no prior and subsisting contractual
relationship that the defendant approached the dealings between the parties in early April 1991. The
submissions upon this aspect of the case thus, in my view, proceeded upon a false premise. But upon
the analysis of the dealings of the parties before April 1991 which I accept, it is still necessary to
determine whether in April the parties effected a contractual variation in the sense described in the
authorities to which I have referred earlier in these reasons. The issue is not whether the parties then
entered into contractual relations for the first time. It is whether they effected the variation of their
subsisting contract to provide a regime for physical inspection of the ship after delivery to Bakri, or
whether they failed to do so, so that (a) clause 7 remained in the form as substituted on 8 March
1991, and (b) this subject had not been lifted by Bakri before Glorious broke off its dealings with
Bakri on 16 April 1991.

40. Counsel for Glorious submitted that upon a proper analysis of the telex of 8 April 1991 (which is
document 080411) Bakri was stating, through the medium of Seascope, that in lieu of its subject in
clause 7 of the recap, dealing with physical inspection of the ship, Bakri would agree to purchase the
ship on the otherwise agreed terms, provided that a letter of undertaking was forthcoming from the
parent of Glorious, and further provided that the terms of that letter of undertaking were approved by
Bakri's lawyers. Counsel then submitted that on a true analysis this amounted to a "conditional
counter offer" which, in truth, is no offer at all. That was said to be so because in effect Bakri's
"offer" stipulated that it would not be bound merely by the notification by Glorious of assent to those
provisos, but only upon satisfaction of the condition, inserted for Bakri's own benefit, namely
approval by Bakri's lawyers. Glorious accepted that it was to procure the issue by its parent of the
letter of undertaking. But the condition in question had not been satisfied before Glorious broke off
its dealings with Bakri.

41. Particular reliance was placed by counsel for Glorious upon the judgment of Wilson J. in Buhrer
v Tweedie (1973) 1 NZLR 517. In that case, it was held that no contract for the sale of a dwelling
house had been made. The owner, in response to an offer to purchase, wrote a statement of the terms
upon which he was prepared to sell, "subject to final approval of my solicitors", and the response had
been "I agree". The condition as to the solicitor's approval was a condition precedent to entry into
any contract and until it was fulfilled, the owner was free to withdraw. The decision is one
illustration of the operation of principles to which I have referred earlier in these reasons.

42. But the present case falls to be assessed in the particular circumstances and with due regard to the
context in which the form of words in question was used. Thus, I have endeavoured to outline that
context in some detail. Consistently with what I have already indicated when discussing the
judgment of Gibbs J. in Godecke v Kirwan, supra, I accept the submission of the plaintiff, Bakri, that
it would be artificial in the extreme and run counter to the apparent intentions of the parties to
analyse what happened as the making by Bakri of a "conditional counter offer". The reference in
document 080411 to the "one proviso" was no more than a statement that the form of the undertaking
had to be checked by Bakri's lawyers to ensure that it reflected the intentions of the parties as
expressed in documents 040403 and 080411.

43. In my view, at the time of the telex of 16 April 1991, which disrupted the procedures then under
way to settlement of the purchase and sale of the ship, there was in force an agreement for that sale
and purchase. It had been entered into as described, on 20 February 1991, and the terms later had
been varied as to price and by the provision of a side agreement for a further time charter. All
subjects had been lifted, save for the provision in clause 7 as to physical inspection of the ship.
Clause 7 had been varied on 8 March 1991 but then replaced by the agreement reached between 4
and 8 April 1991, whereby the parties accepted that, on certain terms, delivery of the ship might go
ahead even though inspection of all tanks had not by then been completed.

44. The first question should be answered "yes".

The International Arbitration Act 1974

45. It follows from what I have said that the agreement for the sale and purchase of the ship included
a term requiring arbitration in London, the terms otherwise being based on the Norwegian Saleform
1987 as the MOA. Clause 15 of that Saleform provides for the contract embodied therein to be
subject to the law of the country agreed as the place of arbitration. The United Kingdom is a
Convention country within the meaning of the Arbitration Act. Subject to the submissions for Bakri,
to which I turn shortly, there was an arbitration agreement to which, by reason of para. 7 (1) (a), the
Arbitration Act applied.

46. However, Bakri submitted that in the events that happened after the institution of the present
litigation, and in particular by virtue of the terms of the Deed of Undertaking, there is no longer an
arbitration agreement within the meaning of the Arbitration Act. This was said to be because (a) the
term "arbitration agreement" is defined in sub-s. 3 (1) as meaning an agreement in writing of the
kind referred to in sub-article (1) of Article II of the Convention and (b) this, in turn, requires

". . . an agreement in writing under which the

parties undertake to submit to arbitration all
or any differences which have arisen or which
may arise between them in respect of a defined
legal relationship, whether contractual or not,
concerning a subject matter capable of
settlement by arbitration."
and (c) the effect of the Deed of Undertaking was to vary the contractual relationship between the
parties so as to remove those provisions which answer the description of an undertaking to submit to
arbitration. The question of whether there is in effect an arbitration agreement, for the purposes of
the Arbitration Act, is, it is submitted, to be answered by looking at the state of affairs as it ex ists
when the application for a stay is made. I accept that submission. But it remains to consider the
effect of the Deed of Undertaking. Accordingly, it is necessary to have regard to the terms of that
instrument.

47. The deed is ex pressed as made 3 May 1991 between the plaintiff ("Bakri") of the first part, the
defendant ("Glorious") of the second part, and Sanko of the third part. The deed recites that Glorious
is the legal owner of the ship M.T. "Golden Glory", that Bakri claims to be entitled to enforce an
agreement with Glorious to acquire the ship, that Glorious disputes the ex istence of any such
agreement, that Bakri has commenced proceedings in this Court seeking to enforce the agreement,
and has procured the arrest of the ship pursuant to a warrant issued by this Court. Then it is recited
that Sanko is the parent company of Glorious, and that Sanko and Glorious desire the release of the
ship, and have agreed to make the covenants set out in the deed in order to procure that release. It is
further recited that Glorious has given an undertaking to this Court in the terms of an annex ed
document "Annex ure 'A'"; this reflects the tex t set out in the early pages of this judgment.

48. The proper law of the deed is ex pressed to be the law of England (clause 6). Clauses 1 - 5 are in
the following terms:

"1. Glorious covenants

(a) to comply with the undertaking which is annex ure 'A'
hereto;
(b) not to enter any charter or other contractual
arrangement concerning the use of the ship without the
prior written consent of Bakri pending the
determination of the proceedings (including any
appeals).
2. Sanko guarantees the performance by Glorious of its
covenants contained in clause 1 hereof.
3. (1) This guarantee is a continuing guarantee and is not to
be released or discharged by reason of any dealings
between Bakri and Glorious whatsoever or for any other
reason, and Sanko appoints Glorious its agent for all
purposes relating to any acts which may be related to
the continuing operation of this guarantee including
its agent for the purpose of varying this deed.
(2) Without limiting the generality of the foregoing, this
guarantee shall not be released or discharged by
(i) the granting of time or any other
indulgence
(ii) the release in whole or part of any
security which Bakri holds or might
hereafter hold
(iii) any variation to any contract which might ex ist
between Bakri and Glorious concerning the ship
or the conduct of these proceedings
(iv) the winding up or dissolution of Glorious,
the appointment of a receiver to Glorious,
or Glorious being in any way impaired in
the ex ercise of its legal powers.
4. As an independent covenant to those contained in clauses 2
and 3 hereof, Sanko irrevocably, absolutely and
 unconditionally, as primary obligor and not merely as
surety, warrants that Glorious will perform its covenants
contained in Clause 1 hereof, and indemnifies Bakri against
all loss which Bakri suffers in consequence of any failure
of Glorious to perform all or any of the said covenants.
5. In consideration of the foregoing Bakri covenants that
pending the outcome of the proceedings (including any
appeals therefrom) it will not cause the vessel to be
arrested in any port which it might visit. This covenant is
given without prejudice to Bakri's right to arrest the
vessel in connection with any claim for damages which might
hereafter arise."

49. By the Writ issued out of this Court, the plaintiff sought a declaration as to the ex istence of a
contract and an order for specific performance thereof. When the deed, particularly clauses 1, 4 and
5, is read together with the terms of the undertaking given the Court on 3 May 1991, it is apparent
that the subject matter of the covenants and undertakings was the whole of the proceeding instituted
in this Court including the claim to enforcement of the alleged agreement, and not merely the issue
of whether any such agreement ex isted. The parties were not bargaining for a release of the ship on
terms, so as to have this Court determine only the question of the ex istence and terms of the alleged
contract.

50. This proceeding involves the question of whether the agreement as so found should be enforced,
and insofar as this dispute is a difference between Bakri and Glorious concerning a subject matter
capable of settlement by arbitration as provided for in that agreement, then there has been, in the
events that have happened, a subsequent agreement which effects such a variation of the arbitration
agreement as is necessary to give effect to the undertakings given the Court and to the covenants set
out in the Deed of Undertaking. But the arbitration agreement is not thereby deprived of all effect in
all circumstances that may arise from time to time hereafter. I would regard what was achieved as
the rendering of the arbitration agreement inoperative or ineffective in respect of the claims involved
in the present proceeding in this Court. I would not treat the result as the removal of the provision for
arbitration from the contractual relationship between Glorious and Bakri.

51. However, that is not the end of the matter. Earlier in these reasons I set out the tex t of sub-s. 7 (5)
of the Arbitration Act which has the result that the order for a stay sought under sub-s. 7 (2) shall not
be made if the Court finds that the arbitration agreement is "inoperative or incapable of being
performed". In Paczy v Haendler and Natermann GmbH (1981) 1 Lloyd's Rep 302 at 307, Buckley
L.J. (with the agreement of Brightman L.J.) held, in relation to the corresponding British provision,
that:

"The agreement only becomes incapable of

performance . . . if the circumstances are such
that it could no longer be performed, even if
both parties were ready, able and willing to
perform it."

In this case, it is unnecessary to decide whether the phrase "incapable of performance" has any wider
operation than these remarks would suggest.

52. This is because, in my view, the arbitration agreement has, in any event, become "inoperative"
within the meaning of sub-s. 7 (5). In that regard, Sir Michael Mustill and Mr S.C. Boyd state, in the
2nd edition of their work, "The Law and Practice of Commercial Arbitration in England", 1989, at p
464:
 "The ex pression 'inoperative' has no accepted
meaning in English law, but it would seem apt to
describe an agreement which, although not void
ab initio, has for some reason ceased to have
effect for the future. Three situations can be
envisaged in which an arbitration agreement
might be said to be 'inoperative'. First, where
the English Court has ordered that the
arbitration agreement shall cease to have
effect, or a foreign court has made a similar
order which the English Court will recognise.
Second, . . . there may be circumstances in
which an arbitration agreement might become
'inoperative' by virtue of the common law
doctrines of frustration, discharge by breach,
etc. Third, the agreement may have ceased to
operate by reason of some further agreement
between the parties."

In relation to the third situation, the learned authors cite Kruidenier (London) Ltd v The Egyptian
Navigation Co. (1980) 2 Lloyd's Rep 166, where the dealings between the parties fell short of such a
further agreement. But the contrary is the case on the present facts. I would accept what is said in the
passage I have set out above. In the sense there given to the term 'inoperative', the facts in this case
lead to the conclusion that an order for stay should not be made under sub-s. 7 (2).

53. Accordingly, I would answer questions (2), (3) and (4) by answering "yes" to question (2), "no"
to question (3) and "yes" to question (4).

54. The proceeding should stand over for a short time after delivery of these Reasons for Judgment
and directions then be given as to the further conduct of the trial.

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