Ravennavi SPA v New Century Shipbuilding Company Ltd

A commercial agreement must be read fairly as a whole, in its documentary, factual and commercial context. Detailed linguistic analysis is unlikely to provide a reliable answer unless the document is detailed, complex and evidently drafted so that its provisions dovetail precisely.

Where an option contemplated that its exercise would create a contract on specified existing terms, those terms formed part of the context for construing the option. An obligation to offer an earlier delivery date operated only before exercise where the contemplated contract fixed delivery and the option did not provide for that obligation to continue afterwards.

An Italian shipowner exercised an option granted by a Chinese shipbuilder to purchase two vessels. The option stated that, if an earlier delivery position became possible, the shipbuilder would grant it to the buyer. Formal shipbuilding contracts were then executed with fixed delivery dates and entire agreement clauses.

After a dispute arose over allegedly available earlier construction slots, the buyer began Commercial Court proceedings. Gloster J held that the option created a continuing obligation, but that the formal contracts extinguished it through their entire agreement clauses.

The buyer appealed. The shipbuilder contended by respondent’s notice that the obligation had ended when the option was exercised. The central issues concerned the duration of the option obligation and, if it continued, the effect of the entire agreement clauses.

1. The appeal was dismissed in substance. The order below was set aside in part. The first preliminary issue was answered “No”, and the second did not arise. Jacob and Tuckey LJJ agreed with Moore-Bick LJ.

2. The option was to be read fairly as a whole and against the commercial and factual background known to both parties. Detailed linguistic analysis was inappropriate because the option was an informal, one-off document which had not been drafted in formal language. Unless a detailed and complex document can be assumed to have been carefully coordinated, close semantic analysis is unlikely to yield a reliable construction.

3. Clause 5 was integral to the option. Exercise automatically created an informal shipbuilding contract on the terms of an earlier shipbuilding contract, subject to specified amendments, and contemplated its replacement by a formal contract on the same basis. The incorporated contract terms therefore formed part of the context for construing the earlier-delivery provision.

4. The parties contemplated that the resulting contract would contain a fixed delivery date and an entire agreement clause. The option expressly identified other amendments to the incorporated terms but did not identify the earlier-delivery provision as a continuing amendment. A continuing obligation would have been commercially important and would naturally have appeared in the formal contract, together with any necessary modification of the entire agreement clause.

5. Clause 4(ii) therefore required the shipbuilder to offer any earlier delivery date becoming available before exercise of the option. Any accepted earlier date would then be incorporated into the informal contract and subsequently the formal contract. Once the option was exercised, the delivery date was fixed, subject to later renegotiation.

6. It was unnecessary to decide the effect of the entire agreement clauses. Moore-Bick LJ observed that such a clause must primarily be construed from its language in context. Its significance is not reduced merely because it appears among boilerplate provisions, although particular circumstances may show that apparently broad language was not intended to cover the matter in dispute.

• Court of Appeal (Civil Division): By [2007] EWCA Civ 58, set aside paragraph 3 of Gloster J’s order, answered the first preliminary issue negatively, held that the second did not arise, and dismissed the appeal in substance on the respondent’s notice.

• High Court, Queen’s Bench Division (Commercial Court): Gloster J held that clause 4(ii) of the option created a continuing obligation, but that the obligation was extinguished by the entire agreement clauses in the formal shipbuilding contracts.