BP Shipping Ltd v Bernhard Schulte Shipmanagement (Bermuda) Ltd Partnership

In construing a specifically negotiated commercial agreement, the language chosen by the parties is decisive when read in the context of the agreement as a whole and its factual matrix. A court should not alter that meaning because the resulting termination payment appears generous or commercially unattractive. A deeming provision may assign a defined meaning to an existing contractual phrase. Where it substitutes “fees” for “monthly lump sum payment”, the substitution concerns the contractual subject matter, not the payment method. Annual fees payable in monthly instalments remain annual fees unless the drafting refers to the monthly instalments themselves.

The owners appealed from Blair J’s decision in the Commercial Court, reported at [2009] EWHC 111 (Comm). The parties had entered into crew management agreements, later amended by side letters. The third side letter amended the termination provision so that the reference to the monthly lump sum payment was deemed to refer to the fees in paragraph 4.1. Following termination, the dispute was whether compensation was one half of the annual fees or one half of their monthly instalments. The central issue was the proper construction of the amended termination provision.

The appeal was dismissed unanimously. Lord Justice Thomas gave the judgment, with Lord Justice Wilson and Lord Justice Laws agreeing. The Court of Appeal upheld Blair J’s construction.

1. The agreements were specifically negotiated contracts, and the industry standard forms offered little assistance. The decisive consideration was the language used by the parties, read in the context of the agreement as a whole and its factual matrix.
2. Commercial arguments did not justify adopting the owners’ construction. The possibility that the payment might be generous was no guide to construction, since the amount payable on termination was a matter of commercial negotiation. The payment was not commercially absurd. The fact that termination could occur following a change in the managers’ ownership or management did not make the agreed payment uncommercial, particularly as that provision had remained unchanged for more than ten years.
3. Paragraph 5 of the third side letter gave the phrase “monthly lump sum payment” a defined meaning by deeming it to refer to “the fees in paragraph 4.1”. The court therefore read clause 5.9(c) as requiring compensation equal to one half of the applicable fees in paragraph 4.1. The discussion of deeming clauses in Dairy Containers Ltd v Tasman Orient Line CV [2005] 1 WLR 215 did not require a different result; the deeming language here operated simply by assigning a lexicon meaning to the contractual phrase.
4. The only fees identified in paragraph 4.1 were the annual sums of US$1.5 million and £1.067 million. The provision that those fees were paid in equal monthly instalments concerned the method of payment, not the amount of the fees. The reference to the fee prevailing at termination was also workable because the sterling fee was subject to annual adjustment. The wording was clear, so the contra proferentem argument did not arise.

The compensation payable was therefore one half of the applicable annual fees, and the judgment below was affirmed.

• Court of Appeal (Civil Division) dismissed the appeal and upheld the construction adopted below.
• High Court of Justice, Queen’s Bench Division, Commercial Court Blair J decided the issue in favour of the managers in [2009] EWHC 111 (Comm).