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

Where a contract is amended by a later instrument, the termination payment must be construed by giving effect to the words actually agreed, read in their contractual and commercial context. A reference in an earlier agreement to a “monthly lumpsum payment” may be replaced by a reference to fees identified elsewhere in the amending instrument. The fact that those fees are payable in monthly instalments does not necessarily make the termination payment a proportion of one monthly instalment. Pre-contractual negotiations and subjective intentions are generally inadmissible to add a gloss to the contract, although evidence of the parties’ knowledge of the surrounding circumstances may be admissible.

The claimant managed the defendant’s vessels under six crew management agreements made in 1994 and amended by side letters in 2000, 2003 and 2006. The original agreements provided compensation on termination equal to half the applicable monthly lumpsum payment. By 2006, remuneration comprised auditable costs and fixed annual fees, payable monthly in advance in twelve equal instalments.

The 2006 side letter provided that the reference to “monthly lumpsum payment” in the termination clause was deemed to be a reference to the fees in paragraph 4.1. Following termination, the parties disputed whether compensation was half the annual fees or half one monthly instalment. The issue was one of contractual construction.

The claim succeeded. The court construed the 2006 side letter as substituting the paragraph 4.1 fees for the earlier reference to the monthly lumpsum payment.

1. Admissible background. The court applied the principles stated in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. Previous negotiations, drafts and subjective intentions could not be used to place a gloss on the agreed words. Evidence of discussions could, however, be relevant to establish the parties’ knowledge of the circumstances in which the contractual language was used.
2. Construction of the amendment. The 2006 wording stated that the reference to “monthly lumpsum payment” in clause 5.9(c) was deemed to be a reference to “the fees in Paragraph 4.1”. Paragraph 4.1 identified fees of US$1,500,000 and £1,067,000 per year. The monthly payment mechanism was merely the method by which those annual fees were paid.
3. Commercial context. The construction advanced by the claimant was commercially coherent. It reduced the compensation that would otherwise have been payable under the original lump-sum arrangements, but did not reduce the payment to a merely nominal sum. Commercial considerations relied on by either party were not conclusive; the primary task was to construe the words agreed in 2006.

Accordingly, the defendant was liable for compensation equal to one half of the applicable annual fees: US$750,000 and £553,773.

First-instance decision. No appellate history is stated in the judgment.