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11 Jul 2019

Maintenance of unexpired Class is not a contractual condition

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The Court of Appeal has held in Ark Shipping Company LLC v Silverburn Shipping (IOM) Ltd [2019] EWCA Civ 1161, that a charterer’s obligation to keep the vessel with unexpired classification and other required certificates in force at all times (pursuant to Clause 9A of the BARECON 89) is not a condition but an innominate term. Stephenson Harwood acted for the successful charterers.

In a unanimous lead judgment, Gross LJ supported by McCombe and Leggatt LJJ, held that the term lacked the hallmarks of a condition and treating it as a condition would risk long-term contracts being prematurely terminated on the basis of trivial breaches. This reaffirms the Court of Appeal's more recent approach to the classification of contractual terms.

Background

The parties entered into a bareboat charterparty in 2012 on an amended standard BARECON 89 Form whereby Silverburn Shipping (IoM) Ltd, bareboat chartered its vessel, the tug “ARCTIC”, to ARK Shipping Company LLC, for a period of 15 years.

The vessel arrived at the Caspian port of Astrakhan for repairs and maintenance on 31 October 2017. Her class certificates expired on 6 November 2017, before she entered dry dock for repairs. By a notice of termination sent in December 2017, the owners, Silverburn, purported to terminate the charterparty and demanded redelivery of the vessel, contending that the charterers, ARK, had failed to pay hire in full and had failed to keep the vessel in class.

Silverburn commenced arbitration in January 2018 and the Tribunal (consisting of two experienced shipping arbitrators) dismissed the application for delivery up of the vessel. In respect of the non-payment of hire the Tribunal held that the December 2017 notice was wrongful and invalid. In respect of charterers’ obligation under Clause 9A to maintain the vessel and keep her in class, the Tribunal held that these obligations were not “absolute” but required the exercise of due diligence. Charterers’ obligation to maintain and repair the vessel went “hand in hand” with and was “part and parcel” of their obligation to maintain class.

The High Court

Upon appeal by Silverburn, Carr J. reversed the Tribunal's decision, holding that the term was a condition. In deciding this, the Judge made the following points:

  1. The obligation had “significant sequencing consequences”, impacting not just the parties themselves but also cargo interests, subcharterers, regulatory issues, ports and flags.
  2. It was not determinative that the classification obligation was not labelled a condition and that express rights of withdrawal were not provided for in the event of its breach, but were provided for elsewhere.
  3. The Tribunal's reliance on the status of the classification obligation in the time charter context (NYPE standard form) was said to have been misplaced.
  4. The language of the obligation is not inconsistent with the concept of its being a condition, and if anything, suggests that it is. It is clear and absolute with a fixed time limit, redolent of a condition.
  5. Nor was it fatal that the classification obligation was not a condition precedent (Bunge Corporation v Tradax Export SA [1981] 1 WLR 711) as the categories of such conditions were not closed.
  6. The key question was to strike the right balance, as identified in Spar Shipping v Grand China Logistics ([2016] EWCA Civ 982; [2016] 2 Lloyd’s Rep 447) and in that regard, categorising the classification obligation as a condition carried “clear and important advantages in terms of certainty”.

The Court of Appeal

The sole question of law on appeal was whether the term contained in Clause 9A of the charterparty obliging the charterers to “…keep the vessel with unexpired classification of the class indicated in Box 10 and with other required certificates in force at all times” was a condition or an innominate term.

Taking an iterative approach, the Court of Appeal came to the firm conclusion that the term was not a condition. While a term related to the vessel’s classification status is important, that is not sufficient in itself to make it a condition.

The Court of Appeal clarified that the balance struck by the Judge in seeking to apply Spar Shipping was wrong and her conclusion was unduly harsh to the charterers. As to certainty, this was, without doubt, an important consideration, but not one entitled to undue weight in determining whether a term is a condition or innominate.

The Court of Appeal's reasoning was as follows:

A. Wording: the term was not expressed as a condition. While this was not decisive, it was a significant consideration given that BARECON 89 is an industry standard form, drafted after consideration by an industry drafting committee.

B. Not a time clause: the term was not a “time clause” similar to that in Bunge v Tradax and the Court disagreed with the first instance Judge that the fact that the term obliged the charterers to maintain class throughout the time charterparty (the “temporal element”) rendered it in any way analogous to a time clause.

C. No interdependence: there was simply no interdependence here (which had been a key factor in Bunge v Tradax) and the term was not a condition precedent.

D. Type of breach: although the term went to the classification status of the vessel (the importance of which the Court did not seek to minimise), this was however outweighed by a plethora of other factors.

E. Clause 9A as a whole: the location of the term, in the middle of Clause 9A, was surprising if it had been intended that the classification obligation was to be a condition. The structure of Clause 9A, in an industry standard contract, strongly suggested that the term was not to be construed as a condition.

F. “Other required certificates…”: the term required the charterers to keep “…other required certificates in force at all times”. This wording could not be limited to certificates required by class because it would have added nothing to the charterers’ obligation to maintain class. The consideration of “other required certificates” was damaging to the owners’ case as they were driven to say either that only a part of the term was a condition (this was an unattractive and improbable construction), or that charterers’ obligation as to “other required certificates” forms part of the condition for which they contend (which seemed hopelessly open-ended as it would mean that the 15 year charterparty could be terminated by the owners if the charterers committed any breach in respect of the certificates required under, for example, the BWM or AFS conventions).

G. Scheme of the charterparty: insurance: it was clear that Clause 13B (dealing with P&I insurance) was not a condition of the charterparty. A breach by the charterers of Clause 13B did not entitle the owners, without more, to terminate the charterparty. Instead, that clause provided for the owners to notify the charterers, whereupon the charterers would be offered a period of time within which to remedy the breach. This undermined the owners’ submission that the Clause 9A term was a condition.

H. Consequences of breach of the term: breach of the term may likely result in trivial, minor or very grave consequences, thus suggesting that the term is innominate rather than a condition.

I. A continuing obligation: it was one thing to conclude that a statement as to the vessel’s class at the commencement of the charterparty was a condition or condition precedent. It would be quite another to hold that a 15 year warranty to maintain the vessel in class at all times is a condition. Typically, continuing time charter warranties as to the vessel’s physical condition do not constitute conditions. The advantages of certainty to be achieved by the categorisation of the term as a condition were clearly outweighed by the risk of trivial breaches having disproportionate consequences.

The judgment demonstrates, once again, that the Courts are reluctant to classify contractual terms as conditions where the risk of disproportionate consequences outweighs the advantages of commercial certainty. This is particularly so in the context of bareboat charterparties which tend to be fixed for long periods.

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