Ark Shipping Co LLC -v- Silverburn Shipping (IoM) Ltd [2019] EWCA Civ 1161

Introduction

The Court of Appeal considered whether a charterparty term obliging charterers to keep the vessel in in a specified class was a condition or an innominate term. This case initially went to arbitration and was subsequently appealed to the High Court. The arbitration tribunal decided that the term was not a condition, but the High Court disagreed and found that it was a condition. See here.

However, the Court of Appeal ruled in favour of the charterers and held that the charterparty clause was an innominate term.

Factual background

The case involves the tug “ARCTIC” (the Vessel), which was chartered by Silverburn Shipping (IoM) Ltd (Owners and Respondent) to ARK Shipping Company LLC (Charterers and Appellant) by a bareboat charterparty on an amended standard BARECON 89 Form, dated 17 October 2012 (the charterparty) for a period of 15 years. The Vessel was delivered into service under the charterparty on or about 18 October 2012. There had been various disputes regarding hire payments and invalid efforts to withdraw the Vessel, however, the charterparty continued.

The ultimate dispute arose after the Vessel’s class certificates expired. 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, some five years after her last special survey. This led Owners to serve a notice on the Charterers purporting to terminate the charterparty and demanding redelivery of the Vessel, as Owners regarded the expiration of the Vessel’s class certificates as a breach of the charterparty. The notice also dealt with various issues regarding non-payment of hire.

By their replies, dated 8 and 11 December 2017, Charterers resisted Owners’ demand for the return of the Vessel, denied any breach and contended that the charterparty remained alive.

Further exchanges between the parties continued until Owners commenced arbitration in January 2018, requesting relief, including an order for delivery up of the Vessel.

Legal issues

The Court of Appeal held that the question as to the classification of the term (that is, whether condition or innominate term) was clearly one of construction.

The Owners’ main argument was that the issue was ‘one dimensional’ or ‘binary’, since the Vessel can either be in class or not. It was submitted that maintenance of class was a matter of status, a consideration which justified categorisation of the term as a condition. The consequences flowing from a breach of the term could be serious and/or irreversible.

The Charterers argued that categorising the term as a condition would be uncommercial, particularly since the term was not expressed to be a condition. The obligation to maintain class was bound up with the maintenance of the minimum physical condition of the Vessel, which was plainly not a condition.

The arguments focused on three authorities in particular; Bunge -v- Tradax [1981] 1 WLR 711, The Seaflower [2001] 1 All ER (Comm) 240, and Spar Shipping AS -v- Grand China Logistics Holding (Group) Co Ltd [2016] 2 Lloyd’s Rep 447. Owners placed much reliance on Bunge -v- Tradax and The Seaflower, in seeking to uphold the High Court’s classification of the term as a condition. Charterers submitted that these authorities were clearly distinguishable. Spar Shipping was said by both Owners and Charterers to support their respective cases.

The Court of Appeal held that both ‘textually and contextually’ the term was not a condition, the term related to the Vessel’s classification status. Although classification status is important, it does not suffice to make it a condition. Lord Justice Gross explained his reasoning as follows:

• Wording: The term is not expressed to be a condition. This is in no way decisive, however, had the industry and the parties wished to make the position plain, they could have used the language of condition; they did not choose to do so.
• Not a time clause: The term is not a ‘time clause’ of the nature under consideration in Bunge -v- Tradax.
• No interdependence: In Bunge -v- Tradax, performance of the obligation was a condition precedent to the ability of the other party to perform its obligation. Thus, there was some interdependence which does not exist in the present case. While breach of the term would or could have a variety of consequences or knock-on consequences, the sequencing in issue in Bunge -v- Tradax is distinguished as involving actions required for performance of the contract, rather than the consequences flowing from a breach of contract in this case.
• Type of breach: There can be only one kind of breach of the term; the Vessel can either be in class or not, which supports the Owners’ position. However, the Court of Appeal considered that this point was outweighed by the plethora of other factors discussed by Lord Justice Gross in his reasoning.
• Clause 9A as a whole: The term is found in the middle of clause 9A, a clause headed ‘Maintenance and Operation’. It was held that to describe the term as ‘ancillary’ would not reflect the importance attached to class status, which places distinct but closely connected obligations on Charterers, as to maintaining both the physical condition of the Vessel and its class status. However, Charterers’ obligation as to the physical maintenance of the Vessel is not a condition of the charterparty. It does not contain language or substance of a condition. Having regard to clause 9A as a whole, had the intention been to constitute the term as a condition, that would be a surprising place to find it.
• ‘Other required certificate’: The term requires Charterers to keep ‘other required certificates in force at all times’. The wording was considered by Lord Justice Gross to be very damaging to the Owners’ case. On the one hand, the Court rejected Owners’ case that the certificates in question were limited to those ‘required by class in order to issue the main classification certificate’, as such the wording would be redundant, it simply adds nothing to Charterers’ obligation to maintain class. On the other hand, if the wording cannot be limited in the manner contended for by Owners, then the obligation assumed by Charterers was startlingly extensive and hopelessly open-ended, encompassing a range of matters, from the trivial to the those of serious consequence.
• The scheme of the charterparty – insurance: The Court explained that clause 13B that deals with P&I insurance undermines the Owners’ submission that the term was a condition. One of the Owners’ main arguments was that a breach of the term potentially puts the Vessel’s insurance at risk and that the term should therefore be classified as a condition. However, based on the fact that clause 13B is not a condition, if leaving the Vessel uninsured does not alone entitle the Owners to terminate the charterparty, it could not be accepted that putting the Vessel at risk of being uninsured was or ought to have been classified as a breach of condition. 
• Consequences of breach: Breach of the term may equally result in severe and/or irreversible, but also trivial and/or minor consequences, which suggests that the term must be classified as innominate and be assessed on a subjective case-by-case basis depending on the consequences of each individual breach.
• A continuing obligation: It is one thing to conclude that a statement as to the Vessel’s class at the commencement of the charterparty is a condition, it is quite another to hold that a 15 years’ 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. Despite the fact that class is different, comprising a matter of status, the Court of Appeal held that the law should not be developed in the direction of such terms being classified as conditions. It was explained that the advantages of certainty, achieved by categorisation of the term as a condition, are clearly outweighed by the risk of trivial breaches having disproportionate consequences.

Comment

This decision restores the balance between owners and bareboat charterers by recognising that if maintaining a vessel in class was a condition, that would impose a heavy and uncommercial burden on the bareboat charterers.

More importantly, it highlights the different approaches in interpreting a term/obligation in long-term contacts (i.e. demise charters) compared to short-term contracts (i.e. voyage or time charters), taking into consideration the adverse effects of a continuing obligation. The court also confirmed that clauses should be interpreted as a whole and not in parts.

The decision of the Court of Appeal affirms that in commercial contracts, courts should not generally go outside of the language of a term. Given the extensive drafting and consideration such contracts have undergone, and the fact that parties have the freedom to amend them, if a term was meant to be a condition, then its language should clearly suggest that on the face of it.

Lastly, the reasoning in Spar Shipping was reapplied in the context of the clause being an innominate term, providing a ‘right balance’ based on the consequences of the breach, a different approach than in the first instance.