Ark Shipping Company LLC v Silverburn Shipping (IOM) Ltd, “ARCTIC” [2019] EWCA Civ 1161

A demise charterer is under an obligation to keep the vessel in class during the term of the charter. Is that a condition of the charter so that if the vessel is out of class for a day, the owner can terminate the charterparty and claim damages for the remainder of the term, even if the effect on it is nugatory (if there is any effect at all)?

The sole question of law on this appeal was whether the term in a bareboat charterparty obliging 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.

In their partial final award, two experienced LMAA arbitrators held that the term was not a condition.

Reversing the arbitrators and allowing the Owners’ appeal, brought pursuant to s.69 of the Arbitration Act 1996, Carr J held that the term was a condition, breach of which entitled the Owners to terminate the charterparty for any breach, however slight and of whatever duration and irrespective of the effect on Owners. The Charterers appealed from that judgment to the Court of Appeal.

The Court of Appeal strongly disagreed with the analysis of the ‘keep vessel classed’ term as a condition and, in line with the modern and very sparing approach to ‘conditions’ (cf. Spar Shipping on non-payment of hire), the Court held it was an innominate term, not a condition. To be able to terminate for breach of the term therefore required the owner to show a breach going to the root of the contract and depriving it of substantially the whole benefit of the charter (something the owner did not even allege).  Given the similarity of wording of time charter terms where the corresponding obligation is on the owner, the decision is of importance in this context also.

The charterparty

The vessel was chartered to the Charterers under a 15 year charter on an amended BARECON 89 Form dated 17 October 2012.

Box 10 provided for the vessel to be classed by Bureau Veritas. 

The classification obligation set out above appeared in the middle of a clause 9A which dealt with the Charterers’ obligations in relation to the maintenance and operation of the ship.

Clause 13 of the charterparty required the charterers to insure the vessel against P&I risks. If the Charterers failed to keep the ship so insured, the Owners were to notify the charterers and charterers were to rectify the position within seven running days, failing which the Owners had the right to withdraw the vessel from service.

The facts

The vessel was delivered into service in 2012. 

On 31 October 2017, the Vessel arrived at the Caspian port of Astrakhan for repairs and maintenance.  Her class certificates expired on 6 November 2017, before she entered dry dock for repairs and some five years after her last special survey.

On 7 December 2017, the Owners sent a notice to the Charterers purporting to terminate the charterparty.   The notice raised an issue with hire payments and complained about the condition of the vessel and the fact that the vessel’s class certificates were overdue.

The Charterers denied any breach and resisted the Owners’ demands for redelivery of the vessel.

The Owners therefore commenced arbitration and sought relief including an order for delivery up of the vessel under s.48(5) of the 1996 Act.

The award

The arbitrators dismissed the Owners’ application.  With regard to the alleged non-payment of hire, they held that the December notice was wrongful and invalid.  They held that the charterers’ obligations under clause 9A to maintain the vessel and keep her in class were not “absolute”, but merely required the exercise of due diligence.  The arbitrators held that the obligation to keep the vessel in class was part and parcel of the obligation to maintain and repair the vessel.  They also rejected the submission that the classification obligation was a condition.

The first instance decision

On the Owners’ s. 69 appeal, Carr J held that the classification obligation in clause 9A was “absolute” rather than merely requiring the exercise of due diligence.  There was no appeal against that ruling because the Judge did not give permission to appeal against that aspect of her decision.

The Judge further concluded that the classification obligation in clause 9A was a condition of the contract. 

In the Judge’s view, although the classification obligation was not a time clause strictly speaking, it had an “obvious temporal element”. 

Furthermore, though not a condition precedent, breach of the obligation had “significant sequencing consequences” for third parties such as cargo interests, sub-charterers, ports and flags. 

Classifying the obligation as a condition “had clear and important advantages in terms of certainty”. 

The consequences of breach (including in relation to flag, finance and insurance) were likely to be serious.  

As to Charterers’ reliance on the apparently wide wording in clause 9A relating to “other required certificates in force at all times”, this only applied to “certificates” (not plans) and must be taken to refer only to that which was required for class purposes. 

The Court of Appeal

The Court of Appeal unanimously overturned the Judge’s decision and held that the obligation to maintain the vessel in class was an innominate term and not a condition.

Giving the leading judgment, Gross LJ emphasised that the question of the classification of the term was one of construction.  Contrary to the Owners’ submissions, it was not an evaluative exercise where a range of conclusions was open.  But even if it had been, the Court’s reluctance to interfere with the commercial judgment of arbitrators would have applied to the appeal from the award to the Commercial Court, not the appeal from the Commercial Court to this Court.

Gross LJ reviewed the key authorities on the classification of terms and reiterated the general guidance summarised in Spar Shipping v Grand China Logistics [2016] EWCA Civ 982; [2016] 2 Lloyd’s Rep 447 (in which Simon Rainey QC and Natalie Moore also appeared for the successful Owners).

Both “textually and contextually” the Court came to the firm conclusion that the term was not a condition. 

1. Wording. The term was not expressed to be a condition.  This was a consideration of some significance, especially given that the BARECON 89 Form is an industry standard drafted after consideration by an industry drafting committee.
2. Not a time clause. The term was not a time clause of the nature under consideration in Bunge v Tradax [1981] 1 WLR 711. 
3. No inter-dependence. There was no interdependence of obligations.  There were no sequencing issues in relation to the performance of the contract.
4. Type of breach. Although the term goes to the classification status of the vessel (the general importance of which the Court did not seek to minimise) and only one kind of breach is possible, this was outweighed by a plethora of other factors.
5. Clause 9A as a whole. The term was found in the middle of clause 9A dealing with Charterers’ maintenance obligations. If the classification obligation was intended to be a condition, this was a surprising place to find it.  The classification and maintenance obligations are closely connected and Charterers’ obligation as to the physical maintenance of the vessel was plainly not a condition.  
6. “other required certificates”. The term also required Charterers to keep “other required certificates in force at all time”.  This wording could not be limited to certificates required by class because it would add nothing to Charterers’ obligation to maintain class.  Therefore the Owners were driven to say either that only part of the term is a condition (not including the “other required certificates” wording or the maintenance obligation) or that Charterers’ obligation as to “other required certificates” forms part of the condition for which they contend.  The former was unattractive and improbable.  The latter was hopelessly open ended and would mean that this 15 year charterparty could be terminated by Owners if Charterers committed any breach in respect of various minor certificates.
7. The scheme of the charterparty: insurance. An important strand of Owners’ case was that breach of the term puts at risk Owners’ insurance arrangements.  But Charterers’ obligation in clause 13B to insure the vessel against P&I risks is not a condition.  If leaving the vessel uninsured does not constitute a breach of condition, putting the vessel at risk of being uninsured is or ought not to be classified as a condition.  The same scheme applied in relation to hull or war risks cover under clause 12 of the standard BARECON 89 Form.  
8. Consequences of breach. The consequences of 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. On the facts of this case, the breach of the term resulted in no adverse consequences. There was nothing to suggest that repairs and maintenance were required at any earlier time, nor that dry-docking was required immediately or at any time before she was actually drydocked.  The vessel’s class certificates expired on 6 November.   The repair and maintenance work conducted in drydock thereafter, took place under the supervision of BV. 
9. 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 or condition precedent (as suggested by Rix LJ in The Seaflower [2001] 1 All ER (Comm) 24).  However, there is no authority which decides that a continuing warranty as to classification status is to be categorised as a condition.  The law should not be developed in that direction.

Comment

The case provides a (further) clear statement of the principles that apply to the classification of contractual terms as conditions or innominate terms.  It is particularly important for shedding light on the proper interpretation of the parties’ continuing obligations during the life of a charterparty in relation to ostensibly important matters such as classification status.  Whilst the case considers the position under a bareboat charter, it has important implications for the classification of similar obligations in the time charter context: cf. clause 1 of the NYPE form.

Simon Rainey QC and Natalie Moore (neither of whom appeared below) were instructed for the successful appellant in the Court of Appeal by Menelaus Kouzoupis, Hyun Woo Kang and Margaux Harris at Stephenson Harwood LLP.