Charterparty ‘keep vessel in class’ obligations… are NOT conditions - Simon Rainey QC and Natalie Moore

Wed, 10 July, 2019

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

Overview

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.

A copy of the judgment can be found here.

        

Simon Rainey QC

Simon is one of the best-known practitioners at the Commercial Bar with a broad commercial advisory and advocacy practice spanning substantial commercial contractual disputes, international trade and commodities, shipping and maritime law in all its aspects, energy and natural resources and insurance and reinsurance and has extensive experience of international arbitration. Simon regularly acts in ground-breaking shipping and commodity cases including NYK Bulkship (Atlantic) NV v Cargill International SA (The Global Santosh) [2016] UKSC 20 where Simon represented Cargill. The decision is the leading one in relation to a contracting party’s responsibility for the vicarious or delegated performance by a third party of its contractual obligations, both in the common charterparty and international sale of goods contexts and more generally. InBunge SA v Nidera SA [2015] UKSC 43 Simon represented Bunge in a landmark decision by the Supreme Court on GAFTA Default Clause and sale of goods damages after The Golden Victory. His most recent appearance in the Supreme Court was in Volcafe Ltd v Compania Sud Americana de Vapores SA [2018] UKSC 61 one of the most important shipping appeals in recent times, dealing with issues as to the burden of proof under the Hague / Hague-Visby Rules and the inherent vice defence. He has been brought in to argue the prospective Supreme Court appeal in Evergreen Marine Ltd v Nautical Challenge Ltd (The Ever Smart) [2018] EWCA Civ 2173, on the application of the ‘crossing rule’ under the Collision Regulations.

Ranked as the “Star Individual” for shipping and commodities by Chambers UK in 2015, 2016, 2017, 2018 and again in 2019, Simon was ranked as Shipping Silk of the Year 2017 by both Chambers and Partners UK and Legal 500 UK Awards and one of the Top Ten Maritime Lawyers 2017 and again in 2018 by Lloyd’s List. He has also been cited for many years as a leading Silk in the areas of Commodities, Commercial Litigation and Dispute Resolution, International Arbitration, Energy and Natural Resources, and Insurance and Reinsurance by Chambers UK and/or Legal 500. He was shortlisted for Shipping Silk of the Year at the Chambers UK Bar Awards 2018 and for Shipping Silk of the Year and International Arbitration Silk of the Year at the Legal 500 UK Awards 2019.

He has given expert evidence of English law to courts in several countries. He also sits as a Recorder in the Crown Court and as a Deputy High Court Judge (Commercial Court).

“A fantastically intelligent and tactically astute barrister who is immensely erudite”; “A pleasure to work with. Fantastically intelligent and tactically astute.” ...”Personable and intellectually brilliant. He has the ability to sift through numerous documents and turn arguments into razor-sharp points that get straight to the core issues”; .”Meticulous and very thoughtful”;  “Simon is just brilliant at conveying the meaning of agreements and making complex things simple and persuasive.”... “He’s a very fluent advocate and a very good cross-examiner.”   (Chambers UK 2019)

“Incredibly user friendly; a great advocate”; “Absolutely charming and probably the best cross-examiner I’ve ever seen”;  “A class act who’s proved himself to be a stellar performer; he’s fighting at the top of his game”; “One of the best commodities barristers – diligent and responsive, he is an excellent example of the modern QC.”; A senior QC with gravitas and an ability to provide crystal clear advice that gets to the bottom line”; ‘He is a gift to the Bar – he can always think a few steps ahead and understands both the legal and commercial perspectives.”;  ‘A first-choice QC for the very complicated cases” (Legal 500 2019)

> view Simon's full profile

simon.rainey@quadrantchambers.com

Natalie Moore

Natalie has a broad commercial practice with particular experience in international commerce and shipping. She regularly appears in the Commercial Court and in arbitration, both as sole and junior counsel.

 Natalie is ranked by Chambers UK Bar 2019 as a leading junior barrister.  She is described as: “"Very switched-on and enthusiastic. She is hard-working, easy to deal with and personable." ..."An excellent junior and a strong team player." (Chambers 2019)  Recent commentary recognises that “She has a razor sharp legal mind, is very commercially minded and is an excellent advocate’ (Legal 500 2019).

Significant cases include:

  • Ark Shipping Company LLC v Silverburn Shipping (IOM) Ltd (The “ARCTIC”) [2019] EWCA Civ 1161 - Natalie and Simon Rainey QC (neither of whom appeared below) acted for the successful appellant in the Court of Appeal in this important ruling on the classification of the charterers’ obligation to keep a vessel in class under a bareboat charter.  Simon and Natalie successfully overturned the Judge’s decision that the term was a condition. The Court of Appeal held that the obligation was an innominate term and that the owners were not entitled to terminate for breach of this obligation in the absence of a repudiatory breach.  
  • Lukoil Asia Pacific PTE Ltd v Ocean Tankers (PTE) Ltd (THE “OCEAN NEPTUNE”) [2018] 1 Lloyd’s Rep Plus 31 - Natalie acted for the Claimant charterers on their s 69 appeal from an arbitration award on a demurrage time bar.  The arbitrators decided that a claim brought by owners for time lost waiting for charterers’ orders was not time barred.  Natalie overturned the decision, successfully arguing that the owners’ claim was a claim for demurrage and therefore time barred by reason of the owners’ failure to provide the required supporting documents within the time limit specified in the demurrage time bar clause in the charterparty.
  • Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2016] EWCA Civ 982 - Natalie appeared with Simon Rainey QC and Nevil Phillips in the Court of Appeal in the leading case on whether payment of hire is a condition of a time charter.

> view Natalie's profile

natalie.moore@quadrantchambers.com