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The Arctic: no termination of bareboat charterparty for loss of class15 October 2019

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In The Arctic[1], a significant recent decision of the English Court of Appeal, it has been held that the BARECON ’89 charterparty obligation on the bareboat charterer to maintain the vessel’s class certificates is not a legal ‘condition’ of the charterparty contract, and so the owner is not entitled to terminate the charterparty if this obligation is breached.

"The Owners appealed to the Commercial Court, which overturned the Tribunal’s decision, holding that the class obligation (and the separate repair/maintenance obligation) was absolute rather than qualified."

The Court’s construction of the terms of the BARECON ’89 charterparty, and commercial contracts in general, will be of particular interest to ship owners and bareboat charterers and could affect how bareboat charterparty terms are negotiated from now on.

Factual background

The Owners bareboat chartered their tug, the Arctic (the “Vessel”), to the Charterers for a period of 15 years on an amended BARECON ‘89 form. Box 10 of the charterparty provided for the vessel to be classed by Bureau Veritas. Clause 9 was headed “Maintenance and Operation”, and clause 9A stated:

“…The Charterers shall maintain the Vessel, her machinery, boilers, appurtenances and spare parts in a good state of repair, in efficient operating condition and in accordance with good commercial maintenance practice and, except as provided for in Clause 13 (l), [2] shall keep the Vessel with unexpired classification of the class indicated in Box 10 and with other required certificates in force at all times. The Charterers to take immediate steps to have the necessary repairs done within a reasonable time failing which the Owners shall have the right of withdrawing the Vessel from service of the Charterers…”

During the charter, the Vessel drydocked for repairs and maintenance, by which time its class certificates had expired. The Owners sought to terminate the charterparty, among other things, on the basis that the Charterers had breached their clause 9A obligation to maintain the Vessel in class. The Charterers denied that the Owners were entitled to do so.

The Tribunal and High Court decisions

An arbitral Tribunal held that the Charterers’ obligation to keep the Vessel in class was not absolute and that the preferable construction of clause 9A was that, if the Charterers breached the obligation (or their separate repair/maintenance obligation under the clause), then the Charterers had to take immediate steps to rectify such breach within a reasonable time.

The Owners appealed to the Commercial Court, which overturned the Tribunal’s decision, holding that the class obligation (and the separate repair/maintenance obligation) was absolute rather than qualified and constituted a legal ‘condition’ of the charterparty contract which, if breached, entitled the Owners to terminate the charterparty. On this basis, the Owners’ termination for the breach was held to have been valid.

The Charterers appealed to the Court of Appeal on the question of whether the obligation for them to keep the Vessel in class was a legal ‘condition’ of the contract.

Court of Appeal Decision

Under English law a contractual term/obligation is categorised as:

  1. A ‘condition’, entitling the innocent party to terminate the contract for its breach;
  2. A simple ‘warranty’’, not entitling it to terminate; or
  3. An ‘innominate’ term, entitling it to terminate only if the breach deprives it of substantially the whole benefit of the contract[3].

English courts are reluctant to construe a contractual term as a ‘condition’ (which has a draconian effect) unless this is clear from the clause and the contract as a whole and, as a starting point, lean towards it being an ‘innominate’ term[4].

Against this backdrop, the Court of Appeal held in the Charterers’ favour, finding that whilst classification of a vessel is an important matter, this did not suffice to make the clause 9A class obligation a ‘condition’. Whether or not the obligation was a ‘condition’ was a question of the construction of the clause and, both “textually and contextually” in accordance with the language, structure and scheme of the Charterparty, the term was not a condition but an innominate term.

the Court of Appeal held in the Charterers’ favour, finding that whilst classification of a vessel is an important matter, this did not suffice to make the clause 9A class obligation a ‘condition.

The Court of Appeals gave the following reasons supporting its construction:

  • Wording: Clause 9A did not express the term to be a ‘condition’.
  • Not a ‘time clause’: The term was not a ‘time clause’ (in the sense that time was of the essence). In this regard, the Court of Appeal disagreed with the Commercial Court judge’s view that the obligation to maintain the Vessel’s class throughout the charter gave it a “temporal element” analogous to one found in a time clause.
  • No inter-dependence: There was no inter-dependence between the term and other terms of the charterparty.
  • Clause 9A as a whole: Clause 9A placed distinct, but closely connected, obligations on the Charterers concerning the maintenance of the Vessel’s physical condition and her class status. The obligation to maintain the Vessel to a minimum physical standard was not worded as a ‘condition’ of the charterparty – the Charterers were required to take immediate steps to remedy any breaches of the obligation by completing necessary repairs within a reasonable time. In addition to this, the Court of Appeal considered that the structure of clause 9A militated against the term being a ‘condition’.
  • “Other required certificates”: The reference to “other required certificates” in the clause required the Owners to argue that this obligation was an innominate term (but that the remainder of the term was a condition), alternatively that this obligation was a ‘condition’ as well as the obligation to keep the Vessel in class. As to the latter argument, the Court of Appeal noted that if correct, the 15-year charterparty could be legitimately terminated by the Owners if the Charterers committed any breach (however trivial) in respect of the Vessel’s certificates, which it could not accept was in line with the intention of the parties.
  • The scheme of the Charterparty – insurance: The essence of the Owners’ case was that a breach of clause 9A put the Vessel’s insurance cover at risk and that the term should, therefore, be classified as a ‘condition’. However, the Court of Appeal noted that since a breach of the charterers’ obligation under the Charterparty to keep the Vessel insured against P&I risks was not a ‘condition’, it could not be right that a separate breach which merely put the insurance cover at risk was a ‘condition’.
  • The consequences of the breach: The Owners placed emphasis on the likely impact of loss of class on the Vessel’s flag, finance and insurance. The Court of Appeal accepted that loss of class can have serious consequences, but in this case it did not, and the Court of Appeal did not accept that it was driven to a conclusion that loss of class during drydock repairs under class supervision amounted to breach of a ‘condition’ entitling termination
  • A continuing obligation: The Court of Appeal also disagreed that a continuing warranty to maintain the Vessel in class at all times during a 15-year period should be categorised as a ‘condition’. The advantages of certainty, achieved by categorising the term as a ‘condition’, were outweighed by the risk of trivial breaches having disproportionate consequences.
  • Final considerations: The nature of the Charterparty, i.e. the fact that it was a bareboat charter, did not persuade the Court of Appeal that the term should be classified as a ‘condition’.
  • Type of breach: Although the Court of Appeal noted that the term went to the classification status of the Vessel such that there was only one kind of breach that was possible: either the Vessel was in class or not, and that this was a relevant factor in favour of finding the term to be a ‘condition’, the Court of Appeal considered it was outweighed by a plethora of other factors.

Commercial considerations and conclusions

This judgment will be seen by many as achieving a fair and correct result given the wording of clause 9A and the severe repercussions if a contract term requiring a vessel’s class to be maintained over a long period of time was construed as a ‘condition’, entitling the owner to terminate the contract if the term was breached. More generally, the judgment provides clarification and useful guidance on the principles to be applied by the courts when classifying contract terms. However, the judgment also serves as a reminder that parties must be careful when drafting contract clauses: if they intend for there to be a right of to terminate for breach, this needs to be clearly spelled out.

[1]ARK Shipping Company LLC v Silverburn Shipping (IOM) Ltd [2019] EWCA Civ 1161

[2]This amendment ensures the burden of maintaining class compliance stays with the Charterers

[3] Hongkong Fir Shipping Co. Ltd. v Kawasaki Kisen Kaisha Ltd. [1962] 2 QB 26

[4]Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2015] EWHC 718 (Comm)