A Demise Charterers’ obligation to keep the vessel in class is not necessarily a condition of the charterparty.

So said the Court of Appeal in the recent judgment, Ark Shipping Co LLC v. Silverburn Shipping (IOM) Ltd, The “ARCTIC”  [2019] EWCA Civ 1161, in a Judgment which provides useful guidance on the proper interpretation of parties’ continuing obligations during the life of a bareboat charterparty.  Alex Hudson, Senior Associate in CJC’s Newcastle Office, provides further details.

A contractual term will always be classified as a condition, warranty or intermediate (or innominate) term. The classification is significant because it affects the remedies available to an innocent party following a breach.

A breach of any term will give rise to a right to recover damages. However, if the term is a condition, an additional automatic right for the innocent party to treat the contract at an end (i.e. to terminate the contract) also arises.

It is vital therefore that, immediately following a breach, the innocent party establishes what type of contractual term has been breached. Is it a condition or not? If the innocent party terminates the contract without the requisite right (i.e. where there has only been a breach of warranty or breach of an intermediate term that does not deprive the innocent party of substantially the entire benefit of the contract), the innocent party will themselves have breached a condition of the contract and a corresponding claim for damages against them will likely result.

Ark Shipping Company LLC v. Silverburn Shipping (IoM) Ltd: The Arctic [2019] EWCA Civ 1161

Owners bareboat chartered the vessel to Charterers by way of amended BARECON ’89 form for a period of 15 years. Clause 9A materially obliged the Charterers to maintain the vessel’s class at all times during the charterparty. Notwithstanding this, Charterers allowed the vessel’s class to expire whilst the charterparty was still in force.

Did the Owners have an automatic right to terminate the charterparty for breach of a condition? The Court of Appeal held that they did not.

Gross LJ who gave the leading judgment emphasised that the question was one of contractual construction. Unless it was clear from the contract that the term was intended to be a condition or a warranty, it would ordinarily be treated as an intermediate term only.

Applying the criteria to the facts, the Court held, that the bareboat charterparty was not sufficiently clear for the Court to consider Charterers’ obligations under clause 9A as anything other than an intermediate term. In so ruling, the Court considered:

1. Charterers’ obligation to maintain the vessel’s class was not expressed in the charterparty to be a condition;
2. Charterers’ obligation was not a condition precedent to any other obligations under the charterparty. In other words, Owners did not require Charterers to comply with the obligation in order to fulfil their duties under the charterparty, or any other contract;
3. Charterers’ obligation was expressed midway through clause 9A. If the parties had intended it to be a condition, the Court held that this would be a surprising place to find it;
4. Charterers’ separate obligations to maintain and insure the vessel were plainly expressed not to be conditions. This undermined Owners’ argument that Charterers’ obligation to maintain class was a condition;
5. A breach of the obligation might have resulted in trivial, minor or very grave consequences. This broad spectrum of outcomes leaned towards the term being intermediate in nature rather than a condition;
6. An obligation to have the vessel appropriately classed at the commencement of the charterparty might be considered  a condition. However, it was another thing altogether to hold that a 15 years warranty to maintain the vessel in class at all times was a condition – this would be unduly onerous.

Summary

As with previous judgments relating to a party’s non-payment of hire (see Spar Shipping [2019]) the Artic Judgment evidences Court’s reluctance to rule that a term is a condition unless the term is expressly stated to be so. The Court considered that the advantages of certainty, achieved by categorising the term as a condition, were outweighed by the risk of a trivial breach having disproportionate consequences.

The Judgment potentially has important implications for a variety of contracts beyond bareboat charterparties. The obvious implication is for an Owners’ corresponding classification obligations under a time charterparty however the Judgment potentially has a wider ambit than that.

The Judgment was (arguably) fair given the facts of the present matter however it does little to appease frustrated Owners and Charterers who face a lack of certainty when considering their options and strategy following a breach of contract.