On this occasion, the Commercial Court rejected the notion of an implied term, overturning an argument that the owners could not seek additional security under a ‘see to it’ charterparty guarantee. Instead, the Court reiterated that the cause of action against a guarantor arises as soon as the guaranteed debtor is in default under English Law. It is at that point of alleged breach that the beneficiary may call on the guarantee.
Background
CVLC Three Carrier Corp and CVLC Four Carrier Corp (the “owners”) each entered into a bareboat charter (“Charterparties”) with Al-Iraqiya Shipping Service and Oil Trading (the “charterers”). Arab Maritime Petroleum Transport Company (AMPTC”) (the “Guarantor”) entered into associated guarantees (“Guarantees”), guaranteeing the charterer’s performance under the bareboat charters. While it was suggested that the Guarantor and the charterer were associated companies, this did not need to be conclusively determined for the purposes of this dispute.
The guarantees provided in essence that in consideration of the owners entering into the charters with the charterer, the Guarantor “irrevocably, absolutely and unconditionally” guaranteed due and punctual payment of hire, as well as the charterer’s other obligations under the charters. In the event that the charterer defaulted on its hire obligations, the owners could call upon the guarantees and demand immediate payment by the Guarantor of the outstanding hire. The guarantees described the Guarantor as “primary obligor”.
The owners subsequently terminated the charters, alleging breach by the charterer. They commenced separate arbitrations against the charterer and the Guarantor. They then also arrested a vessel owned by the Guarantor as security for their guarantee claims.
In an expedited application to the sole arbitrator, the Guarantor sought a declaration that it was an implied term of the guarantees that the owners would not seek additional security in respect of the matters covered by the guarantees. The Arbitrator noted that the guarantees did not expressly provide for additional security. However, he concluded that there was an implied term as proposed by the Guarantor and that the owners were in breach of it and liable to the Guarantor for damages.
The Arbitrator’s reasoning was that liability under the guarantees could only be triggered if it had been established that the charterer had failed properly to perform the charters. Further, while the Guarantor was potentially liable as primary obligor and not only as a surety, the guarantees were given in consideration of the owners entering into the charters. Therefore, it could be inferred that the guarantees must have been considered adequate security at the time the charters were concluded, otherwise they would not have been concluded.
The Guarantor appealed.
The Judgment
Mrs Justice Cockerill DBE allowed owners’ appeal and held that the Arbitrator’s decision was wrong in law.
The Judge first dismissed the Guarantor’s procedural argument that permission to appeal was wrongly granted. The Judge held that there would need to be highly unusual circumstances before the trial judge would second-guess the wisdom of the judge granting permission to appeal, even when (as, unusually, in this case) the same judge had considered the appeal at both the permission stage and the appeal hearing.
The Judge went on to review the merits of the appeal. She held that the legal hurdle for implying a term in English law is a high one and was not met in this case. The Court’s reasoning centred on the following points:
1. The term implied by the Arbitrator deprived owners of their common law remedies. Generally, clear words are required before a Court will conclude that this was the intention of the parties. No such words were to be found in the Guarantees.
2. The Arbitrator did not seem to have considered the stringent legal requirements laid down by the authorities for implying a contractual term. This left room to question whether the Arbitrator had the correct test in his mind.
3. The Arbitrator had found that the Guarantees themselves were adequate security. However, this begged the question: security for what? The Judge held that:
- The Guarantees acted as security for the obligations of the charterer under each of the Charterparties, not those of the Guarantor under the Guarantees.
- The Guarantees constituted a separate and distinct contractual relationship.
- In English law, a cause of action against a guarantor under a “see to it” guarantee (which is the usual form of guarantee securing performance under a charterparty) arises as soon as the debtor is in default. It is at that point of alleged breach by the debtor that the beneficiary may call on the guarantee and, if the guarantor does not respond, seek security against the guarantor for the breach by the guarantor of the terms of the guarantee themselves.
Procedural take-away
In allowing the appeal, the Court clarified the position in relation to the two-step appeal process under section 69 of the Arbitration Act 1996. The Court’s decision narrowed the scope for parties to argue points in the substantive appeal that were dismissed at the permission to appeal stage under section 69, emphasising the importance of the streamlined two-step process and noting that “highly unusual circumstances” would be required to revisit such issues once permission to appeal had been granted. Notably, the Court not only granted the appeal under section 69 of the Act, finding that the arbitrator’s decision was incorrect, but it also refused to remit the matter back to the arbitrator to reconsider the issue on the facts.