In the recent case of Silverburn Shipping (IoM) Ltd v Ark Shipping Company LLC (M/V "ARCTIC") (2019), the key question was whether a specific charterparty term which had been breached, was a condition or whether it was an innominate term. Depending on the answer, the legal consequences could vary significantly for both parties.
"Condition" v "Innominate Term"
The importance of the distinction between the terms lies in the legal consequences that arise from their breach. Under English law, when a condition is breached, the injured party has the right to sue to rescind the contract and for damages. On the other hand, when an innominate term is breached, the legal consequences depend on the factual circumstances of the breach. The question that then needs to be addressed is: does the breach deprive the injured party of substantially all the benefit which such party was intended to derive from the contract? If that is the case, then there is a right to rescind the contract and sue for damages.1 If not, then damages is the only remedy.
M.v. "ARCTIC" (the Vessel) was bareboat chartered for a period of 15 years, under an amended BARECON 89 Form, which included a term in clause 9A (Maintenance and Operation) whereby the bareboat charterers were required to:
"...keep the Vessel with unexpired classification of the class indicated in Box 10 and with other required certificates in force at all times...”
In October 2017, the Vessel arrived at the Caspian port of Astrakhan for repairs and maintenance. Shortly after, in November 2017, the Vessel's class certificates expired.
In December 2017, the charterers received a notice of termination and redelivery of the Vessel from the owners who claimed that the charterers had breached the condition that class certificates would be maintained at all times (entitling them to terminate the charterparty) and to demand the redelivery of the Vessel, citing, in addition, that it was in poor condition and that the charterers had continually failed to pay hire in full.
Charterers disagreed, responding that the owners were aware the Vessel was undergoing scheduled maintenance work, that it had arrived at the dock prior to the expiration of the class certificates, and that, after completion of the works, the surveyors would undertake a final inspection and issue a new set of documents.
The dispute led to arbitration proceedings and later, to appeals to the High Court and the Court of Appeal.
In January 2018, arbitrators determined that the term was an innominate term, breach of which did not entitle the owners to terminate the charterparty, but the award was reversed in February 2019 by the High Court, which ruled that the term was a condition, so that owners were entitled to terminate.
On 10 July 2019, overturning the High Court decision, the Court of Appeal ruled that the term was in fact an innominate term, which meant that the owners had not been entitled to terminate the charterparty.
On a true construction of the term, it was held that "textually and contextually" the term was an innominate term. The following factors were considered:
- Wording: The term was not expressed to be a condition and the word "condition" had not been used.
- Not a time clause: The clause required the maintenance of class throughout the 15 year charterparty but it did not refer to a specific time.
- No inter-dependence: The term was not a condition precedent and there were no seemingly "significant sequencing consequences" as a result of the expiration of the class certificates.
- Type of breach: The vessel was either in class or it was not, however, this had to be considered in the context of the other factors mentioned above and below.
- Clause 9(A) as a whole: The term was in the middle of clause 9(A) and the clause addressed maintenance of the ship's physical condition and obliged the charterers to undertake necessary repairs within a reasonable time, allowing the owners to withdraw the ship in case the charterers failed to take such steps. The Court held that the sections of the clause were not conditions, and "within a reasonable time" was also not the substance or language of a condition. Purporting to hold the term located in the middle of clause 9(A) to be a condition would constitute a stark contrast with the remainder of the clause.
- Other required certificates: A term requiring the charterers to keep the "other required certificates in force at all times" was not a condition as this would be too wide.
- The scheme of the charterparty: Insurance - Clause 13(b) placed an obligation on the charterers to keep the ship insured against P&I risks, but this was, again, not a condition of the charterparty – it required the owners to notify the charterers to remedy any breach. Any breach of the charterparty which left the ship without P&I cover did not entitle the owners to terminate the charterparty, which meant that the owners' argument that the term was a condition due to its potential impact on the validity of the insurances, was undermined.
- The consequences of a breach of the term: The consequences were deemed to be either trivial, or minor, or grave consequences, which suggested that the term was innominate rather than a condition.
- Continuing obligation: There was no authority to suggest that maintaining a continued classification status at all times was a condition, and the consequences of categorising as a condition such obligation, which could be the subject of trivial breaches, would be disproportionate.
- Further general guidance: The Spar Shipping case was referred to. This provided that:
a. the true construction of the contract was a matter of the parties' intentions;
b. where, upon the true construction of the contract, the parties had not made the term a condition, it would be innominate if a breach were to result in either trivial, or minor, or very grave consequences; and
c. unless it was clear that a term was intended to be a condition or (only) a warranty, it would be innominate.
As explained in the case, the Court's role is "to ascertain the objective meaning of the language which the parties have chosen to express their agreement... consider the contract as a whole and... give more or less weight to elements of the wider context in reaching its view as to that objective meaning". The BARECON Forms are industry standard, drafted by an industry drafting committee, and had the industry intended for the term to be a condition, then the language used in the BARECON Forms would reflect this.
Additionally, whilst contractual certainty is important "the key... is striking the right balance" and "where... the likely breaches of an obligation may have consequences ranging from the trivial to the serious, then the downside of the certainty achieved by classifying an obligation as a condition is that trivial breaches will have disproportionate consequences...."
1The Law of Contract, sixth edition, 3.35 "Contract: The Law of Contract (Common Law Series)", Conditions, warranties and innominate terms – Types of terms.