BARECON: Best in Class

Silverburn Shipping (IoM) Ltd. V Ark Shipping Company LLC (the “ARCTIC”) [2019] EWCH 376 (Comm)

The Facts
On 17 October 2012, registered owners SILVERBURN SHIPPING (IoM) Ltd (the “Owners”) let the MV “ARCTIC” to ARK SHIPPING COMPANY LLC (the “Charterers”) for a period of 15 years on an amended BARECON 1989 form.  On 31 October 2017, the Vessel arrived at port for repairs and maintenance.   Class certificates expired on 6 November 2017 whilst the Vessel was in dry dock and prior to the Vessel’s special survey taking place.

Owners terminated the Charterparty on 7 November 2017 inter alia because the Vessel’s class had expired and so Charterers were in breach of Clause 9 of the Charterparty.  Charterers however, maintained that the Charterparty was still alive and disputed Owners’ right to terminate. The dispute was referred to arbitration and appealed to the High Court.

The Arbitration Award
The Tribunal agreed with Charterers.  The relevant clause was as follows:

9. A “….The Charterers shall maintain the Vessel…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 (I), they 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 Owners shall have the right of withdrawing the Vessel from the service of the Charterers….”

The Tribunal rejected Owners’ argument that the obligation to maintain the Vessel’s class was separate from the obligation to maintain and repair the Vessel.  Accordingly, the Tribunal could not accept Owners’ submissions that Charterers’ obligation to maintain class was an absolute obligation and condition of the Charterparty, breach of which would entitle Owners to immediately terminate the Charterparty.

The Tribunal were of the view that if Charterers were in breach of the obligation to maintain Class, Charterers were obliged to take steps to carry out the necessary repairs and reinstate class within a reasonable time, failing which Owners would have the contractual right pursuant to Clause 9A to withdraw the Vessel from Charterers’ service.

The Appeal to the High Court

Owners’ appeal consisted of two questions of law:

1. Is Charterers’ obligation in Clause 9A “to keep the Vessel with unexpired classification of the class…and with other required certificate in force at all times” an absolute obligation or merely an obligation to reinstate expired class certificates “within a reasonable time”?

2. Is Charterers’ obligation in Clause 9 A “to keep the Vessel with unexpired classification of the class…and with other required certificates in force at all time” a condition of the contract or an innominate term?

Question 1
At the hearing of the appeal, Charterers conceded that, contrary to the finding of the Tribunal, the classification obligation was an absolute one to keep the Vessel with unexpired classification and with other required certificates in force at the time.

However, Charterers described that their breach of that obligation was “technical” only and argued that the third sentence of Clause 9 A should be read as to attach to (and qualify) the classification obligation in the same way as it attaches to the maintenance obligations.  The Judge disagreed.

Mrs Justice Carr held that that approach “did not withstand scrutiny” and would have involved writing into the Charterparty substantive wording in the third sentence of Clause 9 A to include a specific reference to the reinstatement of expired class certificates.  The obligation to take immediate steps to have repairs done could not be equated to a classification breach which might be wholly unrelated to the need to carry out repairs.  Accordingly, the Judge held that the classification obligation was an absolute one.

Question 2
The Court held that the obligation was a condition of the Charterparty.  Starting with the default position that in mercantile contracts, time is of the essence, the Court also had regard to the fact that the obligation to keep certificates valid is an integral feature of a bareboat charter.  Not only does loss of class have potentially immediate and irreversible effects for the parties themselves, but also adversely affects third parties in relation to insurance, ship mortgages and flag.  The consequences of breach of the obligation were therefore significant and was likely to always be so.

A further indication of the obligation being a condition, was the clarity and absolute nature of the language used, (i.e. the obligation to keep the Vessel with unexpired Class “at all times”).

Based on this analysis, Mrs Justice Carr was satisfied that treating the obligation as a condition would not run the risk of allowing “trivial breaches to have disproportionate consequences” and would have the advantage of providing certainty.

Comment
Notwithstanding the serious consequences which a loss of class can lead to, on the Tribunal approach, an owner faced with such a serious breach may have found itself unable to get its (potentially uninsured) vessel back through an early termination of the Charterparty.  The Court’s decision will thus provide comfort to an owner who will be able to take back possession of their vessel if charterers fail to maintain class.