|[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]|
England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Silverburn Shipping(IoM) Ltd v Ark Shipping Company LLC (M/V "ARCTIC")  EWHC 376 (Comm) (22 February 2019)
Cite as:  1 Lloyd's Rep 554,  EWHC 376 (Comm),  2 All ER (Comm) 914
[New search] [Context] [View without highlighting] [Printable PDF version] [Help]
BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
COMMERCIAL COURT (QBD)
In the matter of the Arbitration Act 1996
In the matter of an arbitration claim
Strand, London, WC2A 2LL
B e f o r e :
| SILVERBURN SHIPPING (IoM) LTD
||Claimant / Appellant
|- and -
|ARK SHIPPING COMPANY LLC
||Defendant / Respondent
|In the matter of an arbitration: M/V "ARCTIC"
Mr Nicholas Craig (instructed by Stephenson Harwood LLP) for the Defendant
Hearing date: 7th February 2019
Crown Copyright ©
Mrs Justice Carr :
i) Is Charterers' obligation in Clause 9A) "to keep the Vessel with unexpired classification of the class indicated in Box 10 and with other required certificates in force at all times" ("the classification obligation") an absolute obligation, or merely an obligation to reinstate expired class certificates "within a reasonable time"? ("Question 1")
ii) Is the classification obligation a condition of the contract or an innominate term? ("Question 2")
The relevant facts
"Without prejudice to the previous termination of the charter on 15 March 2017 it has recently come to our attention that the vessel is currently in a very poor condition and, of very serious concern that the vessel's class certificates have expired. It is your position that the charter between us continues (despite the fact that until 6 December 2017 no hire at all has been paid hire continues to be outstanding) and if that position is correct (which we do not accept) then it is your responsibility to strictly comply with your obligations under the bareboat charter. Clause 9 of Part II of the above charter expressly states that as Charterers you must maintain the Vessel in a good state of repair, in an efficient operating condition and in accordance with good commercial maintenance practice. Further, you have an express obligation to keep the vessel with unexpired classification certificates in force. You are also required to take immediate steps to have any necessary repairs done to the vessel within a reasonable period of time which you have clearly failed to do.
Given your continuing failure to pay hire in full for the vessel, your serious failure to maintain the vessel in class and in a good state of repair and in particular your failure to take immediate steps to repair the vessel as required by Clause 9 of the bareboat charter, and further without prejudice to our position that this Charter has already been terminated on 15 March 2017, we notify you that we are today immediately withdrawing the vessel from your service under Clause 9 of the charter. This termination is effective immediately and we require you forthwith to place the Vessel at our disposal at the port of Astrakhan. Further and in the alternative your conduct in relation to performance of this charter has evidenced a complete disregard by you to comply with your obligations which conduct we consider to be repudiatory and which we accept as terminating the charter with immediate effect…"
The terms of the Charterparty
i) Box 8: When/Where built
ii) Box 10: Class (Cl. 9)
Veritas Bureau, perpetual;
iii) Box 11: Date of last special survey by the Vessel's classification society
iv) Box 14: Time for delivery (Cl. 3)
v) Box 16: Port or Place of redeliver (Cl. 14)
vi) Box 18: Frequency of dry-docking if other than stated in Cl. 9f)
In accordance with the classification documents;
vii) Box 20: Charter period
viii) Box 30: Latent defects (only to be filled in if period other than stated in Cl. 2)
"2. Delivery (not applicable to newbuilding vessels)
The Vessel shall be delivered and taken over by the Charterers at the port or place indicated in Box 13, in such ready berth as the Charterers may direct. The Owners shall before and at the time of delivery exercise due diligence to make the Vessel seaworthy and in every respect ready in hull, machinery and equipment for service under this Charter. The Vessel shall be properly documented at time of delivery. The delivery to the Charterers of the Vessel and the taking over of the Vessel by the Charterers shall constitute a full performance by the Owners of all the Owners' obligations under Clause 2, and thereafter the Charterers shall not be entitled to make or assert any claim against the Owners on account of any conditions, representations or warranties expressed or implied with respect to the Vessel but the Owners shall be responsible for repairs or renewals occasioned by latent defects in the Vessel, her machinery or appurtenances, existing at the time of delivery under the Charter, provided such defects have manifested themselves within 18 months after delivery unless otherwise provided in Box 30.
The Owners shall have the right at any time to inspect or survey the Vessel or instruct a duly authorized surveyor to carry out such survey on their behalf to ascertain the condition of the Vessel and satisfy themselves that the Vessel is being properly repaired and maintained. Inspection or survey in dry-dock shall be made only when the Vessel shall be in dry-dock for the Charterers' purpose. However, the Owners shall have the right to require the Vessel to be dry-docked for inspection if the Charterers are not docking her at normal classification intervals. The fees for such inspection or survey shall in the event of the Vessel being found to be in the condition provided in Clause 9 of this Charter be payable by the Owners and shall be paid by the Charterers only in the event of the Vessel being found to require repairs or maintenance in order to achieve the condition so provided. All time taken in respect of inspection, survey or repairs shall count as time on hire and shall form part of the Charter period. The Charterers shall also permit the Owners to inspect the Vessel's log books whenever requested and shall whenever required by the Owners furnish them with full information regarding any casualties or other accidents or damage to the Vessel. For the purpose of this Clause, the Charterers shall keep the Owners advised of the intended employment of the Vessel.
9. Maintenance and Operation
A. The Vessel shall during the charter period be in the full possession and at the absolute disposal for all purposes of the Charterers and under their complete control in every respect. 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 (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 the Owners shall have the right of withdrawing the Vessel from service of the Charterers without noting any protest and without prejudice to any claim the Owners may otherwise have against the Charterers under the Charter.
B. The Charterers shall at their own expense and by their own procurement man, victual, navigate, operate, supply, fuel and repair the vessel whenever required during the Charter period and they shall pay all charges and expenses of every kind and nature whatsoever incidental to their use and operation of the vessel under this Charter, including any foreign general municipality and/or state taxes. The Master, officers and crew of the Vessel shall be the servants of the Charterers for all purposes whatsoever, even if for any reason appointed by the Owners. Charterers shall comply with the regulations regarding officers and crew in force in the country of the Vessel's flag or any other applicable law.
C. During the currency of this Charter, the Vessel shall retain her present name as indicated in Box 5
and shall remain under and fly the flag as indicated in Box 5. Provided, however, that the Charterers shall have the liberty to paint the Vessel in their own colors, install and display their funnel insignia and fly their own house flag. Painting and re-painting, installment and re-installment to be for the Charterers' account and time used thereby to count as time on hire.
E. The Charterers shall have the use of all outfit, equipment, and appliances on board the Vessel at the time of delivery, provided the same or their substantial equivalent shall be returned to the Owners on redelivery in the same good order and condition as when received, ordinary wear and tear excepted. The Charterers shall from time to time during the Charter period replace such items of equipment as shall be so damaged or worn as to be unfit for use.
F. The Charterers shall dry-dock the Vessel and clean and paint her underwater parts whenever the same may be necessary, but not less than once in every eighteen calendar months after delivery unless otherwise agreed in Box 18.
E. Time shall be of the essence in relation to payment of Hire hereunder. In default of payment beyond a period of seven running days, the Owners shall have the right to withdraw the Vessel from the service of the Charterers without noting any protest and without interference by any court or any other formality whatsoever, and shall, without prejudice to any other claim the Owners may otherwise have against the Charterers under the Charter, be entitled to damages in respect of all costs and losses incurred as a result of the Charterers' default and the ensuing withdrawal of the Vessel.
13. Insurance, Repairs and Classification
B. During the Charter period the Vessel shall be kept insured by the Charterers at their expense against Protection and Indemnity risks in such form as the Owners shall in writing approve which approval shall not be unreasonably withheld. If the Charterers fail to arrange and keep any of the insurances provided for under the provisions of sub-clause (b) in the manner described therein, the Owners shall notify the Charterers whereupon the Charterers shall rectify the position within seven running days, failing which the Owners shall have the right to withdraw the Vessel from the service of the Charterers without prejudice to any claim the Owners may otherwise have against the Charterers."
"86. In support of their submission that the Charterers' obligation to maintain the Vessel's class is an absolute obligation and a condition of the Charterparty, the Owners relied, inter alia, on the decision in the "Seaflower". We do not think that this assisted them as we think that that case can be distinguished on the facts.
87. The Owners also submitted that their position was consistent with the rule in time charters that a vessel must have her relevant certificates in place as a condition precedent to delivery. Again, we do not think that this submission assisted their case.
88. Although we agree that there is limited authority in a bareboat chartering context, as concerns time charters, the NYPE Form requires Owners to "maintain her class and keep the vessel in a thoroughly efficient state in hull, machinery and equipment for and during the service". Our understanding is that this wording does not impose an absolute obligation but merely an obligation to exercise reasonable diligence. Furthermore, we understand that this is an intermediate obligation (and not a condition of the charter) which would allow termination of the charter only if any breach was serious enough to deprive the party of the substantial benefit of the charter. Whilst this is our understanding of the position under time charters, we do not see why there should be much difference as concerns the contractual obligations set out in Clause 9 of the Charterparty.
89. As regards the Owners' submission that Clause 9(a) permitted latitude in the case of general repairs but no such latitude for expiration of the Vessels' classification certificates which suggested that none was intended; we were not persuaded that this was a material consideration. To the contrary, if no such latitude was intended, it would have been an easy task for the draftsman to make clear that the obligation to maintain the Vessel's class was absolute and a condition of the contract and/or that, if class expired, the Owners were entitled to immediately withdraw the Vessel from service.
90. Accordingly, we do not consider that the Charterers' obligation to maintain the Vessel's class is separate from their obligation to maintain and repair the Vessel in the manner as submitted by the Owners. We think that the Charterers' obligation to maintain and repair the Vessel goes hand in hand with and is part and parcel of their obligation to maintain class. We consider that this is the correct and natural reading of Clause 9. Accordingly, we do not accept the Owners' submission that the Charterers' obligation to maintain class is an absolute obligation and condition of the Charterparty which, if breached, would allow the Owners to immediately terminate the Charterparty for breach of condition and/or repudiatory breach by the Charterers.
91. We consider that the preferable and correct construction of Clause 9 is that, if the Charterers are in breach of their obligations to maintain/repair the Vessel and to maintain her class, they must immediately take steps to carry out the necessary repairs and reinstate the class certificates etc. within a reasonable time, failing which the Owners would have the contractual right to withdraw the vessel from service pursuant to the provisions of Clause 9(a) of the Charterparty.
92. The Owners rely on their December Notice, submitting that this was valid to terminate the Charterparty. Insofar as the Charterers' obligation was to take the required steps to have the repairs/maintenance and reinstatement of class carried out within a reasonable time (as is our view), we consider that the burden of proof is on the Owners to establish that the Charterers were in breach of their obligations as of 7 December 2017.
100. No evidence was put forward by the Owners concerning this question. They simply sought to rely on their surveyor's report of 24 December 2017 as evidencing that the Charterers were in breach of their obligations to maintain/repair which allowed them to terminate the Charterparty on 7 December 2017. We do not think that this is sufficient to discharge the burden of proof on the Owners. The Owners did not submit or provide any evidence that the necessary maintenance/repairs required the Vessel to be immediately dry-docked or indeed at any time before she actually was dry-docked. In this connection the frequency of dry-docking was agreed in the Charterparty to be in accordance with the classification documents and no evidence was put before us to suggest that BV required any earlier dry-docking of the Vessel.
101. We do not consider that the evidence put before us by the Owners discharges the burden of proof upon them to establish that the Charterers were in breach of their obligations under the Charterparty as of 7 December 2017 which was the date upon which the Owners served their notice terminating the Charterparty."
Principles to be applied on appeal
"…even if I had been in any doubt on this aspect, and finding no error of law nor indication of any misdirection in the arbitrators' reasoning…, I should have accepted their conclusion on this issues, because I regard it as one of commercial judgment."
He went on to emphasise the importance to be attached to the views of trade tribunals on questions which do not involve pure points of legal construction.
The approach to construction
An overview of the parties' respective cases
Owners' position in summary
i) Stipulations as to the time for performance (other than for payment) are of the essence in mercantile contracts. The temporal boundaries of the classification are drawn in absolute, binary terms unlike the remedial maintenance obligation. That distinction supports the proposition that the classification obligation is in the nature of a condition. The use of the word "unexpired" is a strong indicator that the obligation is to ensure that certificates do not expire, failing which Owners have the right immediately to terminate;
ii) There is only one type of breach possible and one sufficiently fundamental to undermine the whole contract. The obligation to keep the vessel in class is an integral feature of a bareboat charterparty. Loss of class is likely to have potentially immediate and irreversible consequences for owners. It may prevent owners from complying with their own obligations under the charterparty because of interface between classification and insurance, ship mortgages and flag;
iii) There is no resulting undue hardship on charterers. It is readily ascertainable when a vessel's class certification is due to expire. Conversely, if the classification obligation is innominate, owners (and their financiers) are at very considerable risk. There is considerable uncertainty for owners who would be required to second-guess the termination of a (potentially long term) charter. Certainty is highly important in commercial transactions such as this;
iv) The result contended for is consistent with the general rule in time charters that a vessel must have the relevant certificates in place as a condition precedent to delivery (see Time Charters 7th ed. 2014 at paragraphs 8.3 and 8.12). Again in the time charter context, owners' undertaking as to class is said to be a condition (see The Seaflower (No 2)  1 Lloyd's Rep 341 ("The Seaflower") at  and Time Charters (supra) at paragraphs 3.25 and 3.46). The Tribunal did not articulate any good grounds for distinction between the general principles identified in The Seaflower and the instant situation. The justification for the categorisation as a condition is that matters of class are matters affecting status and not seaworthiness;
v) The result reached by the Tribunal fails to recognise the good commercial sense in distinguishing between an obligation to repair and an essentially documentary obligation to maintain class. There can be no room for debate on class and so no resulting harshness in immediate enforcement of a right to terminate.
Charterers' position in summary
i) Clause 9A) breaks down into three separate sentences. The second sentence is concerned with maintenance. The third sentence addresses the position when repairs are necessary. In other words it addresses circumstances which include where the Vessel is not kept in class. It relates to the whole of the second sentence and not just to the maintenance and repair obligations;
ii) The Tribunal's construction is supported by a number of other clauses in the Charterparty:
a) Those where an express right of withdrawal was identified (Clauses 9A), 10E) and 13B));
b) Clause 7 where the right of Owners to require the Vessel to dry-dock only arises where Charterers fail to dry-dock in accordance with her normal classification intervals. In other words, the remedy for a failure to maintain class is not a right of withdrawal but a right to require the Vessel to be dry-docked;
c) The remainder of Clause 9A) (deleted in the Charterparty) provides that in the event of new class requirements making necessary, for example, structural changes or expensive new equipment, the parties are, in the event of their not reaching agreement, to arbitrate over a rate of hire which reflects an appropriate and equitable share in the additional cost. The Vessel might become temporarily out of class during the period of negotiation/arbitration. Self-evidently this would not result in Owners having a right to withdraw the Vessel;
iii) The overall purpose of Clause 9A) was to put the Vessel at the absolute disposal for all purposes of the Charterers. The purpose of the Charterparty overall was not to keep the Vessel maintained but to give full possession to Charterers. Maintenance is simply ancillary to this;
iv) The Tribunal took into account the factual/commercial background under time charterparties;
v) From a commercial perspective, the construction contended for by Owners is in truth "nonsensical". Various illustrations of absurdity are suggested:
a) "[R]equired certificates" could cover many which are in real terms of no great significance and purely administrative, such as a garbage management plan;
b) On Owners' construction they could withdraw the Vessel by reason of some internal failing of BV (such as a surveyors' strike);
c) In the event of a collision involving the Vessel, including one where the fault was not that of the master/crew, class would be suspended. On Owners' case this would give them a fortuitous automatic right to terminate;
d) The consequences of a breach of the classification obligation could have trivial, minor or very grave consequences (see Spar Shipping (supra) at [52(ii)]);
e) A vessel could be delivered by Owners (under Clause 2) with certificates that would expire the day after delivery or with a latent defect. On Owners' construction, Owners could terminate immediately after delivery or where a latent defect was discovered after delivery which meant that the Vessel was no longer in class;
f) A change in class rules over the course of the Charterparty, for example under a new International Convention could require substantial structural or new safety changes. On Owners' construction a failure by Charterers to effect all changes required would entitle Owners immediately to withdraw;
g) On the facts of this case, the Vessel arrived at port for the purpose of carrying out maintenance and repairs before class expired where class did not require the Vessel to be dry-docked any earlier and the condition of the Vessel was not such as to require maintenance or repairs to be carried out any earlier. The Vessel was not at risk in any way.
What did the Tribunal decide?
"1. The questions of law were identified by the Tribunal in paragraphs 47 and 48 of the Partial Award. It is apparent from paragraphs 90, 91 and 101 that they decided both of those questions against the claimant.
2. It is serious arguable that a) the obligation of a charterer under clause 9(a) of the BARECON 89 form is to maintain the vessel's class and not merely to take steps to reinstate an expired certificate within a reasonable time and b) that the obligation is a condition of the contract. The Tribunal's decision to the contrary is at least open to serious doubt…."
Question 1: Is Charterers' obligation in Clause 9A) "to keep the Vessel with unexpired classification of the class … and with other required certificates in force at all times" an absolute obligation, or merely an obligation to reinstate expired class certificates "within a reasonable time"?
Question 2: Is Charterers' obligation in clause 9A) "to keep the Vessel with unexpired classification of the class … and with other required certificates in force at all times" a condition of the contract or an innominate term?
"Among the points which have weighed with me are the following: (1) There are enormous practical advantages in certainty, not least in string contracts where today's buyer may be tomorrow's seller. (2) Most members of the string will have many ongoing contracts simultaneously and they must be able to do business with confidence in the legal results of their actions. (3) Decisions would be too difficult if the term were innominate, litigation would be rife and years might elapse before the results were known. (4) The difficulty of assessing damages is in indication in favour of condition…. (6) To make "total loss" the only test of a condition is contrary to authority and experience…"
"[p]arties to commercial transactions should be entitled to know their rights at once and should not, when possible, be required to wait upon events before those rights can be determined."
"(i) First, the question was one of ascertaining the intentions of the parties and thus of the true construction of the contract….it follows that where on a true construction of the contract a term was to be classified as a condition, then it was unnecessary and inappropriate to explore the gravity of the breach….
(ii) Secondly…if, on the true construction of the contract, the parties have not made a particular term a condition and if the breach of that term may result in trivial, minor or very grave consequences, then the term is innominate.
(iii) Thirdly…unless the contract made it clear that a particular stipulation was a condition or only a warranty, it was to be treated as an innominate term; the courts should not be too ready to interpret contractual clauses as conditions."
"In my view, a Court should not be overready, unless required by statute or authority so to do, to construe a term in a contract as a "condition" any breach of which gives rise to a right to reject rather than as a term any breach of which sounds in damages….In principle, contracts are made to be performed and not to be avoided according to the whims of market fluctuation and where there is a free choice between two possible constructions I think the Court should tend to prefer that construction which will ensure performance and not encourage avoidance of contractual obligations."
"58. Certainty is plainly a consideration of major importance when construing commercial contracts such as the charterparties here. That it should be so is both a matter of legal principle and commercial common sense – having regard to the importance of the framework provided by commercial law for commercial decision-taking……
59. The key question, however, is striking the right balance. Classifying a contractual provision as a condition has advantages in terms of certainty…Where, however, 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…
62. To my mind, the real question lies not between certainty and no certainty but as to the degree of certainty best likely to achieve the right balance of which I have already made mention…"
"(viii) Whilst certainty is an important consideration in the construction of commercial contracts, I consider that undue weight should not be given to it in evaluating whether a term is a condition or an innominate term. That is because the operation of a condition is always more certain than that of an innominate term and so over-reliance on certainty would lead to a presumption that terms are conditions. There is no such presumption. On the contrary the modern approach is that a term is innominate unless a contrary intention is made clear."
The authorities applied
i) Charterers suggest that Owners' remedy for a failure to maintain class is not a right of withdrawal, but rather a right to require the Vessel to be dry-docked under Clause 7 of the Charterparty. Whilst Clause 7 does provide Owners with a right of inspection, that it is all that it does. It is difficult to see how a bare right of inspection was intended by the parties to be the (and an effective) remedy for breach of the classification obligation;
ii) Charterers point to the remainder of Clause 9A) (deleted in this Charterparty). The suggestion is that the Vessel goes out of class during the course of negotiations or arbitration over the sharing of any additional costs arising out of new class requirements. This cannot have been intended to give Owners the right to withdraw the Vessel. But this ignores the reality that new class requirements involving significant changes will be trailed well (ie months and years) in advance;
iii) Charterers point to the additional words in the classification obligation relating to "other required certificates in force at all times". The parties cannot have intended that a failure to maintain, for example, a garbage management plan or a ratings certificate, could entitle Owners to withdraw a vessel. Owners make the simple point that a plan is not a "certificate"; in any event, the reference to "required" in context must be a reference to what is required for class purposes;
iv) Charterers suggest that performance of the classification obligation is dependent on a third party, namely the classification society, BV, over which Charterers have no control. They point to the possibility of a surveyors' strike meaning that no surveyors were available at the required time. This is not a reasonable or commercial construction of the risk that Charterers agreed to bear. Ignoring whether or not this is a remotely realistic scenario, there is nothing unusual about parties agreeing to allocate risk involving third parties in this way (as was the case in The Seaflower). Charterers accepted an absolute obligation to maintain class;
v) Charterers suggest that a collision involving the Vessel (including one where the fault was not that of the master/crew) would result in automatic suspension of class. The parties could not have intended this to lead to an automatic right to terminate the Charterparty. Owners disputed this: it would be most unlikely for class to be removed completely in the event of such a collision. No reference to this argument was made by the Tribunal, nor is there any evidence before me properly to resolve it. In the circumstances, it cannot advance matters materially for present purposes;
vi) Charterers submitted that Clause 2 of the Charterparty did not apply in this case because the Vessel was a newbuild. However, as a matter of principle Charterers refer to Clause 2 of the Charterparty in two particular respects:
- Owners' obligation extends only to delivery of the Vessel in class at the time of delivery. If class expired the day after delivery, on Owners' construction, Owners would be entitled immediately to terminate. Again, this hypothetical scenario lacks total realism. Part I of the Charterparty reveals full details of the Vessel's class and date of last special survey;
- Owners' obligation is to exercise due diligence to make the Vessel seaworthy and ready for service under the Charterparty. On Owners' construction they would be entitled to terminate the Charterparty where a latent defect was discovered after delivery meaning that the Vessel was no longer in class. What if Owners were to breach their latent defect obligation, putting the Vessel out of class and then using the opportunity to terminate? Again, it is difficult to see how a situation could arise whereby Owners could properly rely on a loss of class as a basis for termination if that loss arose out of their own breach of obligation;
vii) Charterers referred again to the possibility of a change in class rules over the course of the Charterparty requiring substantial structural changes or new expensive safety equipment. On Owners' construction a failure to effect all necessary modifications without for example any recompense in hire would constitute a breach entitling them immediately to withdraw the Vessel. This has already been addressed, at least in part, in sub-paragraph ii) immediately above. Beyond that, the full version of Clause 9A) provides the answer. The fact that the parties chose here to proceed on an abridged version of Clause 9A) was a matter of commercial judgment for them;
viii) Finally, Charterers suggest that on the facts here the Vessel was not at risk in any way. This is no answer to the principled approach to construction identified above.