In what situations can you terminate for breach of contract?

The Court of Appeal’s judgement in Ark Shipping Company LLC and Silverburn Shipping (IOM) Ltd (The “Arctic”) [2019] sets out clearly the factors that the English courts will take into account in ascertaining whether a term is a condition or an innominate term in a contract. Depending on the classification of the term, varying rights are afforded to the innocent party on breach of contract.

BACKGROUND

Under English law, a term in a contract can be classified in one of the following three ways:

1. warranty– usually a statement or assurance about factual matters. Breach of a warranty allows the innocent party to claim damages but not usually to terminate the contract;
2. condition– a term essential to the performance of the contract and goes to the heart of the contract. Breach of a condition allows an innocent party to claim damages as above as well as the right to terminate/repudiate the contract; and
3. innominate term– a term that is neither a condition nor a warranty. It is classified as such if the remedy for its breach depends on the nature and effect of the breach at the time it happens. The test that is frequently applied is whether the non-defaulting party is deprived of “substantially the whole benefit which was the intention of the parties as expressed in the contract that it should obtain”. Therefore, the remedies for breach of an innominate term can either be those for a breach of warranty or for a breach of condition (and in either event, damages will be available).

FACTS OF THE CASE

ARK Shipping Company LLC (the “Charterers”) entered into a charterparty contract with Silverburn Shipping (IoM) Ltd (the “Owners”) to charter a vessel owned by the Owners (the “Vessel”) in 2012 for a period of 15 years. A ‘charterparty’ contract is a maritime contract by which the owner of a ship hires out its ship to a ‘charterer’, typically for use in transporting cargo. The Vessel arrived at the Caspian port of Astrakhan for repairs and maintenance on 31 October 2017. The Vessel’s class certificate was due to expire on 6 November 2017 however, the Charterers allowed the Vessels classification to lapse before the Vessel entered dry dock for repairs.

On the 7 December 2017, the Owners served a notice on the Charterers to terminate the charterparty contract and to demand redelivery of the Vessel, claiming breach of contract as the Charterers had allowed the Vessel’s class certificate to expire. The Owners argued that the Charterers were in breach of a term within Clause 9A of the charterparty contract which required that the Charterers “keep the Vessel with unexpired classification of the class indicated in Box 10 and with other required certificates in force at all times”.

The Charters denied any breach and resisted the demands for redelivery of the Vessel.

CASE COURT OF APPEAL DECISION 

The question put before the Court of Appeal was whether the term under Clause 9A to maintain the Vessel in class was classified as a condition or as an innominate term.

The Owners’ main argument was that the obligation under Clause 9A to keep the Vessel with an unexpired certificate was a condition of the contract and entitled them to lawfully terminate the charterparty and re-possess the Vessel for their own benefit. Whereas the Charterers argued that categorising the term as a condition was not commercial as the obligation to maintain the class certificate formed part of their obligations to keep up with the general maintenance of the Vessel, which was clearly not a condition of the contract and as such meant the Owners where not entitled to terminate the charterparty.

The Court emphasised that the classification of a term within a contract was one of construction, citing key authorities on the classification of terms, and reiterating the general guidance summarised in Bunge and Tradax [1981] and Spar Shipping and Grand China Logistics [2016] amongst other cases. The Court ultimately held that the term was not a condition as it related to just the Vessel’s classification status, and although this status was important, maintaining the class certificate was not essential to the performance of the contract and as such was classified as an innominate term. The Owners were therefore not entitled to terminate the contract.

In arriving at its decision, the Court provided helpful guidance on the questions to consider when determining if a contractual term is a condition or an innominate term based on a number of factors summarised as follows:

1. wording. Although not decisive, as the term was not expressed as a condition, it was not considered as such. If the parties had wished for the term to be considered as a condition, the Court commented that the parties were free to have amended the charterparty as such and expressly have labelled the term as a condition in the contract;
2. not a time clause.Time was not of the essence of performance of the term;
3. no inter-dependence.As no interdependence of obligations existed, as the obligation to keep the Vessel with an unexpired class certification under Clause 9A was not a condition precedent for the Owners to perform any of their obligations under the charterparty, meant the term was not essential to the performance of the contract. In Bunge and Tradax, a term was considered as a condition, as a breach of the term had a knock on effect on the other party’s ability to perform its obligations under the contract;
4. type of breach.Although there is only one clear breach of the term (that the Vessel would not have a valid class certificate) that supported the position that the term should be classified as a condition, the general importance of which the Court did not seek to minimise, the Court ultimately considered that this point was outweighed by other factors;
5. construction of clause 9A as a whole. As the term was in the middle of clause 9A, a clause headed “Maintenance and Operation” that dealt with the Charterers’ general maintenance obligations, it was held that if the term was intended to be a condition, this was a surprising place to find it as the importance attached to maintaining the class certificate was lost.  The classification and maintenance obligations are closely connected and Charterers’ obligation as to the physical maintenance of the vessel was plainly not a condition;
6. insurance. One of the Owner’s main arguments that the term should be classified as a condition was that a breach of the term put the Vessel’s insurance arrangements at risk.  However, the Charterers’ obligation to insure the Vessel against professional and insurance risks was not classified as a condition under the charterparty. Therefore, as the Owners were not entitled to terminate the charterparty should the Charters leave the Vessel uninsured, it could not then be accepted that putting the Vessel at risk of not being insured by the class certification lapsing was a condition;
7. consequences of breach.As set out above, an innominate term is classified as such if the consequences of breach of the term may equally result in minor or severe consequences. An unexpired class certificate could have resulted in severe consequences to the Owner however, on the facts of this case, the breach of the term resulted in no adverse consequences which suggested that the term should be classified as innominate rather than a condition when assessed on the seriousness of a consequences of a breach; and
8. a continuing obligation. The Court distinguished between an obligation to conclude that a statement as to the Vessel’s class at the commencement of the charterparty is a condition or condition precedent verse requiring the Charterer to maintain the Vessel’s classification at all times throughout the life of a contact. If the parties had wished for the condition to be continuous and for the full duration of a contact, this should have been made explicitly so.

CONCLUSION 

The judgement affirms the Court’s reluctance to classify contractual terms as conditions outside of the commercial language of the contract. The principles summarised above are relevant to all those involved in the drafting and interpretation of contracts and highlights the importance of clear drafting. When drafting contracts, it is important that both parties are commercially on the same page as to what exactly is expected in terms of performance of obligations and the specific consequences for a breach of an obligation. If parties wish for a term to be classified as a condition (with subsequent termination rights on a breach), the language in the contract must clearly reflect this.

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