We previously reported a High Court decision on the M/V Arctic in which it was decided that demise charterers’ obligation under Clause 9(a) of an amended BARECON 89 Form to keep the vessel in class during the period of charter was a condition of the contract. That decision was seen as being very onerous on the demise charterer because a problem with class would potentially deprive them of the ship if owners decided to terminate the charter. The High Court case was an appeal from a decision made by LMAA arbitrators in which they came to the view that the obligation to keep the vessel in class was not a condition but an innominate term such that any breach would give rise only to a claim for damages (if any). You can read our article on the High Court judgment here.
We are pleased to report that the High Court’s decision in the M/V Arctic has now been overturned by the Court of Appeal (1). They unanimously concluded that the LMAA arbitrators were correct and the term was in fact not a condition but an innominate term. The judgment is interesting to those who need reminding of the law on conditions, warranties and innominate terms. Factors influencing the Court of Appeal in this case were that the obligation was not expressed to be a condition in the BARECON 89 Form which is an industry standard form. It was suggested that had the intention been that this was to be a condition then this would have been made plain. The wording of Clause 9 (a) also required demise charterers to keep ‘other required certificates in force at all times’ which, if a condition, would expose the demise charterers to very serious consequences on a trivial breach. The Court was anxious to avoid a move in law towards a long term continuing warranty becoming a condition of the contract.
As an innominate term, an obligation can be a condition or a warranty depending on the effect of the breach. If a breach deprives the owners of substantially the whole benefit of the contract, it would potentially be classed as a condition. If not, it would be a warranty. In this case the failure to keep the vessel in class did not deprive the owners of the whole benefit of the contract and as such there was no right to terminate.
Regardless of the above, we still recommend that owners keep a close eye on their demise charterers’ compliance with class and other requirements given that a breach of such terms can adversely impact on the owners’ obligations under any financing documents. It may still be possible to argue that a breach is sufficiently serious as to deprive the owner of the benefit of the charter, for example where a financing bank declares an event of default and requires prepayment of a loan.