Contractual condition, warranty or an innominate term?
Ark Shipping v Silverburn (Court of Appeal) [2019]
The traditional classification of contractual provisions into ‘conditions’ and warranties’ is now of much less importance than it was historically. This case is an example of how the courts are reluctant to sanction termination and will use the tool of classifying a term as an innominate one as a means to reach that position. Innominate (or sometimes ‘intermediate’) terms are ones that are neither conditions or warranties but instead can be treated as either depending upon the consequences of a particular breach
Facts:
Contractual provisions have historically been categorised as either conditions (breach of which gives rise to a right to terminate as well as a claim in damages) or warranties (breach of which only gives rise to a claim in damages). However, that clear cut distinction is becoming of less relevance in modern commercial contracts as this case illustrates. The courts sometimes refer to provisions as ‘innominate’ or ‘intermediate’ where the remedies available will vary according to the nature and effect of the breach when it occurs.
Under a charterparty entered into in 2012 (‘the Charterparty’), Silverburn, the owners, chartered a tug to Ark for a period of 15 years. Clause 9A of the Charterparty read:
“The Charterers shall maintain the Vessel in efficient operating condition and in accordance with good commercial maintenance practice and they shall keep [all required certification] 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”.
The Vessel arrived in port for repairs and maintenance on the 31 October 2017. The Vessel's certificates expired on 6 November 2017, which was before she had entered dry dock for repair work and some 5 years since the last relevant survey was conducted.
The Owners served notice on the Charterers on 7 December 2017 referring to unpaid hire, the poor condition of the Vessel and to the Charterer’s breach of Clause 9A. In that notice the Owners sought to terminate the Charterparty and demanded the return of the Vessel. The Charterers resisted that demand, stating that the Vessel had arrived at dock before her certificates expired and they would shortly be renewed. They argued that the “reasonable time” which applied to repairs also applied to the renewal of certificates.
The matter was referred to arbitration and the tribunal awarded in favour of the Charterers.
The Owners appealed to the High Court. The High Court considered whether the Charterers’ obligation under Clause 9A was an absolute obligation, or merely an obligation to reinstate expired certificates "within a reasonable time" and whether the obligation [to maintain the Vessel’s certification] was a condition of the contract or an innominate term.
Decision:
The High Court held that the obligation to maintain certification was an absolute one. On the second point, the High Court held that the certification obligation should be construed as a condition of the Charterparty despite the fact that the parties had not expressly chosen to label it as such.
The Court of Appeal however came to the conclusion that the term was not a condition. The Court of Appeal's reasoning included the following:
Wording: the term was not expressed as a condition – although this was said not to be decisive. The term required the charterers to keep a number of different certificates in force at all times some of which were clearly more important than others.
Consequences of breach of the term: breach of the term may result in very trivial consequences or very grave consequences, thus suggesting that the term is innominate rather than a condition. The advantages of certainty to be achieved by the categorisation of the term as a condition were said by the court to be clearly outweighed by the risk of trivial breaches having disproportionate consequences.
Points to Note:
- What the case illustrates is that the courts are somewhat reluctant to classify terms as giving rise to a potential right to terminate in circumstances where termination would be disproportionate. The court said that “the term lacked the hallmarks of a condition and treating it as a condition would risk long-term contracts being prematurely terminated on the basis of trivial breaches”.
- This case is unusual in that the overwhelming majority of modern commercial contracts include express termination provisions which refer to unremedied ‘material breaches’ and arguably it is the question of whether a breach is sufficiently ‘material’ or ‘substantial’ which is key in most cases. This is a question of fact and degree – see the discussion in Mid Essex Hospital Services v Medirest [ May 2013] (Court of Appeal)
- Because of the risk that terminating prematurely constitutes a repudiatory breach entitling the originally ‘guilty’ party to itself terminate and claim damages, you need to be very careful to ensure that any breaches relied upon are sufficiently serious to justify termination whether under an express provision or at common law.