Introduction

In the recent English case CVLC Three Carrier Corp and another v Arab Maritime Petroleum Transport Company [2021] EWHC 551 (Comm), the English High Court (Commercial Court) (the “Court”) emphasized that a term can only be implied into a contract if it is of commercial necessity.    

Background

On 15 March 2019 CVLC Three Carrier Corp (CVLC3) and CVLC Four Carrier Corp (CVLC4) (“Owners”) chartered their respective vessels to Al-Iraqia Shipping Services and Oil Trading (“Charterer”). Arab Maritime Petroleum Transport Company (“AMPTC”) guaranteed the punctual performance of the Charterer’s obligations. Two identical guarantees (“Guarantees”) were given as consideration by AMPTC to the Owners for entering into the respective charterparties with the Charterer (“Charterparties”). The Guarantees were not drafted in standard forms, but their terms were such as would be familiar to anyone with a working knowledge of guarantees and their drafting was largely composed of “boilerplate” text. The terms of Guarantees include, among other things, the following:

“In the event that [Charterer] default in their hire payment obligations in respect of hire which is from time to time due and payable to [Owners] by reference to the respective charterparty terms and conditions and provided [Charterer]’s default in such payment obligations continues for a period of no less than 30 calendar days, [Owners] has the right to call upon this guarantee by notifying [AMPTC] of [Charterer]’s default and request payment of outstanding hire which has accrued and is due and payable to [Owners], payment of such hire to be made immediately by [AMPTC] to the bank account stipulated in Box 26 of the foregoing charterparty. …

[AMPTC] also irrevocably, absolutely, and unconditionally guarantee, as primary obligor and not merely as surety, the due and punctual performance of any and all other obligations of the bareboat charterer under the said charterparty. …”

On 24 December 2019 the Owners served notice on the Charterer terminating the Charterparties due to alleged breaches of Charterparties by the Charterer. Subsequently, the Owners served notices of arbitration on AMPTC, alleging that they had suffered loss and damage because of the Charterer’s breaches of the Charterparties, and that AMPTC was liable under the associated Guarantees. A sole arbitrator (“Arbitrator”) was appointed for the Owners’ claims.

On 31 July 2020 the Owners filed an application in the Provincial Court of Luanda, Angola, seeking the arrest of AMPTC’s vessel as security for their claims under the Guarantees. The Angolan court then issued an interim order for the detention of the vessel, and handed down a judgment ordering the arrest of the vessel.

In the meantime, AMPTC applied to the Arbitrator for a declaration that “It is an implied term of the [Guarantees] dated 15 March 2019 between AMPTC and the [Owners] that the Owners would not seek additional security in respect of the matters covered by the [Guarantees]”. The Arbitrator then issued an award making a declaration in the terms sought by AMPTC and awarding interest and costs in favour of AMPTC. Subsequently, the Arbitrator issued a second award declaring that the Owners had acted in breach of the implied terms and that their liability to AMPTC for damages to be further assessed (“Awards”).

Pursuant to s. 69 of the Arbitration Act 1996, the Owners appealed against the Awards to the Court.

Decision

In allowing the appeal, the Court stated that a high legal hurdle has to be met for a term to be implied and the correct test applicable is the test of necessity. A term will not be implied for the plain reason that it appears to be fair or because the parties would have agreed to such an implied term if it had been put forward to them. Rather, as in the cases of Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 742 and Ali v Petroleum Company of Trinidad and Tobago [2017] UK PC 2, a term can only be implied if, without the term, the contract would lack practical coherence and business efficacy.

On the application of the above test, the Court did not consider that the nature of the contract and the surrounding circumstances warranted a term, which limits the Owners’ right to seek additional security, to be implied into the Guarantees.  In view that the Guarantees were on “boilerplate” terms, the Arbitrator’s decision to impose an implied term into the Guarantees would suggest that the same term should also be implied into all other similarly worded guarantee agreements.

Further, the Court noted that in normal circumstances, a party to a contract is not restricted to obtaining security in the event of an arguable default. The implied term barring the additional security is thus akin to an exclusion clause in which it is well established that clear wording is generally required for courts to conclude that the parties had the intention for the contract to take away their common law rights or remedies. However, in this present case, such an intention was not observed in view of the wordings used in the Guarantees.

In relation to the Arbitrator’s view that adequate security has already been provided pursuant to the Guarantees since the parties would not have otherwise entered into the Charterparties, the Court held that the arrest of the AMPTC’s vessel would not amount to “double security” as the Guarantees create a separate contractual relationship between the Owners and AMPTC.  While the Owners may seek recourse against AMPTC pursuant to the Guarantees where there is an arguable breach of the Charterparties by the Charterer, such a situation does not call for a right for the Owners to seek security against AMPTC.  Such a right to seek security against AMPTC only arise when AMPTC acts in breach of its own obligation under the Guarantees and not when the Charterers acted in breach of the Charterparties. For this reason, whilst the Guarantees were sufficient security in respect of the Charterer’s obligations under the Charterparties, they do not provide adequate security in relation to the breaches committed by AMPTC under the Guarantees, as its obligation as the guarantor is independent and separate.

The Court also added that it would be against “commercial common sense” if the Owners would be able to seek security, e.g. by way of arrest of vessel, for the Charterers’ breach of its obligations under the Charterparties, but unable to seek similar security against AMPTC for its breach of its primary obligations under the Guarantees.

Takeaways

In view of CVLC Three Carrier Corp, a term will not be implied into a contract unless it is of commercial necessity. If parties wish to exclude certain rights in the contract (e.g. the right to seek additional security), it must be expressly stated in the contract in order to be enforceable.

The Court also underlined the independency of obligations imposed under the charterparties and guarantee agreements in which obligations of the primary obligor and the guarantor are completely separate. The provision of security in the event of a breach of a charterer’s obligation under the charterparty would not limit the owner’s right to seek security against the guarantor in relation to the guarantor’s breach of its obligation under the guarantee.   

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.