CVLC Three Carrier Corp v Arab Maritime Petroleum Transport Company
DMC/SandT/22/06
England
CVLC THREE CARRIER CORP & ANOR v. ARAB MARITIME PETROLEUM TRANSPORT COMPANY [2021] EWHC 551 (Comm)
English High Court: Commercial Court: Mrs Justice Cockerill DBE: 11 March 2021
Judgment available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2021/551.html
Simon Rainey QC and Mr. Gavin Geary, instructed by Reed Smith LLP, for the Claimants (“Owners”)
Steven Berry QC and Mr. David Walsh, instructed by Lax & Co LLP, for the Defendant (“AMPTC”)
CHALLENGE TO ARBITRATION AWARD FOR ERROR OF LAW UNDER S.69 ARBITRATION ACT 1996: WHETHER TRIBUNAL ERRED IN LAW IN IMPLYING A TERM PRECLUDING CREDITORS’ RIGHT TO SEEK ADDITIONAL SECURITY FOR ALLEGED BREACH BY PERFORMANCE GUARANTOR UNDER THE CONTRACT OF GUARANTEE
Summary
The High Court, in allowing the Owners’ appeal from two arbitral awards on a point of law, held that, in the case of a contract of guarantee and indemnity which (i) guarantees the performance of another contract and (ii) is expressly given in consideration of the beneficiary entering into that other contract, no term is to be implied to the effect that the creditors would not seek security over and above that provided by the contract of guarantee and indemnity where the guarantor is, or is alleged to be, in breach of the contract of guarantee and indemnity.
Case note contributed by Julia Zizhen Zhu, Solicitor of England & Wales, Solicitor of Hong Kong, International Contributor to DMC’s Case Notes
Background
On 15 March 2019, the Owners, by way of two bareboat charterparties, let their two vessels to the same Charterer, Al-Iraqia Shipping Services and Oil Trading (“Charterparties”). The Defendant, Arab Maritime Petroleum Transport Company (“AMPTC”), guaranteed the punctual performance of the Charterer’s obligations under the Charterparties (“Guarantees”). AMPTC stood as the primary obligator under the Guarantees, not surety for the Charterer. The Guarantees provided, inter alia, as follows: -
“We 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 terminated the Charterparties alleging breach by the Charterer, and subsequently called on the Guarantees issued by AMPTC. On 25 June 2020, the Owners commenced arbitration against AMPTC. On 11 August 2020, the Owners procured from the Provincial Court of Luanda, Angola, a judgment ordering the arrest of a vessel of AMPTC.
On 13 August 2020, AMPTC successfully obtained an award under the English arbitral reference, declaring that there was an implied term of the Guarantees issued by AMPTC that the Owners would not seek additional security in respect of the matters covered by these Guarantees. A supplementary award was made, which determined that the Owners were in breach of the implied terms and liable to AMPTC in damages.
On 8 September 2020, the Owners sought to appeal the two awards pursuant to section 69 (Appeal on point of law) of the Arbitration Act 1996.
Judgment
AMPTC objected that the question of law on appeal was not exactly the one which the tribunal had been asked to determine. The Court held that the question on appeal had to be one arising out of the awards and which the tribunal had been asked to determine, but it did not have to be asked in exactly the form in which it was posed to the Court. What was necessary was that the question of law was inherent in the issues for decision by the tribunal. Questions as to the proper construction of a contract (or the existence of contractual obligation) could qualify as a “question of law” under section 69 Arbitration Act 1996.
The Court then reformulated the question of law on appeal, against generic – rather than specific - facts, as “is there to be implied into contracts of guarantee and indemnity which
(i) guarantee the performance of another contract and
(ii) are expressly given in consideration of the beneficiary entering into that other contract,
an implied term that the creditors would not seek security over and above that provided by the contracts of guarantee and indemnity where the guarantor is, or is alleged to be, in breach of the contracts of guarantee and indemnity?”
The correct test for implication of terms is the test of necessity. The Court elaborated the test by referring to 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, and quoted “a term is to be implied only if it is necessary to make the contract work and this it may be if
(i) it is so obvious that it goes without saying … and/or
(ii) it is necessary to give the contract business efficacy. The concept of necessity must not be watered down.”
The Guarantees in the context of this case created a separate contractual relationship from the Charterparties. The Guarantees might be called on according to their terms if there were an arguable breach by the Charterer. In the event that AMPTC did not respond under the Guarantees, the Owners had right to seek security against AMPTC for the breach of AMPTC’s obligation, not for breach by the Charterer.
The tribunal, if applying the correct test above, should have considered this question to the parties, or a person in their position: ”If before you entered into the contract you were asked: ‘Do you intend for Owner not to be able to get security for its claims if there were an arguable breach by AMPTC?’ would you have said ‘Of course there should be no security’?” But that was not the question the tribunal dealt with. The answer to that question appears self-evidently “no”.
Moreover, the term to be implied in this case was in the nature of an exclusion clause. It will generally require clear words in a contract to take away a party’s common law rights or remedies.
The Court also did not accept the “in consideration” wording in the Guarantees as capable of bearing the inference that the Guarantees must have been considered to be adequate security on their own, as otherwise the Charterparties would not have been agreed. The wording “in consideration” is commonly found in many contracts, hardly unique nor magic.
In light of the above, the Court reached the view that there was no implication of a term barring the Owners from seeking additional security by arresting AMPTC’s vessel. Therefore, the Court concluded that the Tribunal was wrong in its approach to the issue and wrong to conclude that the term contended for fell to be implied. The appeal was allowed.
Comment
1. This case is a good example of applying the legal test for the implication of a term into a contract. The judgment reinstates the test of necessity and confirms that the legal hurdle for implication of a term is a high one. When it comes to excluding a party’s rights and remedies, the Court will require express and clear words to have such an effect.
2. The wording of the Guarantees in dispute is commonly seen and familiar to anyone with a working knowledge of guarantees, in particular the words “In consideration of you entering into the charterparty described in”. Such words on their own do not make “entry of contract” a condition to anything. It is no more than a description of an item of fact.
3. Last but not least, the case suggested the question of law on appeal pursuant to section 69 may be phrased in a way to “strip away the accretions of case specific drafting to arrive at the real issue of law”. It is a helpful reference in formulating a question of law on appeal.