In CVLC Three Carrier Corp and Anor v Arab Maritime Petroleum Transport Company ( EWHC 551 (Comm)), Reed Smith (Nick Austin, Charles Weller, Alfred Perkins, Vassilis Mavrakis) represented two shipowning companies in successfully overturning an arbitration award which held that there was an implied term in a performance guarantee that the beneficiary would not seek further security beyond that created by the guarantee itself, thus protecting the guarantor’s vessels from arrest.
The background was one regularly encountered in shipping: two shipowning companies (“Owners”) chartered out their vessels on bareboat terms (“Charterparties”). In consideration of their entering into the Charterparties, Owners asked for and obtained a performance guarantee from a third party (“Guarantor”) in respect of the charterers’ obligations under each Charterparty (“Guarantees”). The Guarantees were drafted in general, “boilerplate” terms. Owners terminated the Charterparties and commenced arbitration proceedings against the charterers (under the Charterparties) and the Guarantor (under the guarantees).
Owners arrested a vessel owned by the Guarantor (“Vessel”) as security for their claims under the Guarantees. The Guarantor successfully applied to the Arbitrator for declarations that:
- It was an implied term of the Guarantees that Owners would not seek additional security in respect of the matters covered by the Guarantees; and
- Owners were in breach of that implied term in taking steps to arrest and arresting the Vessel.
Owners appealed under s.69 Arbitration Act 1996 on grounds that the Arbitrator had made an error of law in reaching his decision.
Mrs Justice Cockerill DBE allowed Owners’ appeal and held that the Arbitrator’s decision was wrong in law.
The Judge first dismissed the Guarantor’s procedural argument that permission to appeal was wrongly granted. The Judge held that there would need to be highly unusual circumstances before the trial judge would second-guess the wisdom of the judge granting permission to appeal, even when (as, unusually, in this case) the same judge had considered the appeal at both the permission stage and the appeal hearing.
The Judge went on to review the merits of the appeal. She held that the legal hurdle for implying a term in English law is a high one and was not met in this case. The Court’s reasoning centred on the following points:
- The term implied by the Arbitrator deprived Owners of their common law remedies. Generally, clear words are required before a Court will conclude that this was the intention of the parties. No such words were to be found in the Guarantees.
- The Arbitrator did not seem to have considered the stringent legal requirements laid down by the authorities for implying a contractual term. This left room to question whether the Arbitrator had the correct test in his mind.
- The Arbitrator had found that the Guarantees themselves were adequate security. However this begged the question: security for what? The Judge held that:
a. The Guarantees acted as security for the obligations of the charterer under each of the Charterparties, not those of the Guarantor under the Guarantees.
b. The Guarantees constituted a separate and distinct contractual relationship.
c. In English law, a cause of action against a guarantor under a “see to it” guarantee (which is the usual form of guarantee securing performance under a charterparty) arises as soon as the debtor is in default. It is at that point of alleged breach by the debtor that the beneficiary may call on the guarantee and, if the guarantor does not respond, seek security against the guarantor for the breach by the guarantor of the terms of the guarantee themselves.
- The permission stage of an arbitration appeal is intended to be a qualifying hurdle which is not revisited at the appeal hearing in the absence of highly unusual circumstances.
- Although each case will turn on the specific wording, absent clear words in a performance guarantee, the beneficiary can seek security by arresting the guarantor’s assets in the normal way.
- English law imposes a strict test for the implication of terms into a contract. Arbitrators may expect scrutiny from the Court when asked to consider whether a term falls to be implied into a contract.