Contract Interpretation – Conditions vs Innominate Terms

The recent case of Ark Shipping Co LLC v Silverburn Shipping (IoM) Ltd (M/V 'ARCTIC') [2019] EWCA Civ 1161 caused the court to consider when a contractual term is a condition and when it is an innominate term, that is, neither a condition nor a warranty. The principles covered in the judgment will be relevant to all those involved in the drafting and interpretation of contracts.

The dispute centred on the interpretation of a particular term in a bareboat charterparty (lease) of a vessel (M/V 'ARCTIC') on a standard form of contract by Ark Shipping Company LLC, and whether the vessel's owner, Silverburn Shipping (IOM) Ltd, was able to terminate immediately and seek damages as a result of an alleged breach of that particular clause. If the clause was a condition then as the innocent party Silverburn would be able to terminate the contract immediately for breach and seek damages, regardless of the consequences of that breach.

The charterparty provided that Ark:

'shall maintain [the Arctic] [...] in a good state of repair, [...] in accordance with good commercial maintenance practice and [...] with unexpired classification of the class indicated [..] and with other required certificates in force at all times.'

However, Ark allowed the vessel's classification to lapse before she entered dry dock for repairs and maintenance and Silverburn sent notice to Ark purporting to terminate the charterparty and demanding delivery up of the vessel. This was resisted by Ark who argued that the charterparty continued in force.

Questions around the classification of a contract term were ones of contract construction and the Court of Appeal reiterated that its task was to ascertain the objective meaning of the language used by the parties.

The case endorsed the considerations in Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2016]1, highlighting that the court's approach should be that a term is innominate unless it is clear that it is intended to be a condition or a warranty.

Per Spar, in making its decision the court will consider:

whether it was the intention of the parties that the term in question should be a condition; where the parties have not made the term a condition, the term will be innominate if a breach might result in 'trivial, minor or very grave consequences'; unless it is clear in the contract that a term is intended to be a condition or a warranty, it will be treated as an innominate term. The court also took into account...