Performance Guarantees, Vessel Arrests, And Implied Terms

• Published date: 01 April 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Transport, Corporate and Company Law, Contracts and Commercial Law, Marine/ Shipping, Arbitration & Dispute Resolution
• Law Firm: Reed Smith (Worldwide)
• Author: Nick Austin and Vassilis Mavrakis

In CVLC Three Carrier Corp and Anor v Arab Maritime Petroleum Transport Company ([2021] 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.

Brief facts

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:

1. 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
2. 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.

The judgment

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:

1. The term implied by the Arbitrator...