High Court provides further guidance on implied terms under English law
In the shipping and offshore industry, guarantees are frequently given as security to legally promise the performance of a separate or primary contract. For example, they are: given by parent companies in support of charterparties entered into by their subsidiaries; an essential documentary component of the shipbuilding process; and often a condition precedent to contracts awarded for the construction of large offshore energy projects.
The rationale for this arrangement is simple – if a party to a primary contract defaults on its obligations, the guarantee provides an additional and, in theory, less costly and complex avenue for recovering any amounts owed to a beneficiary.
However, as guarantees are themselves a form of security, do they also contain an implied term that security cannot be sought for breaches of their provisions? That question was recently answered by the High Court in an application under section 69 of the Arbitration Act 1996 (an appeal on a point of law).(1)
CVLC Three Carrier Crop and CVLC Four Carrier Corp (the owners) each chartered one of their vessels to Al-Iraqia Shipping Services and Oil Trading (the charterer) on materially identical bareboat charterparties. The performance of the charterer's obligations under these charterparties was guaranteed by the defendant, Arab Maritime Petroleum Transport Company (AMPTC), pursuant to two materially identical guarantees. These guarantees had been given as consideration by AMPTC to the owners for entering into the charterparties. While not written on standard forms, the guarantees were "largely composed of boilerplate text" which "would be familiar to anyone with a working knowledge of guarantees".
Approximately nine months after entering into the charterparties, the owners terminated them for alleged breaches by the charterer. The owners then served notices of arbitration on AMPTC contending that AMPTC was liable under the guarantees for the losses and damage caused by the charterer's breaches of the charterparties. To secure their claims against AMPTC, the owners proceeded to apply for an arrest of one of AMPTC's vessels in Angola. In the period between filing the arrest application and the Angolan court's judgment ordering the vessel's arrest, AMPTC applied to the sole arbitrator in London for a declaration that it was an implied term of the guarantees that the owners would not seek additional security for their claims under the charterparties. The application was made on a documents-only basis, so the arbitrator declined to make any findings of the facts (as these were contentious).
This declaration was given by the arbitrator who declared that the owners were in breach of that implied term and were therefore liable to AMPTC for damages. Such a finding, if upheld, would have far-reaching consequences both for security already provided and for future security that was being negotiated.
The owners subsequently appealed the tribunal's decision to the English High Court and the Court was asked whether there is an implied term in guarantees which:
- guarantee the performance of another contract; and
- are expressly given in consideration for entering into another contract, such that creditors would not seek security over and above that provided by a guarantee where the guarantor is, or is alleged to be, in breach of the guarantee.
The Court disagreed with the arbitrator and held that there was no implied term preventing the owners from securing their claim against AMPTC.
Mrs Justice Cockerell noted that "the legal hurdle for the implication of a term is a high one" and, as this guarantee was "couched in boilerplate terms", if such a term was to be implied, it would in effect mean that a term of this kind would be implied in most guarantees. The judge also commented that the proposed implied term was essentially an exclusion clause, and, therefore, clear wording would generally be required before the Court circumscribed or took away common law rights and remedies from the owners.
Having noted the above, Mrs Justice Cockerell took little time in rejecting AMPTC's arguments that a term preventing the owners from seeking further security needed to be implied for "business efficacy/necessity" and that it would make no sense for the owners to be entitled to two sets of security that would be activated if the charterer was in breach of its obligations. The judge noted that the guarantees created a separate contractual relationship to that between the owners and the charterers, and that a right to seek security against AMPTC would only arise if they did not respond under the guarantees. Further, the security sought by the owners was security for the breach of AMPTC's obligation under the guarantee and not for a breach of the charterers' obligations under the charterparties.
Accordingly, Mrs Justice Cockerell answered the question of law in the negative, overruling the arbitrator's conclusion with her own. Her ruling meant that the owners were entitled to seek additional security for breaches of the guarantees.
Along with Alpha Marine Corp v Minmetals Logistics Zhejiang Co Ltd [(MV Smart)  EWHC 1157 (Comm)], this case serves as another recent reminder that English law is reluctant to imply terms into commercial contracts unless such a term is so obvious that it goes without saying or it is necessary to give the contract business efficacy.