CVLC Three Carrier Corp & Anor v Arab Maritime Petroleum Transport Company

A term will be implied into a commercial guarantee only where necessary to make the contract work, or so obvious that it goes without saying. Fairness, commercial preference, or the fact that the guarantee was adequate security for the principal debtor’s obligations is insufficient. Boilerplate wording stating that a guarantee is given in consideration of the underlying contract does not, without more, exclude the beneficiary’s ordinary remedies against a guarantor in arguable breach. An arguable breach may trigger a demand and applications for security before breach is finally established, subject to the guarantee’s terms.

The claimants, owners of two vessels, had entered into bareboat charterparties with a charterer. The defendant guaranteed the charterer’s obligations as primary obligor. After terminating the charterparties, the owners commenced arbitration and arrested a vessel belonging to the defendant as security. The arbitrator declared that the guarantees contained an implied term preventing the owners from obtaining additional security and awarded damages for breach of that term.

The owners appealed under section 69 of the Arbitration Act 1996. The central issue was whether such a term was to be implied where the guarantees were given in consideration of the underlying charterparties and the guarantor was, or was alleged to be, in breach.

Appeal allowed. The court answered the reformulated question in the negative, substituted that conclusion for the arbitrator’s conclusion, and declined to remit the matter.

1. Under section 69 of the Arbitration Act 1996, the question must arise out of the award and must be one which the arbitrator was asked to determine. It need not be framed in exactly the same words. It is sufficient that the question is inherent in the issues before the tribunal, and it may be a mixed question of law and fact. A permission-stage decision is ordinarily a qualifying hurdle which is not revisited at the substantive hearing, save in highly unusual circumstances. The approach in Agile Holdings v Essar (The Maria) [2018] EWHC 1055 (Comm) was correct.
2. The test for implying a term is one of necessity. A term may be implied where it is so obvious that it goes without saying or where it is necessary to give the contract business efficacy. Necessity is not absolute necessity, but the concept must not be watered down. Fairness or an improvement to the contract is insufficient. The relevant inquiry may be expressed in terms of commercial or practical coherence, as explained in 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] UKPC 2.
3. The guarantees created separate contractual relationships from the charterparties and made the defendant a primary obligor. Security for the charterer’s breach was distinct from security for the defendant’s own breach of its guarantee. The proposed term would curtail ordinary common-law rights and remedies, so clear contractual words would generally be required. The wording that the guarantees were given in consideration of entering into the charterparties was boilerplate and conveyed nothing relevant to the implication exercise. It did not establish that the owners had agreed to forego security against the defendant.
4. The arbitrator wrongly treated liability under the guarantees as depending on an established breach and approached the implication exercise as though no breach were to be assumed. Subject to the terms of the particular guarantee, the creditor’s cause of action against a guarantor arises on the debtor’s default: Moschi v Lep [1973] AC 331, at 348. An arguable breach was sufficient to trigger a demand and to support procedural steps such as arbitration, a freezing order, or arrest for security. The analysis therefore did not justify an implied term barring additional security.
5. Although remission is the default position under section 69(7) of the Arbitration Act 1996, it was inappropriate here. The court had effectively re-determined the question, the arbitrator was functus in relation to the referred questions, and reopening an expedited reference merely because fuller evidence might have produced another answer would undermine the separateness and finality of arbitration.

The court indicated that the defendant would likely be ordered to pay the owners’ costs, although costs had not been argued.

The owners appealed the First Award and Supplementary Award under section 69 of the Arbitration Act 1996. Permission to appeal was granted by the High Court on 24 November 2020 after reformulation of the question of law. The High Court allowed the appeal, substituted its conclusion, and ordered that the matter not be remitted.