Jamila Khan Partner
Court declines to imply term on additional security into guarantees
CVLC Three Carrier Corp and another v. Arab Maritime Petroleum Transport Company  EWHC 551 (Comm)
The Guarantor in this case guaranteed the performance of the Charterer under two bareboat charters as primary obligor. The Owners terminated the charters, alleging breach and sought to claim against both the Charterer and the Guarantor in separate arbitrations. They also arrested the Guarantor’s vessel to secure their claims under the guarantees.
The Guarantor argued that it was an implied term of the guarantees that the Owners would not seek additional security. The arbitrator agreed with the Guarantor that the guarantees provided adequate security and that the Owners were precluded from seeking further security by way of an implied term. On appeal, the Court reversed this decision. While the guarantees might have provided adequate security for breach of the Charterer’s obligations under the charters, the arrest was intended to secure the entirely separate breach of the Guarantor’s obligations under the guarantees.
The background facts
CVLC Three Carrier Corp and CVLC Four Carrier Corp each entered into a bareboat charter as Owners with Al-Iraqiya Shipping Service and Oil Trading as Charterer. Arab Maritime Petroleum Transport Company (AMPTC”) entered into associated guarantees, guaranteeing the Charterer’s performance under the bareboat charters. While it was suggested that the Guarantor and the Charterer were associated companies, this did not need to be not conclusively determined for the purposes of this dispute.
The guarantees provided in essence that in consideration of the Owners entering into the charters with the Charterer, the Guarantor “irrevocably, absolutely and unconditionally” guaranteed due and punctual payment of hire, as well as the Charterer’s other obligations under the charters. Further, in the event that the Charterer defaulted on its hire obligations, the Owners could call upon the guarantees and demand immediate payment by the Guarantor of the outstanding hire. The guarantees described the Guarantor as “primary obligor”, meaning that its obligations under the guarantees were independent of, and not contingent on, the Charterer’s obligations under the underlying bareboat charters. This should be contrasted with the position of a surety, who has only a secondary obligation that enables him to rely on any defences available to the debtor (in this case the Charterer) pursuant to the underlying contract (here, the charters).
The Owners subsequently terminated the charters, alleging breach by the Charterer. They commenced separate arbitrations against the Charterer and the Guarantor. They then also arrested a vessel owned by the Guarantor as security for their guarantee claims.
In an expedited application to the sole arbitrator, the Guarantor sought a declaration that it was an implied term of the guarantees that the Owners would not seek additional security in respect of the matters covered by the guarantees. The application was made on a documents only basis and the arbitrator declined to make any findings of fact as these were contested. He noted that the guarantees did not expressly provide for additional security. However, he concluded that there was an implied term as proposed by the Guarantor and that the Owners were in breach of it and liable to the Guarantor for damages.
The arbitrator’s reasoning was that liability under the guarantees could only be triggered if it had been established that the Charterer had failed properly to perform the charters. Further, while the Guarantor was potentially liable as primary obligor and not only as a surety, the guarantees were given in consideration of the Owners entering into the charters. Therefore, it could be inferred that the guarantees must have been considered adequate security at the time the charters were concluded, otherwise they would not have been concluded.
The Guarantor appealed.
The Commercial Court Decision
The Court allowed the appeal. In the Court’s view, the arbitrator had impermissibly sought to rewrite the parties’ contract for them. Furthermore, the legal hurdle for implication of a term was a high one. While most implied terms were dependent on the specific facts of the case, the guarantees here were predominantly on boilerplate terms. Implying the term proposed into these guarantees would, therefore, suggest that the term should be implied into other generically worded guarantees.
Furthermore, a party entering into a contract was not normally limited as to the steps it took to secure its claim in the event of a default. Therefore, the proposed implied term here was akin to an exclusion clause and very clear words would be needed to demonstrate that the parties had agreed to such a provision. In this case, there was no clear indication of such an intention in the wording of the guarantees.
The Court rejected the argument that not implying the term would result in the Owners being entitled to double security. It was important to distinguish between: (i) the Owners’ rights against the Charterer under the charters; and (ii) the independent contractual relationship created by the guarantees as between the Owners and the Guarantor.
The guarantees could be called on according to their terms where there was an arguable breach by the Charterer under the charters. However, there only became a right to seek security against the Guarantor if it did not respond under the guarantees. In that case, the Guarantor would arguably be in breach of its obligations under the guarantees and the security obtained would be security for that breach and not for the Charterer’s breach.
The Court added that it would make no sense for the Owners (absent the guarantee) to be able to seek security for the Charterer’s breach, for example by arresting their vessel, but not to be able to seek security for the Guarantor’s breach of its own primary obligations under the guarantees. Further, while the parties might arguably have considered the guarantees as adequate security, this would have been in relation to breach by the Charterer of the charters and not for breach by the Guarantor of its separate obligations under the guarantees.
The Court will not readily imply a term into the parties’ contract unless it is necessary to make the contract work. In this case, the guarantees worked perfectly well without the proposed implied term.
The decision also highlights the difference in the obligations imposed on a primary obligor, as opposed to a surety, under a guarantee. A guarantee given by a primary obligor is in the nature of an indemnity, as opposed to a true guarantee. Those providing such security should be clear as to the nature and extent of the obligations to which they are agreeing.
Finally, parties to performance guarantees similar to this who intend to exclude the right to seek additional security should expressly state this in the document.