In Pan Ocean Co Ltd v Daelim Corporation[1], the Commercial Court upheld the implication of a term requiring the inspection of a vessel’s holds without delay into a charterparty (a contract for the hire of a ship). The Court decided that although the arbitral award suggested that it was reasonable to imply the term, which is not a sufficient basis to do so, the award was valid if read in a reasonable and commercial manner.
Background
In 2017, Pan Ocean Co Ltd and Daelim Corporation, the owners of the vessel DL LILAC, entered into a charterparty which provided for arbitration in London.
On 13 February 2017, DL LILAC arrived at the loading port. Three days later, the cargo holds failed an inspection. On 19 February 2017, the master of the vessel notified Pan Ocean that the holds had been cleaned and requested a reinspection. However, a surveyor only reinspected the holds 12 days later, when the holds passed.
Daelim brought an arbitration against Pan Ocean claiming for loss of hire and the cost of bunkers (fuel for the vessel) because of the delay in the reinspection of the cargo holds.
Daelim contended that it was an implied term that Pan Ocean would carry out a reinspection with reasonable diligence and without any undue delay. It argued that Pan Ocean was in breach of that implied term because the reinspection took so long to arrange. In its award of 27 January 2022, an Arbitral Tribunal consisting of three London Maritime Association arbitrators agreed, concluding that it was reasonable for Pan Ocean to be under an implied obligation to have the vessel reinspected without delay.
Pan Ocean appealed under section 69 of the Arbitration Act 1996, which permits an appeal on a question of law if the parties agree or if the Court gives permission (unless, in both cases, the arbitration agreement excludes this right).
The Commercial Court decision
Pan Ocean argued that the Tribunal had not applied the correct legal test, as it had concluded that it was “reasonable” for Pan Ocean to be under an implied obligation[2]. Reasonableness by itself, Pan Ocean submitted, was not sufficient for the implication of a term.
Test for the implication of a term
The Court reiterated the five requirements for the implication of a term into an agreement[3]:
(1) it must be reasonable and equitable;
(2) it must be necessary to give business efficacy to the contract;
(3) it must be so obvious that it goes without saying;
(4) it must be capable of clear expression; and
(5) it must not contradict any express term of the contract.
Interpreting arbitration awards
It is a key principle that, if possible, courts should construe an arbitral award in such a way as to make it valid. Here, the Judge decided that the Tribunal had applied the correct legal test despite merely referring to “reasonableness” instead of the full criteria.
The Judge noted that the Tribunal had adopted Daelim’s arguments, which accepted that there must be a “need” for an implied term and asserted that any other interpretation of the contract was not commercially sensible. The Judge concluded that this was a “reference to the necessity and obviousness benchmarks in Lord Neuberger’s judgment in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 742.” Daelim had also referred to another arbitration where, in analogous circumstances, the arbitrators had implied a term on the grounds of necessity and obviousness. The judge therefore decided that on a fair reading of the award the Tribunal had applied the correct test.
Content of the implied term
Pan Ocean further argued that the content of the term implied by the Tribunal was wrong in law, as it imposed a strict obligation on it alone, even though the appointment of an independent surveyor clearly required cooperation by both sides.
The judge agreed that any implied term had to oblige both parties to take reasonable steps to cooperate to organise a reinspection without undue delay. However, adopting a “fair and supportive reading of the award”, and considering the overall context, the judge decided that this was indeed the content of the term implied by the Tribunal (despite noting that the award was “certainly not ideal in its expression”, and that the arbitrators had expressed themselves in shorthand form).
When was the implied term breached?
However, the Judge held that the Tribunal was wrong in law to decide that the vessel was immediately available for hire once the master had notified Pan Ocean that the cargo holds were clean, with damages therefore running from that point. The Tribunal should instead have assessed when the reinspection should have taken place had Pan Ocean complied with the implied term, with damages running from the date until the reinspection was actually carried out. been complied with. Accordingly, the judge remitted the award back to the Tribunal to decide this question.
Takeaway
The case is an example of both the long tradition of English courts construing arbitration awards sympathetically, even on points of law, but also the willingness of the Court to intervene if there is a clear error.
[1] [2023] EWHC 391 (Comm)
[2] At paragraph 25 of the Award
[3] As established in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266.
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