- Compact Contract
Innominate or condition? Check the consequences or you'll wreck termination
19 July 2019
In Ark Shipping v Silverburn Shipping, the Court of Appeal had to deal with the law school classic: when is a term a condition, the breach of which entitles the innocent party to terminate, and when an innominate term, where the ability to terminate depends on the gravity of its breach? While the case was about an obligation on charterers to keep a vessel with unexpired class certificates at all times, the principles are relevant to any ambiguous term, the breach of which may have grave or trivial consequences.
Where a term's classification is unclear – as for any question of interpretation following Wood v Capita – the court will consider it "textually and contextually". If a term is not obviously a condition or warranty, it will be innominate. It will also be innominate if its breach might result in trivial, minor or very grave consequences.
Here the term was not expressed as a condition, even in an amended industry-standard contract. It was neither a time-clause nor a condition-precedent. Importantly, it was couched snugly between other closely connected obligations – none of which were conditions. An adjacent maintenance obligation specifically required steps to remedy within reasonable time. Moreover, it sat in the middle of a wider clause, which, if read as a condition, created obligations far too extensive to be commercially logical. This could not have been the parties' intention.
While the fact that consequences would not always be serious was not determinative, the court did consider knock-on consequences (on third parties), likely (not actual) consequences, as well as the obligation's raison d'être. Here, a breach could have been grave (loss of insurance) or trivial (no effect). Classification, then, was a balancing act. Classifying a provision as a condition brought certainty. However, this could not outweigh the risk of manufacturing disproportionate results by gifting an obligation (the breach of which may be trivial) the extensive rights of a condition.
The term was innominate and the owners were not therefore entitled to terminate for breach of the obligation.
This judgment is a reminder that if you want to terminate, and the provision on which you rely is not expressly a condition, you ought to consider whether it is an innominate term, and if so, whether the facts permit a lawful termination.