The Commercial Court has upheld an appeal on a point of law under section 69 of the Arbitration Act 1996, holding that it was not necessary to imply a term into an agreement between the parties in order to give it business efficacy: Pleon Ltd v Leonis Yachting Ltd (“The Maltese Falcon”) [2025] EWHC 3144 (Comm).
The judgment underlines the high threshold that must be met before the courts will imply a term into a commercial contract. Where the court concludes that a contractual term reflects the agreed allocation of risk between the parties, there will be no room for implying a term based on business efficacy.
The decision is also noteworthy because challenges under section 69 of the Arbitration Act are fairly unusual, and it is still more unusual for them to succeed. The arbitral tribunal hearing the underlying dispute was split on the issue, with one arbitrator giving a dissenting opinion. It is sometimes said that dissenting opinions in arbitration encourage losing parties to bring challenges in the court, on the basis that their position has been validated by the lack of unanimity. In this case, both the decision of the majority and the dissenting opinion were considered by the court, but ultimately the appeal was allowed for reasons that were identical with neither those of the majority nor the minority of the tribunal.
Background
The dispute arose from the sale of a yacht, The Maltese Falcon, by the claimant, Pleon, to the defendant, Leonis. Pursuant to an agreement for sale, it was agreed that Pleon would deliver the yacht to Leonis on 7 April 2022. The parties also entered into an access agreement whereby Leonis, having purchased the yacht and taken delivery of it, would then grant Pleon use of the yacht from 20 April to 20 June 2022. During the period of Pleon's access, the yacht suffered a serious breakdown and was immobilised.
Whereas the agreement for sale provided that the yacht should be delivered to Leonis in the same condition as it had been at the time of a sea trial and condition survey that formed part of the purchase process, clause 3.3 of the access agreement provided that Leonis would make the yacht available to Pleon in full working order and in a seaworthy condition.
There was therefore a mismatch between the condition required of the yacht at the point of its delivery to Leonis, and the condition required less than two weeks later when Leonis came to grant access to Pleon. The key issue was whether a term should be implied into clause 3.3 of the access agreement to the effect that Leonis's obligations were conditional on the yacht's hull and machinery on delivery under the agreement for sale having been properly maintained.
The arbitral tribunal found that the period between delivery of the yacht to Leonis and the commencement of Pleon's access period was too short to allow for any meaningful maintenance. It was therefore not possible for Leonis to deliver the yacht to Pleon in a materially different condition than it had been in when delivered to Leonis by Pleon. The tribunal concluded, by a majority, that a term was therefore to be implied into clause 3.3. of the access agreement to qualify Leonis's obligations. This was on the basis that the parties could not have intended Leonis to have to perform the access agreement to a higher standard than Pleon had to perform the agreement for sale, in circumstances where this was not within Leonis's control. Without such a term, said the majority, the contract would lack commercial and practical coherence.
A dissenting opinion was given by Sir Bernard Eder. He concluded that clause 3.3 of the access agreement was clear and unambiguous, imposing on Leonis an absolute obligation that the yacht be in full working order and seaworthy. Although this meant that there was a mismatch between Pleon's obligations under the agreement for sale and Leonis' obligations under the access agreement, the access agreement worked perfectly well without any implied term and nothing warranted introducing one. Indeed the proposed implied term contradicted the express term at clause 3.3.
Decision
The Commercial Court (Knowles J) allowed the appeal, holding that there was no need to imply a term to give business efficacy to the access agreement.
The court began by acknowledging the clarity of the express words in the access agreement as to the required condition of the yacht. The question was whether any qualification to this standard was required in order for the agreement to have business efficacy.
The courts had in some cases concluded that clear contractual words could be qualified as a matter of interpretation or through implication. A qualification was therefore possible in principle.
The key issue in this case was which party bore the risk of unseaworthiness. If the yacht was unseaworthy at the time of the sea trial and condition survey, and the parties still proceeded to delivery, under the sale agreement this risk passed to Leonis as buyer. When access was given to Pleon, the risk remained with Leonis under clause 3.3 of the access agreement.
The contractual purpose of clause 3.3 was to allocate risk. Once it was understood in this way, there was no lack of business efficacy, and no room for the implied term proposed. The parties had expressly dealt with the risk of unseaworthiness in their contractual arrangements, such that the risk was with Leonis if the yacht was unseaworthy when purchased and remained unseaworthy when access was provided to Pleon.
Leonis sought to argue that the tribunal was entitled to find that the access agreement lacked business efficacy in circumstances where Leonis had undertaken responsibility for something which as a practical matter was entirely under Pleon's control, and no error of law had been committed by the tribunal in arriving at that conclusion. Although the court accepted that a factual assessment was involved (and the tribunal's assessment in this regard deserved weight), the conclusion that a term was or was not to be implied remained one of law. Similarly, a finding that a term was sufficiently obvious to justify its implication was also part of the question of law, rather than a finding of fact.
Leonis also argued that it could not be right that, where the breakdown of the yacht had been caused by Pleon's negligence (in respect of which Leonis was prevented from suing by reason of exclusions contained in the agreement for sale), Pleon was able to sue Leonis for damages under the terms of the access agreement. The court noted that Pleon had not agreed to be responsible to Leonis in relation to maintenance. Negligence was therefore beside the point. Leonis, on the other hand, had promised Pleon the use of a seaworthy yacht and failed to honour that promise.
In the circumstances, there was no absence of business efficacy where the parties had agreed in the access agreement that Leonis, not Pleon, should bear the consequences of the yacht being unseaworthy. This was the case even if the reason for that unseaworthiness was because the machinery had not been properly maintained by Pleon before it sold and delivered the yacht to Leonis.
