Briefing

Commercial implications of contractual interpretations: realities of misallocating risk

Case snapshot

The recent case of Pleon Limited v Leonis Yachting Limited [2025] EWHC 3144 (Comm),¹ concerning the sale and purchase of The Maltese Falcon (the Yacht) is a stark reminder of the consequences of failing to allocate risk under expressly agreed terms. It highlights the practical implications such terms can have on a party’s ability to fulfil their obligations and demonstrates the courts’ reluctance to remedy an unfavourable bargain struck between the parties.

Background

The Yacht was sold by Pleon Limited (the Seller) to Leonis Yachting Limited (the Buyer) pursuant to a Memorandum of Agreement dated 18 February 2022, concluded on an amended Mediterranean Yacht Brokers Association (MYBA) form with various addenda (the MOA). Ancillary to the MOA, the parties agreed that the Seller would have the use and access to the Yacht following delivery under the MOA for a period of 61 days, from 20 April 2022 until 20 June 2022, pursuant to a separate access agreement (the Access Agreement). However, the Seller’s use of the Yacht was cut short on 9 May 2022 when the Yacht suffered a starboard generator breakdown.

Under clause 21 of the MOA, the Seller was to deliver the Yacht to the Buyer, “safely afloat… in the same condition (fair wear and tear excepted) and outfitted as at the time of the Sea Trial, if any, and the Condition Survey“, whereas under clause 3.3 of the Access Agreement, the Yacht was to be delivered to the Seller, “in full working order and the Yacht shall be seaworthy…”.

There was therefore a materially higher risk allocated to the Buyer from the time the Seller delivered the Yacht under the MOA on 7 April 2022 until the time the Yacht was to be delivered by the Buyer under the Access Agreement on 20 April 2022. The key issue between the parties was whether a term should be implied into clause 3.3 of the Access Agreement that the Buyer’s obligations to provide access and use of the Yacht were conditional on the Yacht’s hull and machinery having been properly maintained by the Seller at the time of delivery under the MOA (the Implied Term).

The tribunal

The majority of the arbitral tribunal found that the period between delivery under the MOA and delivery under the Access Agreement was too short for the Buyer, “to effect any transformative maintenance“. It was therefore practically impossible for the Buyer to deliver the Yacht to the Seller under the Access Agreement in a materially different condition from that in which it had been delivered to the Buyer under the MOA.

In view of this “practical impossibility” the majority of the arbitral tribunal held that such an Implied Term should be included in the Access Agreement, otherwise such a contract would lack “commercial or practical coherence.” The majority of the tribunal were satisfied that it could not have been the parties’ intention for the Buyer to be held to a higher standard of performance under the Access Agreement than the standard required of the Seller under the MOA.

However, Sir Bernerd Eder provided a dissenting opinion. He concluded that the Implied Term should not be included, as clause 3.3 of the Access Agreement was clear and unambiguous in imposing upon the Buyer an absolute obligation that the Yacht be in full working order and in a seaworthy condition when delivered to the Seller. Sir Bernerd was acutely aware of the “sharp mismatch” between the delivery obligations under each agreement, but concluded that the Access Agreement, “can and does work perfectly well without any implied term“.

Section 69 appeal to the Commercial Court

The Seller appealed the arbitral award under section 69 of the Arbitration Act 1996² (Point of Law) to the Commercial Court. The court allowed the appeal and held that there was no need to imply the Implied Term to give business efficacy to the Access Agreement.

The key issue throughout was to determine which party bore the risk of unseaworthiness. The court began by acknowledging the clarity of the express words in clause 3.3 of the Access Agreement for the condition of the Yacht, i.e., to be in full working order and in a seaworthy condition. From this basis, the court considered that the appeal concerned whether, “a qualification to the circumstances in which that standard would apply is “necessary”… for the agreement between the parties to have business efficacy“.

In contrast to the arbitral tribunal, the Commercial Court focused on the purpose of clause 3.3 of the Access Agreement and were satisfied that it was to allocate risk. As such, the court concluded that:

There was a contractual possibility under the MOA that the Yacht at the time of delivery could be seaworthy or unseaworthy, as evidenced by the Buyer’s option to conduct a sea trial, undertake a condition survey and inspect the Yachts’ documentation.
If the Yacht was unseaworthy at the time of the sea trial and the parties nonetheless proceeded to delivery under the MOA, the risk of the unseaworthiness then passed from the Seller to the Buyer.
When the Access Agreement was concluded between the Seller and the Buyer, the risk of unseaworthiness remained with the Buyer.

On this basis, the court was satisfied that there was no lack of business efficacy and that it was therefore unnecessary to include the Implied Term. The parties had dealt with the allocation of risk by express terms, and these terms left the risk of unseaworthiness plainly with the Buyer. In essence, the Buyer took the risk of making a promise to the Seller that it would enjoy a seaworthy Yacht under the Access Agreement and that promise was not honoured.

Comment

This decision is not only a rare instance in which the Commercial Court has allowed an appeal under section 69 of the Arbitration Act,³ but a stark reminder that the parties should carefully consider the express terms they agree to as part of their sale and purchase arrangements. As this decision illustrates, a failure to appreciate the practical operation of risk allocation clauses can expose a party to significant and potentially unintended contractual liabilities.

What is equally as clear is that the court will not readily imply a term into an agreement struck between parties if that agreement can function without that term, even in circumstances where it remains commercially unfair to one party. The decision in this case, and as referenced within the judgment, upholds the Supreme Court’s decision in Marks and Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd,⁴ reaffirming that that it is not enough to simply show that it would be reasonable or fair to imply a term; it must be an absolute necessity to give commercial or practical coherence to the contract.

This test under English law presents a high bar and broadly requires that in order for an arbitral tribunal or court to imply a term into a contract:

such term must give business efficacy to the contract;
it must be so obvious that its inclusion would go without saying;
its inclusion must be capable of clear expression; and
it must not contradict any express terms of the contract.

If prospective buyers and sellers intend to conclude bespoke arrangements in addition to their Memorandum of Agreement, care should be taken to ensure that terms remain back-to-back and any mismatch or inadvertent allocation of risk is avoided, since implied terms cannot be readily relied upon. Parties should also carefully consider whether bespoke terms allocating risk are practically and commercially achievable as part of their sale and purchase arrangements.

Footnotes