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27 February 2019
The recent High Court decision in Silverburn Shipping (IoM) Ltd v Ark Shipping Company LLC will provide comfort for vessel owners and serve as a reminder to charterers of the importance of documentary obligations within a bareboat charter.(1)
In the decision on appeal under Section 69 of the Arbitration Act, Mrs Justice Carr held that in circumstances where a vessel is on bareboat charter, the obligation on charterers to keep the vessel with unexpired class certificates at all times is both an absolute obligation and a condition of the contract. Expiry of those certificates will result in the termination of the charter.
The owners had chartered a new-build anchor handling tug vessel, the Arctic, to charterers on a 15-year amended Barecon 89 standard form. Approximately five years into the charter, the vessel's special survey was due. As the charterers had failed to make adequate preparations in time, the class certificates expired. A dispute arose, whereby the owners sought to terminate the charterparty and the charterers resisted on the basis that the vessel was in dry dock and would soon to undergo repairs, following which the owners would be invited to survey the vessel. The matter was referred to arbitration.
The charterparty was on an amended standard Barecon 89 form. Clause 9A of the charterparty provided as follows:
9. Maintenance and Operation
A. The Vessel shall during the Charter period be in the full possession and at the absolute disposal for all purposes of the Charterers and under their complete control in every respect.
The Charterers shall maintain the Vessel, her machinery, boilers, her appurtenances and spare parts in a good state of repair, in efficient operating condition and in accordance with good commercial maintenance practice and,
except as provided for in Clause 13(l)
they shall keep the Vessel with unexpired classification of the class indicated in Box 10 and with other required certificates in force at all times.
The Charterers to take immediate steps to have the necessary repairs done within a reasonable time failing which the Owners shall have the right of withdrawing the Vessel from the service of the Charterers without noting any protest and without prejudice to any claim the Owners may otherwise have against the Charterers under the charter.(2)
The vessel's class certificates expired on 6 November 2017, before the vessel was dry-docked for repairs. A month later, although now in dry dock, the vessel remained out of class and the owners sought to terminate the charterparty for breach of Clause 9A (ie, failing to "keep the Vessel with unexpired classification of class"). The charterers resisted and maintained that the charter was still ongoing. Their position was that the fourth paragraph of Clause 9 applied equally to the second paragraph with regard to maintenance as to the third paragraph concerning class. On the charterers' case, there was to be a period of "reasonable time" during which class could be reinstated before any right to terminate would arise.
The dispute was referred to arbitration and the tribunal awarded in the charterers' favour. The tribunal saw no reason to differentiate the obligations as to class from those for general repairs and maintenance. It concluded that Clause 9A, insofar as it related to keeping the vessel in class, did not impose an 'absolute' obligation but only a qualified obligation of reasonable diligence (ie, the obligation was to reinstate the vessel's class within a reasonable time, should it expire). This obligation was held to be an intermediate obligation rather than a condition of the charterparty.
The owners appealed to the High Court on the grounds that it was not only a point of general public importance, but also that the tribunal had fundamentally erred in law when deciding the point. The owners sought to rely on Seaflower,(3) in which Lord Justice Rix stated that a vessel's class was distinct from its physical condition and the maintenance of class and maintenance of condition were two distinct obligations. The tribunal had been taken to the Seaflower, but ruled that it was "distinguishable on the facts"; however, it declined to elaborate what those facts were.
The owners were granted permission to appeal on the grounds that it was a point of general public importance. The Barecon form is an industry-wide standard; it is the most commonly used form of bareboat charterparty in use worldwide. In addition, as the issue had not previously come before the courts, there was benefit in providing certainty in this regard.
The owners' argument on appeal was that a bareboat charter was fundamentally different to a time charter in that the owners' asset was entirely at the disposal of the charterers; the owners had:
Conceivably, this could have grave consequences not only for the owners and their asset, but also third parties such as insurers, mortgage providers and flag state authorities which may require that the vessel be kept in class. In such circumstances, the owners could be without cover but also without remedy.
The owners' appeal was brought on two questions of law:
The tribunal held that the obligation as to class was akin to the maintenance obligation in the immediately preceding paragraph (ie, that repairs could be undertaken within a reasonable time). The owners contended that the obligation was unambiguous; to "keep" the vessel with "unexpired" class certificates "at all times". There was no ambiguity in the language and the obligation was binary, in that the vessel was either in class or not. Maintenance on the other hand, was a more qualified obligation open to interpretation and evidential subjectivity. The owners contended that the drafting was deliberately clear; the temporal boundaries of the classification obligations were drawn in absolute, binary terms unlike the remedial maintenance obligation. The use of the word 'unexpired' was a strong indicator that the obligation was to ensure that certificates did not expire, failing which the owners had the right immediately to terminate ".
On the other hand, the charterers' argument required significant wording to be written into the final paragraph of the clause (eg, the following words in bold would need to have been inserted but were not: "Charterers to take immediate steps to have the necessary [repairs and reinstatement of class certificates] done within a reasonable time". In the present case, the parties had made wide and extensive amendments to the printed form which further emphasised that, had the parties intended the charterers to have a reasonable time to reinstate class, they would have included this intention in the charterparty. Conversely, the owners' case did not require such additional wording; the language of the clause was clear: class certificates were to remain unexpired at all times and the charterers had reasonable time in which to affect any necessary maintenance repairs. The principles of contractual interpretation simply did not allow for the addition rewrite for which the charterers contended. The two obligations were necessarily distinct and could not be conflated.
Justice Carr found in the owners' favour, finding that "there is a natural and ready distinction to be drawn between a Vessel's physical condition/maintenance status and its classification status " and that the charterers' "approach does not withstand scrutiny. It involves writing into the Charterparty substantive wording in the third sentence of Clause 9A) that is conspicuously (and to be presumed deliberately) absent ". She held that the obligation on the charterers to keep the vessel with unexpired classification certificates was an absolute obligation.
As to whether the obligation was a condition which, if breached, was capable of terminating the charter, Justice Carr began with the default position in mercantile contracts that time is of the essence. She then went on to consider a long line of well-established authorities which demand that certainty be a tenet of contractual interpretation. However, Justice Carr also reasoned that the court should not overplay this importance and it should not be used as a "trump card".
In her conclusion on the facts, Justice Carr went on to consider that breach of the classification obligation was one which was "immediately, readily and objectively ascertainable", the language of the obligation itself ("unexpired certificates" and "at all times") was "clear and absolute with a fixed time limit, redolent of a condition ". Justice Carr found that in the event of a breach of the obligation to keep the vessel in class, "the obvious intention of the parties would be that… Owners would have the right of termination ".
It was also considered that the absence of the remedy (termination) from the written clause did not preclude the obligation from being a condition; quite the opposite, because only if the term were not a condition would such language be necessary to provide the remedy: "Such a provision would be otiose if the right existed without more at common law for breach of a condition ".
Clause 9 is materially the same in all iterations of the Barecon form (ie, 1989, 2001 and 2017). This decision will provide comfort for vessel owners that they will have a decisive right in remedy in the event that a charterer:
Owners will be able to terminate the charter immediately and repossess their vessel. The Barecon is an important form industry wide and quite often forms the basis of sale and leaseback transaction or bareboat with option to purchase. As loss of class inevitably leads to loss of insurance coverage, this decision is significant and will provide comfort to those vessel owners, whose role may be that of or more akin to a finance house, such that the asset they have out on bareboat charter can be readily repossessed in the in event that charterers fail to maintain class.
The judgment should also serve as a stark reminder to charterers and managers that although documentary obligations might seem trivial or arduous, they go to the root of contracts and can have potentially expensive consequences in damages if a vessel is withdrawn, not just in loss of profit, but potentially by damages sought by any sub-charterers or cargo interests further down the chain.
For further information on this topic please contact Chris Grieveson, Fiona Rafla or Alexandra Eriksen at Wikborg Rein by telephone (+44 20 7367 0300) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Wikborg Rein website can be accessed at www.wr.no.
(2) Under the Barecon form, this deletion makes clear that the obligation is on charterers to ensure a vessel's class certificates are kept unexpired and in full force at all times. Where this provision is not deleted, the obligation rests on owners.
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