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Expiry of class certificate under BARECON 89 did not automatically entitle owners to withdraw vessel

18.07.2019 Maritime

Michael Volikas

Michael Volikas Joint Managing Partner

Joe Crompton

Joe Crompton Associate

Ark Shipping Company LLC v. Silverburn Shipping (IOM) Ltd (M/V Arctic) [2019] EWCA Civ 1161

The Court of Appeal has overturned a recent Commercial Court decision in relation to the consequences of a vessel falling out of class during the currency of a bareboat charter under the BARECON 89 form.

The background facts 

The Owners bareboat chartered the vessel to the Charterers for a period of 15 years, commencing from delivery on or about 18 October 2012, on amended BARECON 89 terms. 

A series of disputes arose over the payment of hire and the general state of the vessel’s repair. On 31 October 2017, the vessel entered dry dock for repairs. On 6 November 2017, her classification certificate expired. On 7 December 2017, the Owners purported to terminate the charterparty for breach of Clause 9A of the charter, which 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, 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 (I), 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 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. 

The Charterers denied that there was any breach and declined to return the vessel, maintaining that the charterparty remained alive. In arbitration, the Owners sought, among other things, an order for delivery up of the vessel. 

The Tribunal dismissed the Owners’ application and disagreed with the Owners that the Charterers’ obligation to maintain the vessel in class was both absolute and a condition of the charterparty. Rather, if the Charterers were in breach of their Clause 9A obligations, they had to immediately take steps to carry out the necessary repairs and reinstate the class certificates within a reasonable time, failing which the Owners would be contractually entitled to withdraw the vessel. On the evidence, the Tribunal found that the Owners had not established that the Charterers should have dry-docked the vessel and completed the necessary repairs and reinstatement of class before 7 December 2017. 

The Commercial Court decision 

On appeal, the Court reversed the Tribunal’s findings. In the Court’s view, the contention that the obligation to maintain the vessel’s class was only one of due diligence could not be supported by a natural reading of Clause 9A, which explicitly required the Charterers to effect repairs within a reasonable time, but contained no such explicit wording in respect of reinstating lapsed class certificates. The Court, therefore, concluded that the obligation was absolute. 

The Court further considered that the obligation to maintain class status had an “obvious temporal element”, leading to the conclusion that it was a condition. Among other things, the Court emphasised the possibly serious consequences for the Owners if the vessel was to fall out of class, including potential loss of insurance cover. 

The Court of Appeal decision 

The appeal was only on the issue of whether the obligation to maintain class was a condition. The Court of Appeal reversed the Commercial Court decision on the point.

The Court of Appeal thought that, given the BARECON 89 was an industry standard form and the clauses had been carefully drafted by BIMCO, had the intention been that the term should be a condition, this would have been stated expressly. Furthermore, although the judge had found that the clause had a “temporal element” it was not a “time clause”, i.e. a clause specifying that a thing had to be done by a certain time. In addition, although consequences could flow from a breach of the term, there was no “inter-dependence”: performance of the term was not required in order to trigger other obligations required for the “performance” of the contract. 

The Court of Appeal acknowledged that the vessel was either in class or she was not. There was, therefore, only one type of breach. While this factor pointed in the Owners’ favour, it was outweighed by the other factors. Specifically, the wording of Clause 9A as a whole did not suggest that the class obligation was a condition. Clause 9A mainly dealt with maintenance obligations, which were not conditions, and it would be odd to include a condition among them. The Court added that the term did not just apply to the vessel’s class certificate, it applied to all “other required certificates”. As such, if the Owners were right in their interpretation of the term as a “condition”, then they would be entitled to terminate for the most trivial documentary breach. Where the consequences of the Charterers’ breach of the term could be trivial, minor, or indeed very grave, it was more likely that this was an innominate term (where the gravity and consequences of the breach determined whether termination was possible), rather than a condition (where the Owners could automatically terminate and claim damages, irrespective of the consequences of the breach). 

Furthermore, while Clauses 12 and 13B of the BARECON form required the Charterers to insure the vessel against P&I and war risks, this obligation was not a condition. As such, it would be strange if the Owners were entitled to terminate the charterparty if the vessel fell out of class because of the risk that this would leave the vessel uninsured, when they would not be able to automatically terminate if the Charterers actually failed to insure the vessel. 

Finally, the Court of Appeal commented that while a statement that a vessel is in class at the start of a charterparty is usually seen as being a condition, a continuing warranty that a vessel remains in class is not such a condition. The Court of Appeal added that, in its view, the law should not be developed in that direction. 

Comment 

Generally, the decision highlights the importance of drafting charterparty (and other contractual) clauses carefully to achieve the outcome intended. More specifically, the Court of Appeal’s judgment acknowledges that termination of a charterparty and withdrawal of a vessel is an extremely powerful weapon in the arsenal of an owner and a potentially disproportionate consequence of what might be a trivial breach of the charterparty.

Bareboat charters are often used in loan facilities and financing arrangements in which a bank or other lender will become the registered owner of a vessel, only to then lease it back to the shipping company via the bareboat charter. As such, the first instance decision had potentially far-reaching implications in that a shipping company could have faced action to deliver up a vessel to lenders for seemingly trivial documentary breaches.

Article authors:

Michael Volikas Joe Crompton