In the recent case of Silverburn Shipping (IoM) Ltd -v- Ark Shipping Company LLC  EWHC 376 (Comm), the High Court ruled that an obligation in a charterparty to keep a vessel in class is both an absolute obligation and a condition. Failure to comply with this obligation will entitle an owner to terminate the charterparty.
The form of contract being used was an amended version of the BIMCO Barecon ’89. This is one of the most widely used industry standard form contracts, making this an important decision for shipowners, charterers and funders.
Under a charterparty dated 17 October 2012 (the Charterparty), Silverburn Shipping (IoM) Ltd (the Owners) had chartered the anchor handling tug M/V ARCTIC (the Vessel) to Ark Shipping Company LLC (the Charterers) for a period of 15 years. Delivery took place on 18 October 2012.
Clause 9A of the Charterparty read:
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 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 Vessel arrived at the Caspian port of Astrakhan for repairs and maintenance on 31 October 2017. The Vessel's class certificates expired on 6 November 2017, which was before she had entered dry dock for repair work and some 5 years since the last special survey.
The Owners served notice on the Charterers on 7 December 2017 referring to unpaid hire, the poor condition of the Vessel and to the Charterer’s breach of Clause 9A. In that notice the Owners sought to terminate the Charterparty and demanded the return of the Vessel. The Charterers resisted that demand, stating that the Vessel had arrived at dock before her certificates expired and they would shortly be renewed. They argued that the “reasonable time” which applied to repairs also applied to renewal of certificates.
The matter was referred to arbitration and the tribunal awarded in favour of the Charterers.
The Owners appealed to the High Court, leave to appeal being granted on the basis of 2 points of law being open to serious doubt as well as the matter being of general public importance.
The High Court considered:
- Whether the Charterers’ obligation under Clause 9A was an absolute obligation, or merely an obligation to reinstate expired class certificates "within a reasonable time"; and
- whether the classification obligation was a condition of the contract or an innominate term.
On the first point, the High Court held that the obligation was in fact an absolute one and the Charterers had to keep the Vessel with unexpired classification certificates at all times. The classification obligation was in essence a documentary one, and charterers could therefore be in breach of their maintenance obligation without being in breach of the classification obligation. The two obligations are related but they are not "part and parcel" of a single obligation (which is what the Tribunal had considered them to be).
On the second point, the High Court held that the classification obligation should be construed as a condition of the Charterparty despite the fact that the parties had not expressly chosen to label it as such. A vessel is either in class or it is not. Breach of an obligation to maintain a vessel in class is likely to be serious; a charterer would be on notice of when a vessel’s classification was due to expire and would have plenty of time to take the necessary steps to renew it.
The clear and absolute nature of the wording the parties chose, coupled with a fixed time limit (“at all times”), was redolent of a condition. The absence of a remedy – termination – does not mean that the obligation is not a condition; quite the opposite, in fact.
The BIMCO Barecon '89 (and its later forms) is one of the most commonly used bareboat charters, routinely relied upon across a range of circumstances.
From an owner’s perspective, loss of class certification often triggers default under loan documents and will inevitably lead to loss of insurance – this decision therefore gives comfort to owners (and lenders) that they can terminate and repossess if class is not maintained.
Charterers should also take note: contractual requirements to keep documents in force should be taken very seriously. Failure to comply with them could have serious and expensive consequences not just in terms of a vessel being withdrawn but also as a result of actions raised by parties down the contractual chain.
The authors are grateful to Moritz Kopka for his assistance with preparing this article.