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Common Tanker Charterparty Clauses:the law and how to navigate the issuesPeter GloverSenior Associate / Master Mariner31 May 2013

FINANCIAL INSTITUTIONSENERGYINFRASTRUCTURE, MINING AND COMMODITIESTRANSPORTTECHNOLOGY AND INNOVATIONPHARMACEUTICALS AND LIFE SCIENCES

Common Tanker Charterparty Clauses:the law and how to navigate the issues

Outline of Presentation:

• Description of vessel• Repudiation of charterpaty

It has been observed, perhaps somewhat cynically, that there is almost a "tradition" of those parties involved in a maritime collision giving flatly contradictory evidence on all material points.

Port Kembla Coal Terminal Ltd v Braverus Maritime Inc. (2005) 140 FCR 445

Description of Vessel

• Common for a description of the vessel to be found in introductory part

• ASBATANKVOY

PART I

A. Description and Position of Vessel: [ ]

Deadweight: tons (2240 lbs.) Classed: [ ]

Loaded draft of Vessel on assigned summer freeboard ft. in. in salt water.

Capacity for cargo: [ ] tons (of 2240 lbs. each) [ ] % more or less, Vessel's option.

Coated: [ ] Yes [ ] No

Coiled: [ ] Yes [ ] No Last two cargoes: [ ]

Now: [ ] Expected Ready: [ ]

Description of Vessel• SHELLVOY 6

• Part I

(A) Description of vessel

(I) Owners warrant that at the date hereof, and from the time when the obligation to proceed to the loadport(s) attaches, the vessel

(i) Is classed

(ii) (a) Has a deadweight of [ ] tonnes (100kg) on salt-water draft on assigned summer freeboard of [ ] m. and if applicable,

(b) Has on board documentation showing the following additional drafts and deadweights

(iii) Has capacity for cargo of [ ] m3

(iv) Is fully fitted with heating systems for all cargo tanks capable of maintaining cargo at a temperature of up to [ ] degrees

Celcius and can accept a cargo temperature on loading of up to a maximum of [ ] degrees Celcius.

(v) Has tanks coated as follows: [ ]

(vi) Is equipped with cranes/derricks capable of lifting to and supporting at the vessel’s port and starboard manifolds submarine

hoses of up to [ ] tonnes (1000kg) in weight.

(vii) Can discharge a full cargo (whether homogenous or multi grade) either within 24 hours, or can maintain a back pressure of

100 PSI at the vessel’s manifold and Owners warrant such minimum performance provided receiving facilities permit and

subject always to the obligation of utmost despatch set out in Part II, clause 3 (1).

The discharge warranty shall only be applicable provided the kinematic viscosity only exceeds 600 centistokes on part of the cargo or

particular grade(s) then the discharge warranty shall continue to apply to all other cargo/grades.

Description of Vessel

• General rule

– words in charter which describe the vessel or equipment are not representations but

terms of the charter

• Question – is the term a condition, warranty or intermediate term?

– condition – gives rise to a right to terminate

– warranty – gives rise to a right to damages

– intermediate term – right to terminate if it is sufficiently serious, but otherwise damages

Hongkong Fir Shipping Co. Ltd. v Kawasaki Kisen Kaisha Ltd. [1961] 2 Lloyd’s Rep. 478

Pennsylvania Shipping Company v Compagnie Nationale de Navigation(1936) 55 Ll. L. Rep 271• Time charter for 12 months for tanker Vendemiaire

• Protracted negotiations

• Charterers asked Owners:

– what was the diameter of the ship’s cargo lines and how many inches from her bottom the heater coils were placed?

• Owners responded:

– pipelines 350 millimeters intake; 300 millimeters outlet; heating coils fitted right at bottom of tanks.

• These statements were embodied in the charterparty as “guaranteed” by Owners

• Owners also guaranteed Vendemiaire was in every way fitted to carry crude petroleum or molasses

• On inspection by Charterers Vendemiaire was not:

– fitted with limber holes sufficient in number or size to prevent free flow of molasses to suction pipes

– not fitted with a sprinkler system (required for vessels transiting the Panama Canal) with gasoline cargoes

– not fitted with four master valves – being required for the carriage of molasses

– cargo discharge pipes and pipelines were not satisfactory

– heating coils were not fitted right at the bottom of tanks, but on top of frames 12 inches from the bottom

Pennsylvania Shipping Company v Compagnie Nationale de Navigation(1936) 55 Ll. L. Rep 271• Held per Branson J.:

I think that the word “guarantee” in 11 of the 52 clauses shows an intention to lay a special

emphasis upon the obligations assumed under these clauses and to treat them as

conditions of the contract as distinguished from mere warranties.

(emphasis in underline)

• Emphasis on the word “guarantee”

• Charterers entitled under the charterparty to refuse Vendemiaire when tendered

• Pennsylvania Shipping Company Co authority that descriptive elements may be conditions

• However ….

Reardon Smith Line v Hansen-Tangen (the “Diana Prosperity”)[1976] 2 Lloyd’s Rep. 60

• To secure financing for new building of 88,000 ton Japanese motor tanker

• Vessel chartered before building work started

• Two charterparties on Shelltime 3 form

• Charterparties referred to vessel to be built at Osaka with yard or hull number 354

• Vessel finally built at Oshima bearing yard or hull number “Oshima 004”

• Physical attributes of vessel met those required under the respective charters

• Vessel delivered in 1974:

– market had collapsed due to oil crisis

– charterers sought to escape obligations by rejecting vessel

– vessel tendered did not correspond with the contractual description in that it was “Oshima 004” and

not “Osaka 354”

• Charterers sought to argue that every aspect of the vessel’s description was a “condition”

– breach would entitle charterers to terminate the charterparty

Reardon Smith Line v Hansen-Tangen (the “Diana Prosperity”) [1976] 2 Lloyd’s Rep. 60• Per Lord Wilberforce

Even if a strict and technical view must be taken as regards the description of unascertained future

goods (e.g. commodities) as to which each detail of the description must be assumed to be vital, it may

be, and in my opinion is, right to treat other contracts of sale of goods in a similar manner to other

contracts generally so as to ask whether a particular item in a description constitutes a substantial

ingredient of the “identity” of the thing sold, and only if it does to treat it as a condition.

Endorsing approach in Cargo Ships “El-Yam” Ltd v Invotra [1958] 1 Lloyd’s Rep 39 and

Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 Q.B. 26

… in attending to the nature and gravity of a breach or departure rather than in accepting rigid

categories which do or do not automatically give a right to rescind …

• Look to the nature and gravity of a breach for remedy

• Casts doubt - but does not overrule - Pennsylvania Shipping Co v Compagnie Nationale de Navigation

Athenian Tankers Management S.A. v Pyrena Shipping Inc.(the “Arianna”) [1987] 2 Lloyd’s Rep. 376

• Amended Esso time form

• Charterparty for 10 years 2 months more or less in charterers’ option

• Charterparty provided:

Preamble:-

…and equipped with … Butterworth Tank Cleaning machinery, and fitted throughout in all cargo and bunker compartments

with heating coils … and Vessel is capable of heating cargo to a maximum temperature of 135oF and of maintaining such

temperature throughout entire discharge, the Vessel being so constructed and equipped on delivery under this Charter …

57A) The vessel to be employed in general product trading with all liquid cargoes that can safely be handled by product

tankers and for which the ship is suitable according to tanks segregations …

69) Owner to at all times maintain tank cleaning system in good order such that 6 machines can run simultaneously, at

seawater temperature of 180oF at 170 PSI pressure.

Athenian Tankers Management S.A. v Pyrena Shipping Inc. (the “Arianna”) [1987] 2 Lloyd’s Rep. 376• Owners tendered delivery

• Charterers declined to accept on grounds vessel did not comply with certain charterparty provisions

• Arbitrators held re. tank cleaning system:

• Taking all the above in to consideration, we consider that it was implicit in Clause 69 that the vessel was, at the date of

delivery, capable of operating her tank cleaning system with all six Owners’ supplied tank cleaning machines (having a

total capacity of about 150 m3/hour) running simultaneously at a seawater temperature of 180F (82oC) at 170 psi (12

kg/cm2) pressure when supplied with seawater at an inlet temperature of 15oC.

• But arbitrators further held:

• ... held that cl. 69 properly construed contained an implied obligation on the part of the owners to maintain the tank

cleaning system such that six machines could run simultaneously at a seawater temperature of 180 deg F. at 170 psi while

at the same time heating the cargo;

• Found that the vessel was incapable of meeting that requirement

• By their interim award the arbitrators decided in short that although the owners’ obligations in relation to the tank cleaning

system were not fully met, nonetheless the vessel was ready for delivery in accordance with cl. 4, and in every way fitted

for the service and carriage identified in cl. 57(A), so that the charterers were not entitled to decline to accept delivery.

Athenian Tankers Management S.A. v Pyrena Shipping Inc. (the “Arianna”) [1987] 2 Lloyd’s Rep. 376• Held:

… a charterer who cancels on the ground that the ship’s gear is defective must (in the absence of

express or implied provisions about the gear) show that the defects were such that the ship would

probably be unready when the time came to play her part in the agreed method of loading, if any, or in

giving the necessary co-operation in any reasonable method that might be employed.

• Case did not disclose sufficient evidence or unreadiness in this sense – imports a temporal connection

• Charterer was not entitled to cancel the charterparty

• Considered Pennsylvania Shipping Company v Compagnie Nationale de Navigation

It must be remembered that this is a forfeiture clause and so not to be applied lightly. It would be a

misfortune, I think, if defects of no real significance in the adventure were to be used as a means of

throwing up a charter at the last moment.

Description of Vessel• Practical tips:

• Description of vessel may not be restricted to preamble

– by way of additional terms;

– by way of reference – SIRE

• Term(s) may be (i) conditions; (ii) warranties or (iii) intermediate terms

• Ask what was intended by the use of the term(s)?

• Look to language of the charterparty

• Not necessarily bound by the four corners of the contract

No contracts are made in a vacuum : there is always a setting in which they have to be placed. The nature of what is

legitimate to have regard to is usually described as “the surrounding circumstances” but this phrase is imprecise : it can be

illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial

purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the

context, the market in which the parties are operating.

The Diana Prosperity [1976] 1 W.L.R. 989, 995-6

The Charter Period and Repudiatory Breach

• VELATIME 3

1. Term:

(a) The term of this Charter shall be for a period of about _____________ (hereinafter “Original Period”) plus any

extensions thereof as provided in (b) below. The Original Period shall commence at the time when Vessel is placed at

Charterer’s disposal as provided in Clause 5. The word “about” as used above shall mean _________ (____) days more

or less and shall apply to the term of this Charter consisting of the Original Period plus any extensions as hereinafter

provided.

• SHELLTIME 4

4. (a) Owners agree to let and Charterers agree to hire the vessel for a period of [ ] plus or minus [ ] days in Charterers’

option, commencing from the time and date of delivery of the vessel, for the purpose of carrying all lawful merchandise

(subject always to Clause 28) including in particular;

Crude / Clean Petroleum Products (CPP) / Veg oils / Palms oils and IMO2/3 chemicals per vessels certificate of fitness, including DPP. Cargoes

to be accordance with Vessel’s class, flag state, coating manufacturers resistance list and not harmful to vessel’s tanks, coating, lines and

valves, maximum eight (8) grade segregation within Vessel’s natural segregation. Within British IWL excluding any areas and /or countries

sanctioned, banned or boycotted by the UN and/or US and/or EU and or other countries prohibited by Vessels flag state.

The Charter Period and Repudiatory Breach

• Charterers need to know length of the time charter in order to plan business interests:

– next employment; and

– assessment of gross income for charter period

• General terms – risk of overrun is to be borne by charterers

– contract defines the charter period for charterer to use the ship; and

– owner entitled to take back the ship on expiry of the charter period

• Torvald Klaveness A/S v Arni Maritime Corporation (The “Gregos”) [1995] 1 Lloyd’s Rep. 1

– charterers originally gave a valid legitimate last voyage

– prior to completion of present voyage the “legitimate last voyage” became unworkable

– charterers insisted the orders were legitimate

– owners contended:

– unless legitimate orders were given they would treat charterers as being in repudiatory breach of the charter and

withdraw the vessel

– vessel delivered 8 days late

The “Gregos” [1995] 1 Lloyd’s Rep. 1

Whatever the charter may order, a service which falls outside the range encompassed by the owner’s original promise is

not one which he can be compelled to perform; and this is so as regards not only the duration of the chartered service, but

also all the other limitations imposed by the charterparty on the charterer’s freedom of choice. There is thus to be a

measuring of the service called for against the service promised. As a matter of common sense, it seems to me that the

time for such measurement is, primarily at least, the time when performance falls due.

...

... because in practice the interests of both parties demand that the charterer is entitled to give orders in advance of the

time for performance; and this must entail at least a provisional judgment on the validity of the order.

...

Thus, if and for so long as the service required conforms with those which the shipowner promised in advance to render

the specific order creates a specific obligation to perform them when the time arrives. But only for so long as that state of

affairs persists. If circumstances change, so that compliance with the order will call for a service which in the original

contract the shipowner never undertook, the obligation to comply must fall away.

The Gregos [1995] 1 Lloyd’s Rep. 1, 7

The “Gregos” [1995] 1 Lloyd’s Rep. 1

The original order having become ineffectual the charterers were obliged by cl. 11 to replace it with one

which they were entitled to give.

...

It was plain from the facts stated by the arbitrator that the charterers had no intention of doing this, ...

...

Not that the order constituted a repudiation in itself, but that the charterers’ persistence in it after it had

become invalid showed that they did not intend to perform their obligations under the charter. That is, to

say, “evinced an intention no longer to be bound” by the charter. This was an anticipatory breach, which

entitled the owners to treat the contract as ended.

The Gregos [1995] 1 Lloyd’s Rep. 1, 9-10

Isabella Shipowner SA v Shagang Shipping Co Ltd (The “Aquafaith”) [2012] EWHC 1077 (Comm)

• Charterparty on NYPE terms

• Duration of 59 – 61 months

• Express warranty:

… that the vessel will not be re-delivered before the minimum period of 59 months.

• Admitted anticipatory breach, charterers stated that they would re-deliver the vessel early

• Charterers made it plain that they had no further use for the vessel for the balance of the minimum period of charter

• Owners commenced arbitration seeking:

– a partial final award that owners were entitled to refuse such re-delivery (as they had done);

– to affirm the charterparty; and

– hold charterers liable for hire for the balance of the minimum period

• Arbitrator held:

– owners were required to take re-delivery of the vessel;

– trade the vessel on the spot market by way of mitigation

– claim damages in respect of their loss

The “Aquafaith” [2012] EWHC 1077 (Comm)

• On appeal issue turned on the principals enunciated in the decision of White and Carter (Councils)

Limited v McGregor [1962] AC 413

… basic principle that, if one party to a contract repudiates it, in the sense of making it clear to the other

party that he refuses or will refuse to carry out his part of the contract, the innocent party has the option

of either accepting that repudiation and suing for damages for breach of contract, or refusing to accept

the repudiation and affirming the continuation of the contract. If then the innocent party can complete the

contract himself, without the need for any action on the part of the contract breaker, he will be in a

position to sue for the agreed price.

• Principle is subject to two exceptions where the claimant will be limited to a remedy in damages:

(i) where the defendant's co-operation is required before the claimant can complete performance

(ii) where the claimant has no legitimate interest, financial or otherwise, in performing the contract rather

than claiming damages

The “Aquafaith” [2012] EWHC 1077 (Comm)

• Arbitrator accepted charterers submission that:

– owners could not complete the charter without charterers doing something

– principle in White and Carter of no application

– owners had no legitimate interest financial or otherwise in performing the contract

• Arbitrator accepted that a time charter could not be performed without charterers doing something

• Subsequent authorities

• The Puerto Buitrago [1976] 1 Lloyd's Rep 250

– charterers redelivered a vessel in a state of disrepair

– repairs would cost US $2 million

– end of the repair period the vessel would be worth only $1 million

– it was stated that the White and Carter principle had no application where the plaintiff ought:

... in all reason, to accept the repudiation and sue for damages provided that damages would provide an

adequate remedy for any loss suffered by him. (per Lord Denning)

The “Aquafaith” [2012] EWHC 1077 (Comm)

• The Odenfeld [1978] 2 Lloyd's Rep 357

– charterers repudiated a time charter with 6.5 years to run

– court considered the facts in The Puerto Buitrago to be extreme, and rejected the charterers' contention that the owners

were not entitled to affirm the charter

• Held - any fetter on the innocent party's right of election whether or not to accept a repudiation would only apply in extreme

cases, viz. “where damages would be an adequate remedy and where an election to keep the contract alive would be

wholly unreasonable.”

• The Alaskan Trader [1984] 1 All ER 129

– a major engine breakdown

– early re-delivery of a vessel by 8 months under a 2 year time charterparty

– held - owners were not entitled to sue for the hire

– court reasoned that the shipowners had no legitimate interest in performing the contract and that the court was only

bound to hold that there is some fetter on the right to election only in extreme cases

• The Dynamic [2003] 2 Lloyd's Rep. 693

– premature re-delivery under a time charter

– court stated:

The exception to the general rule applies only in extreme cases: where damages would be an adequate remedy and

where an election to keep the contract alive would be unreasonable.

The “Aquafaith” [2012] EWHC 1077 (Comm)

• First question - Is a time charter subject to the rule in White and Carter?

Could the owners claim hire from the charterers under this time charter without the need for the

charterers to do anything under the charter?

If the charterers failed to give any orders, the vessel would simply stay where it was, awaiting orders but

earning hire.

• Earning of hire after purported redelivery was not dependent on any performance by the charterers

• Second question – Did the exception to White and Carter apply?

• Arbitrator - owners had no legitimate interest in keeping the charterparty alive

• Court - arbitrator had never directed his mind to the principles set in:

– The Puerto Buitrago

– The Odenfeld

– The Alaskan Trader

– The Dynamic

The “Aquafaith” [2012] EWHC 1077 (Comm)

• Held:

– matter was not one which fell within the exception to the principle in White and Carter

– effect of authorities on owners:

... no legitimate interest in maintaining the contract if damages are an adequate remedy and his

insistence on maintaining the contract can be described as “wholly unreasonable”, “extremely

unreasonable” or, perhaps, in my words, “perverse”.

– Charterers were …

... seeking to foist upon the innocent party the burden of seeking to trade in a difficult spot market,

where a substitute time charter was impossible, with all the management issues involved.

– In the present circumstances the Court found that the arbitrator should have:

... been asking himself whether or not this was an extreme case of the kind where damages were an

adequate remedy and the owners' conduct was so beyond the pale that they should not be allowed to

keep the contract alive. That he did not do.

The “Aquafaith” [2012] EWHC 1077 (Comm)

• Reformulation of the test for repudiation as set out in Aquafaith

– decision of the shipowner need be "beyond the pale" or "perverse"

– before can be said to have no legitimate interest in maintaining the charterparty

– evidential bar has been raised for charterers seeking to avoid the bargain agreed

– owners arguably in a stronger position in difficult tanker trading market

– may have wider contract law implications

Common Tanker Charterparty Clauses:the law and how to navigate the issues

Questions?

Peter GloverTel: 0207 444 2071peter.glover@nortonrose.com

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