Time Charters. Oil Major Approval Introduction

3. In and before 1999 it seems that some major oil companies were happy to inspect oil tankers and record the results of that inspection on a database, available to subscribers, called SIRE. If an owner wanted to comment on any such inspection report, he was entitled to do so and those comments would also be available on SIRE for all subscribers to see. The relevant oil company would if satisfied then issue an approval of the vessel. The approvals would be dated and would often be expressed to be valid for a particular period of time and thus have an expiry date which an owner could then write in to any contract …

4. This practice began to change as a result of pollution incidents involving the vessels "ERICA" and "PRESTIGE" in 2002 because statements that those vessels had been "approved" by oil majors led to damaging publicity for the oil majors concerned. Reports continued to be posted on SIRE and letters reflecting "approval" were given, but they were in more guarded terms often stating that blanket approval had not been granted and should not be assumed.
Per Lord Justice Longmore in Transpetrol Maritime Services Ltd v SJB (Marine Energy) BV (The Rowan) [2012] EWCA Civ 198

Major’s approval is a matter of status rather than condition

First time the effect of the owners’ failure to obtain in due time oil major approval came in sight in The Seaflower case. Although the main difficulty met in this case was the clause drafted with insufficient consideration given to the precise meaning and effect of the terms, this decision attracted general attention to the importance of oil majors’ approval rather than to the importance of careful drafting. The clause in question provided that if for any reason, during the time-charter period, Owners would lose even one of [oil majors] acceptances they must advise Charterers at once and they must reinstate same within 30 days from such occurrence failing which Charterers will be at liberty to cancel charterparty or to maintain same at reduced rate as stipulated above.

The judge at first instance found that the immediate consequence of the owners’ breach was that the charterers could not conclude the fixture for an Exxon cargo. It remained unknown whether any negative financial consequences to the charterers flowed from this breach and anyway these consequences were never advanced in evidence. Moreover, between delivery and redelivery dates 5 November 1997 and 30 December 1997, the charterers obtained continuous employment for the vessel notwithstanding the absence of Exxon approval and the vessel performed three separate voyage fixtures. Finally, the charterers knew the vessel did not have Exxon approval when they made the contract and stipulated for an agreed reduction in hire of US$250 a day for the absence of Exxon approval.

Accordingly the judge concluded that although the fact that the vessel did not have Exxon approval made it a less flexible instrument for voyage chartering, but the parties had themselves quantified that relative lack of flexibility by a small discount on the price. He furthermore held that approval by oil majors was only an aspect of the condition of the vessel, like class, that it was not stated expressly to be a condition and that commercial sense is against such obligation being a condition.

The Court of Appeal disagreed with this line of reasoning. Law Lords unanimously held that provision which give to the charterers right to cancel if "even" one major’s approval is lost, clearly points to the importance to the charterers of the major’s approval being maintained and treat a failure to reinstate it within 30 days as a breach of a condition.

Considering the judge’s point on the owners obligation reflecting rather condition of the vessel, Rix LJ stated at para 64:

An oil company’s approval may reflect the vessel’s condition, but it is a matter of status rather than condition. Similarly, a vessel’s class is a matter of status – although that status may be affected in many different ways: at one extreme a vessel may be completely out of class, which is a most serious matter, because such a vessel cannot trade, but at another extreme there may be only a recommendation or even a mere notation of class that something relatively minor be attended to within a certain date. In the case of an oil majors’ approval, however, the vessel either has it or it does not. In that respect it is like a term as to the vessel’s class at the time of contract: if the vessel is out of class, the condition as to her class is broken.

Notable that although loss of approval was held to be of a significant importance to the charterers such as to give them right to cancel, but an absence of this approval in the first place had not been in itself a great impediment to charter the vessel.

The Seaflower decision is, however, of limited application nowadays, since in the aftermath of The Erika incident all oil majors has changed its the vetting practice and clauses similar to one examined in The Seaflower case are no longer in use. As some industry experts feared The Erika judgment brought an ambivalent result. Although it led oil companies to strengthen safety standards of sea transportation of crude oil and petroleum products in order to improve the prevention of maritime accidents, but it also prompted oil majors to review their monitoring systems to remove from it any basis for liability under existing legislation.

No oil major is using today the term ‘acceptable’ or ‘approved’, as a vessel is always screened prior to use, instead, as an intermediate outcome of screening process, major may only respond that ‘no further information required at this time’, which usually can be considered as the completion of a vetting procedure. Dilution of liability led to situation when no reasons given nowadays by oil major neither in case when the vessel has finally been employed nor when she was rejected.

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