Time Charters. Oil Major Approval Effect of approval clauses

Be that as it may, the case nevertheless highlights the importance of how this type of clause is worded. This applies, in particular, to Charterers’ right to cancel in the event of oil major rejections – as in the present case – and owners’ risk of becoming "trapped" by not being able to remedy such rejections, particularly in situations where charterers have a commercial interest in terminating the charter.
Trond Solvang, Oil major vetting clauses.

Major approval clauses

Major’s approval is a key to tanker’s tradability and accordingly to the vessel’s earning potential. Therefore the charterers look on the market for the proper tonnage in sense of both loadable capacity and majors’ acceptability.

Historically major’s approval was to the bigger extend based on the results of their physical inspection, which since the beginning of vetting process at the end of the last century, provided oil majors with first-hand information about tanker’s condition and her suitability for chartering purposes. Inspection report with the list of observations was a hard copy explanation of either rejection or duly communicated approval and a To-Do list for the owners and ship’s command.

Questionable objective value of some physical inspections and great danger of bad publicity exposure in case of incident became evident after the tragedies of The Erica and The Prestige. 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’, 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. Screening itself is a very complex process, with generally similar but not identical standards applied by each major, with individual emphasis on specific safety and management procedures, vary from one major to another. Picture of arguably better objectiveness appears as a result of examination of various data such as history of vessel’s previous vetting reports, port state control inspections, available record of incidents and accidents, data and reports collected from loading and discharging terminals, etc. This information forms database which is being continuously updated, processed and assessed against the set of criteria developed by the major.

On the other hand dilution of liability led to situation when rejection becomes known but the reasons are always obscure. Unlike to rejection based on physical inspection, when report available to the owners for rectification of observations found, rejection based on review of data collected during screening process communicated to the owners without any reasons.

Although there can be little doubt that in Dolphin Tanker Srl v Westport Petroleum Inc (The Savina Caylyn) [2010] EWHC 2617 (Comm) the fall in the market influenced the Charterers’ decision to opt for cancelation of time charter at the first opportunity, but it worthy to observe the way the charterers utilised A VETTING REVIEW/INSPECTION provisions in cl.50 (VESSEL’S APPROVAL CLAUSE) to reach this goal. They not only succeeded in depriving the owners from relying on positive results of BP physical examination on the grounds that being arranged by the owners this inspection did not qualify (read more here: Inspection initiated by Charterers’ nomination), but also were successful in contending that even if the reason of rejection is unknown, such rejection is one which give them option to cancel as a result of vessel’s failure of OIL MAJOR VETTING REVIEWS/INSPECTIONS DUE TO OWNERS’/VESSEL’S REASON (read more here:Effective cause of major’s rejection).

As report shows combined effect of §3.2 and 3.3 made owners’ liability significantly more burdensome by merging failures resulted from both vetting reviews and inspections. Particularly failures of reviews which the owners of two years old vessel had not had any opportunity to put right brought the charter to an end. The owners got trapped as professor Trond Solvang says “being [not] able to remedy such rejections, particularly in situations where charterers have a commercial interest in terminating the charter.

But even positive result of inspection or review does not guarantee that the vessel will be used by the charterer , which fact by itself confirms that, as the owners contended, a vetting failure can only give rise to a Qualifying Rejection where the latest SIRE Report is the (or an) effective cause of that failure.

In Transpetrol Maritime Services Ltd v SJB (Marine Energy) BV "Rowan" [2012] EWCA Civ 198 Lord Justice Longmore noted that construing approval clauses too literally will mean that:

… an owner would find himself in breach of the clause, if any fact existed which would cause the approval letters to be amended or withdrawn whether or not he knew of that fact and whether or not he had had any opportunity to put right the defect which would have caused the letters to be amended or withdrawn.

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