Time Charterparty
Oil Major’s Approval
Conclusions – Majors’ approval and Off-hire
Owners’ guaranty to obtain major’s approval within certain time was held to be a condition in The Seaflower, breach of which entitled the charterers to rescind the contract. And although in Dolphin Tanker Srl v Westport Petroleum Inc (The Savina Caylyn) [2010] EWHC 2617 (Comm) the court recognized the charterers’ right to terminate contract for owners’ failure to maintain vessel in approved state by recognized oil majors on another grounds, it is hardly necessary to emphasise vital importance of "major’s approval" stipulations in time charter contracts.
Impact of loss of major’s approval in case of voyage charter was recently examined in Transpetrol Maritime Services Ltd v SJB (Marine Energy) BV [2011] EWHC 3374 (Comm), where the High Court supported charterers’ claim for damages resulted from the owners’ breach of Vitol’s oil companies approvals clause. The Court of Appeal, however, came to view that clause 18 of the recap, which has no express continuing warranty of approval for the duration of the charterparty, was not intended to be read together with Vitol Clause 18 (Approval Clause) but in substitution for it. On its true construction the clause 18 of the recap was confined to a promise at the time when it was made. Therefore the owner were not in breach of the charterparty because there was no any evidence that at the date of the charter the owner knew anything about the vessel that would cause the named oil companies to "disapprove" the vessels or alter the terms of the letters which they had given in relation to the vessel(Read more).
Unlike a voyage charter, where an impact of the owners’ breach may be quite damaging but constrained to rather short period of time, a time charterer’s exposure to the losses resulted from the failure of the owners to obtain required majors’ approvals may be of prolonged character. During this period of time the charterer may have little or even no use of the vessel due to its restricted tradability. Understandably, on falling market such financial exposure may have a dramatic effect. Drafted in such business background, majors’ approval clauses serve to strike a difficult balance between respective obligations of the parties to the time charter contract.
Dolphin Tanker Srl v Westport Petroleum Inc (The Savina Caylyn) [2010] EWHC 2617 (Comm) case is a vivid illustration of situation when complex but clumsy worded clause 50 (VESSEL’s APPROVAL CLAUSE) of an amended Shelltime 4 form added very little to any desirable balance between the charterers’ requirements to have in their service an "approved" tanker and the owners’ duty to use best endeavours to have their vessel inspected and approved.
Aframax tanker The Savina Caylyn was chartered on 9 July 2007 for 5 years at a daily rate of US$27,000.00. Time charter rates for this type of tanker has fallen from US$30,700 in 2008 (week 40) to US$20,900 in 2009 and US$20,256 in 2010 (source Capital Link Shipping). No wonder the charterers were at pains to get rid of such burdensome bargain by the end of 2009. Vessel’s failure of Shell inspection on 2 November 2009 followed by several rejections based on SIRE reports gave to the charterers a chance to successfully invoke cl.50.
Paragraph 3.1 of this clause restricts the charterers’ right to rescind the contract if the owners eventually lose any of majors’ approval, while paragraphs 3.2 and 3.3 define the meaning of OIL MAJOR VETTING REVIEWS/INSPECTIONS and set out requirements which, when failed by the owners, give to the charterers rights to put vessel off-hire and to cancel the charter. Wording of the above provisions suggests much more merciful attitude to the owners’ breach than one provided in cl. 43 of Shelltime 2003 in way of equilibrium between gravity of the owners’ breach and respective right of the charterers to put the vessel off-hire or terminate contract. In fact however, an ‘off-hire’ option is hardly exercisable technically for reasons given on Inspection initiated by Charterers ’ nomination page.
Besides, when considering an option to put the vessel off-hire as the charterers’ remedy against the owners’ failure to obtain a major’s approval it is worthy to remember that off-hire operates as an exception to the charterers’ primary duty to pay hire continuously. Such exception is only triggered when
"the ship is for any reason not in full working order to render the service then required from her, and the charterers suffer loss of time in consequence."
In Mareva Navigation Co v Canaria Armadora SA ( The Mareva AS) [1977] 1 Lloyd’s Rep. 368 per Kerr J at p.381-382.
The hire becomes payable again as soon as ship regains her status of "fully efficient and able to render to the charterers the service then required." The most common incidents happening of which usually bring about an off-hire event related to various machinery breakdowns, which require certain remedial action from the part of the owners. In case of loss of major’s approval such remedial action shall obviously constitute of the owners’/vessel’s preparation for a new inspection, then request of physical inspection by the said major and, finally, successful passing of vetting inspection. In The Savina Caylyn case remedial action from the owners’ side was held to be subjected to the charterers’ nomination of an oil major by the virtue of definition of vetting review/inspection given in cl.50(3.2). In other words the owners’ efforts alone, i.e. successful passing SIRE inspection carried out by BP at the Owners’ request, were not in legal sense sufficient to restore fully efficient status of the vessel. Apart of utter illogicality this conclusion apparently contradicts to the concept of off-hire as such.
As a result cl.50 gives to the owners no chances to remedy their wrong because putting the vessel off-hire as per para 3.2, makes it almost impossible to pass a vetting inspection, which situation gives to the charterers a direct and unobstructed road to cancelation of the contract.
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.
By Trond Solvang - Oil major vetting clauses.
Another point, which has been left untouched by this decision, is on what grounds the charterers overcame generally restrictive approach, the law adapted to the charterers’ attempts to escape from their bargain in off-hire disputes.
… the charterer will pay hire for the use of the ship unless he can bring himself … clearly within the exceptions. If there is a doubt as to what the words mean, then … those words must be read in favour of the owners because the charterer is attempting to cut down the owners’ right to hire.
Per Bucknill LJ in Royal Greek Government v Minister of Transport (1948) 82 Ll.L. Rep. 196 at p.199.
Unfortunately the owners did not argue and the judge never touched the question what "owners’/vessel’s" reasons led to the vessel’s failures on three consecutive vetting reviews, especially in view of the judge’s finding at para 17 that "negative vetting decisions are normally communicated to the party proposing the business without reasons..." It is difficult to see how the charterers can invoke cl.50(3.2) and attribute vessel’s failures to obtain majors’ approval to the owners’ side if no details of negative decisions were ever disclosed.
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