[Un]reasonable withholding of approval
In Falkonera Shipping Co v Arcadia Energy Pte Ltd (The Falkonera)  EWHC 3678 (Comm) (20 December 2012) Eder, J., considered whether the owners of VLCC Falkonera were in breach of charterparty on amended BPVOY4 form for withholding of approval of the two VLCC offered by the charterers for Ship-to-Ship (STS) operation.
Clause 8.1 of Part 2 of the standard BPVOY4 form give charterers the option of transferring the whole or part of the cargo… to or from any other vessel including, and furthermore provides that:
All transfers of cargo to or from Transfer Vessels shall be carried out in accordance with the recommendations set out in the latest edition of the "ICS/OCIMF Ship to Ship Transfer Guide (Petroleum)". Owners undertake that the Vessel and her crew shall comply with such recommendations, and similarly Charterers undertake that the Transfer Vessel and her crew shall comply with such recommendations. Charterers shall provide and pay for all necessary equipment including suitable fenders and cargo hoses. Charterers shall have the right, at their expense, to appoint supervisory personnel to attend on board the Vessel, including a mooring master, to assist in such transfers of cargo.
Moreover charterparty contained a specific STS Lightering Clause which outlined the following terms:
If charterers require a ship-to-ship transfer operation or lightening by lightering barges to be performed then all tankers and/or lightering barges to be used in the transhipment/lightening shall be subject to prior approval of owners, which not to be unreasonably withheld, and all relevant certificates must be valid. All ship-to-ship transfer operations shall be conducted in accordance with the recommendations set out in the latest edition of the ics/ocimf ship-to-ship transfer guide (petroleum). All such lightering ships must have a fully working inert gas system (igs), unless the cargo flash point exceeds 60f and only with express approval of the owners/master.
In short facts can be summarised as follows. VLCC The Falkonera was chartered (based on recap) to the defending charterers to perform a single voyage to carry crude oil from the Yemen to "1-2 ports far east", in the event, Pasir Gudang, Malaysia was nominated as discharge port and operation to be done by way of a STS transfer. Initially, the charterers nominated two other VLCCs to receive cargo from The Falkonera ie The Front Queen - built 2009, length overall 330 metres, deadweight 297,936 tonnes - and The Front Ace – built 1993, length overall 326.2 metres, deadweight 274,999 tonnes (Frontline Vessels).
During negotiating stage on vessel’s approach to Pasir Gudang, from 13th to 16th December 2010, the owners rejected several Charterers’ proposals related to two initially nominated VLCCs, which included intention to provide them with LOI against any damage that might be sustained in the course of STS transfers between The Falkonera and the Frontline vessels. The judge described them as withholdings one, two and three. As a result of owners’ stance the charterers had to charter two smaller vessels for the proposed STS transfer, into which The Falkonera subsequently discharged her cargo and left Pasir Gudang on 30th December 2010. The charterers suspended payment of several bills totalling almost to half million USD, arguing that the Owners’ withholding of approval of the Frontline Vessels to carry out the STS transfer was a breach of the charter and led to delay and increased costs which are for the Owners’ account.
The owners contended that on the true construction of Clause 8 and/or the STS Lightering Clause, VLCC-VLCC transfers were precluded or, alternatively that the owners acted reasonably (or, at least, not unreasonably) in withholding their approval of the Frontline Vessels.
The Charterers’ position was that the owners during verbal phase of negotiation of the charter knew that those receiving vessels they proposed to nominate for STS would range in size between Aframax and VLCC tankers and that the owners did not give any indication that their vessel(s) would not be able to carry out the aforesaid STS operations including by STS transfer operations directly between two VLCCs.
1. Were STS transfers between VLCCs precluded under the charter?
2. Did the owners act reasonably (or, at least, not unreasonably) in withholding their approval of the Frontline Vessels?
Decision of the Court
1. The judge analysed a great deal of verbal evidence regarding to the verbal pre-negotiation discussions, which he eventually held to be academic, irrelevant and inadmissible. Both sides also submitted experts’ evidence which was mainly concerned with safety issues around VLCC Mooring Arrangements during STS and the owners’ concern regarding safety of STS between two VLCCs in particular.
On the first issue the judge held that wording of cl.8.1 is wide enough to allow an STS transfer from The Falkonera to any other VLCC. He found that the effect of the clause is as follows:
i.) If the Charterers exercise that right, then both parties are obliged to perform the STS transfer in accordance with the Guide.
ii.) The Owners are responsible for ensuring that Falkonera and her crew comply with the Guide; and the Charterers are responsible for ensuring that the nominated vessel and her crew also comply.
iii.) The Charterers’ right to order Falkonera to perform an STS transfer is entirely separate from the obligation subsequently to perform the STS transfer in accordance with the Guide.
iv.) This clause does not itself envisage that the category of vessels that may perform STS transfers with The Falkonera is dictated or delimited by the Guide – although this is subject to anything else in the charter or (I am prepared to accept) in the Guide itself.
Furthermore the court construed STS Lightering Clause as overlapping with cl. 8 and forming two parts:
- the first part limits the right of the charterers to nominate a vessel to perform an STS transfer with The Falkonera by condition that such vessel must also be approved by the Owners (their right of approval is limited to a right to review the details of the nominated vessel and to decide whether or not she is suitable for STS operations);
- and the second part reiterates the obligation imposed by clause 8 of the BPVOY form, namely that once a vessel has been nominated for STS operations by the Charterers, and approved by the Owners, the parties are obliged to conduct the STS transfer in accordance with the Guide.
The Guide itself contains no specific section dealing with same-size-ship transfers still less STS transfers between VLCCs. However, the learned judge found that it is impossible to read out of such omission what the owners, in effect, say i.e. that the Guide is to be read as precluding transfers between VLCCs. Accordingly, the judge concluded on the first issue that the charterparty did not preclude STS transfers with other VLCCs from/to The Falkonera.
2. In the second part of his judgment Eder, J., dealt with the question whether the owners acted reasonably when they were repeatedly withholding their approvals. It looks like the roots of the owners’ attitude to the problem laid in their previous negative experience in STS transfers between two VLCC off Pasir Gudang. It is also evident from the case report that the charterers fully appreciated such resistance and did their best to ensure the owners that difficulties attributed to such operation will be specifically dealt with and proper risk assessment plus mitigation measures put in place. Indeed, the charterers contacted STS provider and supplied the owners with documents setting out all information relevant to STS operations at Pasir Gudang, such as: information about the local pilots, details of the available "oil spill response" (or OSR) equipment, a fender rigging diagram for a VLCC to VLCC operation, tugs’ assistance, risk assessment and an environmental assessment of the STS anchorage at Pasir Gudang.
Finally, the charterers offered to provide the owners with LOI against any damage that might be sustained in the course of STS transfers between The Falkonera and the Frontline Vessels. But notwithstanding all these efforts the owners declined charterer’s request for acceptance to discharge into another VLCC.
In his analysis the judge agreed with the owners’ submission that they were only in breach if no reasonable shipowner could have regarded their concerns as sufficient reason to decline approval. The judge found that the owners’ did indeed seem to have had a blanket policy to object to any STS operation between VLCCs formed on previous experience, but such previous incident provided no reasonable basis for withholding approval of the proposed STS operation between The Falkonera and the Frontline Vessels. The judge outlined his view on the right conferred to the owners by STS clause at para 92:
I accept that the sts lightering clause in effect looks to a two-stage process ie (i) the approval of the vessel and (ii) the actual conduct of the transfer operation in accordance with the recommendations of the Guide; and that the former ie the right of the Owners to refuse to approve a vessel is to be determined by reference generally to the inherent characteristics of that vessel. However, as submitted by [the owners], it seems to me that the subject-matter of the first part of the sts lightering clause is not STS transfer operations in the abstract, but a particular proposed operation with the "Falkonera",…
I accept as a matter of construction that although the inherent characteristics of the proposed other vessel might be entirely suitable in the abstract, nevertheless the Owners might be entitled to withhold approval because, for whatever reason, it might reasonably be considered that the proposed STS operation involving that other vessel would in any event be unsafe.
The judge then specifically dealt with highly technical question of mooring arrangement during STS operation and related difficulties which owners put forward in their argument. He, however, described the problem which owners faced as one which only required a significant degree of planning: there was no inherent problem with the Frontline Vessels that justified the owners’ withholding of approval, and concluded at paras 98, 113:
… there was here no reasonable basis for the Owners to withhold their approval of the Frontline Vessels when they were nominated with what Mr Allen QC described as "flawless" Q88s; that once approved, as envisaged by the STS lightering clause and the Guide, the Owners should have started and then continued the iterative process of operational planning for the STS transfer in cooperation with the Charterers; that … if any particular problems had arisen or manifested themselves in the course of that iterative process or even during the operation itself, the Owners would, at that stage, have had … a "safety veto"; but that such possibility did not reasonably entitle the Owners to withhold their approval of the Frontline Vessels.
This is not a case where it might be said that the foreseeable conditions rendered the proposed operation unsafe as such. No one was proposing that the STS operations should be carried out blindly without reference to the prevailing conditions. The whole point of appointing SafeSTS to assist in the conduct of the operations was to ensure that the transfers were not performed in adverse conditions that would render them unsafe. Consequently if on arrival at the location the conditions were not conducive to a safe transfer, the operation would be delayed pending more favourable conditions. By the same token, if the operation was started in benign conditions, which then deteriorated, the operation would be suspended.
Thus, in summary, the court held that notwithstanding those points raised by the owners around technical and safety aspects of STS operation between two VLCCs, their arguments did not provide any reasonable basis for the owners to withhold their approval of the Frontline Vessels.
Read full case report and author’s comments here: Falkonera Shipping Co v Arcadia Energy Pte Ltd  EWHC 3678 (Comm).
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