Charter terminated for want of class
This decision will provide comfort for Owners, and serve as a reminder to Charterers of the importance of documentary obligations within a bareboat charter.
In a decision on appeal under s69 of the Arbitration Act, handed down in the High Court today, Mrs Justice Carr held that in circumstances where a vessel is on bareboat charter, the obligation on charterers to keep the vessel with unexpired class certificates at all times is both an absolute obligation and a condition of the contract. Expiry of those certificates will result in the termination of the charter.
Wikborg Rein successfully acted for Owners in this matter.
Owners had chartered a new-build AHT vessel ARCTIC (Vessel) to Charterers on a 15 year amended BARECON 89 standard form. Approximately 5 years into the charter, the Vessel's special survey was due. Charterers had failed to make adequate preparations in time, and, as a result, the class certificates expired. A dispute arose, whereby Owners sought to terminate the charterparty and Charterers resisted on the basis the Vessel was in dry-dock and soon to undergo repairs, following which Class would be invited to survey the Vessel. The matter was referred to arbitration.
The Charterparty was on an amended standard BARECON ’89 form. Clause 9A) of the Charterparty (Clause 9) provided:
“9. Maintenance and Operation
A. The Vessel shall during the Charter period be in the full possession and at the absolute disposal for all purposes of the Charterers and under their complete control in every respect.
The Charterers shall maintain the Vessel, her machinery, boilers, her appurtenances and spare parts in a good state of repair, in efficient operating condition and in accordance with good commercial maintenance practice and, except as provided for in Clause 13.
they shall keep the Vessel with unexpired classification of the class indicated in Box 10 and with other required certificates in force at all times. (Under the BARECON form, this deletion, marked in bold, makes clear the obligation is on Charterers to ensure the Vessel's class certificates are kept unexpired and in full force at all times. Where this provision is not deleted, the obligation rests on Owners.)
The Charterers to take immediate steps to have the necessary repairs done within a reasonable time failing which the Owners shall have the right of withdrawing the Vessel from the service of the Charterers without noting any protest and without prejudice to any claim the Owners may otherwise have against the Charterers under the charter. ….”
The Vessel's Class certificates expired on 6 November 2017, before the Vessel was dry-docked for repairs. A month later, although now in dry dock, the Vessel remained out of Class and Owners sought to terminate the charterparty for breach of Clause 9A, failing to "keep the Vessel with unexpired classification of class". Charterers resisted and maintained that the charter was still ongoing. Charterers' position was that the fourth paragraph of Clause 9 applied equally to the second paragraph as to maintenance as the third paragraph concerning class. On Charterers' case, there was to be a period of "reasonable time" during which Class could be reinstated before any right to terminate would arise.
The dispute was referred to arbitration and the tribunal awarded in Charterers' favour. The tribunal saw no reason to differentiate the obligations as to class from those for general repairs and maintenance. They concluded that Clause 9(a), insofar as it relates to keeping the Vessel in Class, did not impose an ‘absolute’ obligation but only a qualified obligation of reasonable diligence, i.e. the obligation was to reinstate the Vessel's Class within a reasonable time, should the Class expire. This obligation was held to be an intermediate obligation rather than a condition of the charterparty.
Owners appealed to the High Court on the grounds that it was not only a point of general public importance, but also that the tribunal had fundamentally erred in law when deciding the point. Owners sought to rely on the Seaflower (The Seaflower (No 2)  1 Lloyd's Rep 341) in which Rix LJ stated that a Vessel's Class was distinct from her physical condition and maintenance of class and maintenance of condition were two distinct obligations. The tribunal had been taken to the Seaflower but ruled that it was "distinguishable on the facts" (but declined to elaborate what those facts were).
Owners were granted permission to appeal on the grounds that it was a point of general public importance. The BARECON form is an industrywide standard; it is the most commonly used form of bareboat charterparty in use worldwide. In addition to this the issue had not previously come before the courts, therefore there was benefit in providing certainty on this issue.
Owners' argument on appeal was that a bareboat charter was fundamentally different to a time charter in that Owners' asset was entirely at the disposal of Charterers; Owners had no crew on board, no rights to contract with Class directly, and no rights to force Charterers to dock the Vessel for inspection. Conceivably this could have grave consequences not only for Owners and their asset, but also third parties such as insurers, mortgage providers and flag state authorities which may require the Vessel be kept in Class. In such circumstances Owners could be without cover but also without remedy.
Owners' appeal was brought on two questions of law:
- Is the obligation on Charterers in Clause 9A to "keep the Vessel with unexpired classification of the class indicated in Box 10 and with other required certificates in force at all times" an absolute obligation or merely an obligation to reinstate expired class certificates within a reasonable time? ; and
- If the answer to 1) is yes;- is the obligation a condition of the contract or an innominate term?
The had tribunal held that the obligation as to Class was akin to the maintenance obligation in the immediately preceding paragraph, i.e. that repairs could be undertaken within a reasonable time. Owners contended that the obligation was unambiguous; to "keep" the Vessel with "unexpired" Class certificates "at all times". There was no ambiguity in the language and the obligation was binary, in that the Vessel was either in Class, or she was not. Maintenance on the other hand was a more qualified obligation open to interpretation and evidential subjectivity. Owners contended that the drafting is deliberately clear; the temporal boundaries of the classification obligations are drawn in absolute, binary terms unlike the remedial maintenance obligation. The use of the word “unexpired” is a strong indicator that the obligation is to ensure that certificates do not expire, failing which Owners have the right immediately to terminate" .
Charterers' argument on the other hand, required significant wording to be written into the final paragraph of the clause, e.g. the following words in bold would need to have been inserted and were not: "Charterers to take immediate steps to have the necessary [repairs and reinstatement of class certificates] done within a reasonable time". In the present case, the parties had made wide and extensive amendments to the printed form which further emphasised that, had the parties intended Charterers to have a reasonable time to re-instate class, they would have included this intention in the charterparty. Conversely Owners' case did not require such additional wording, the language of the clause was clear: Class certificates were to remain unexpired at all times, and Charterers had a reasonable time in which to affect any necessary maintenance repairs. The principles of contractual interpretation simply did not allow for the addition re-write Charterers contended for. The two obligations were necessarily distinct and could not be conflated.
Carr J found in Owners' favour finding that "there is a natural and ready distinction to be drawn between a Vessel’s physical condition/maintenance status and its classification status ". Charterers' "approach does not withstand scrutiny. It involves writing into the Charterparty substantive wording in the third sentence of Clause 9A) that is conspicuously (and to be presumed deliberately) absent. " She held that the obligation on Charterers to keep the Vessel with unexpired classification certificates was an absolute obligation
As for the second question; whether the obligation was a condition, breach of which was capable of terminating the charter, Carr J began with the default position in mercantile contracts that time as of the essence. She then went on to consider a long line of well-established authorities which call for the need for certainty being a tenet of contractual interpretation [46-53], however Carr J also reasoned that the court should not overplay this importance and it should not be used as a "trump card".
In conclusion on the facts Carr J went on to consider that breach of the classification obligation was one which was " immediately, readily and objectively ascertainable", the language of the obligation itself ("unexpired certificates" "at all times") was "clear and absolute with a fixed time limit, redolent of a condition ". Carr J found that in the event of a breach of the obligation to keep the Vessel in class, "the obvious intention of the parties would be that … Owners would have the right of termination ".
It was also considered that the absence of the remedy (termination) from the written clause did not preclude the obligation from being a condition; quite the opposite, because only if the term were not a condition would such language be necessary to provide the remedy; " Such a provision would be otiose if the right existed without more at common law for breach of a condition ".
Clause 9 is materially the same in all iterations of the BARECON form (1989,2001,2017). This decision will provide comfort for Owners that in the event a Charterer fails to Class the Vessel, does not keep up with special survey intervals or in any way fails to maintain the Vessel's class status, they will have a decisive right in remedy. Owners will be able to terminate the charter immediately and repossess their Vessel. The Barecon is an important form industry wide and quite often forms the basis of sale and lease back transaction or bareboat with option to purchase. As loss of class inevitably leads to loss of insurance coverage, this decision is significant and it will provide comfort to those vessel owners, whose role may be that of or more akin to a finance house, such that the asset they have out on bareboat charter can be readily repossessed in the in event that charterers fail to maintain class.
The judgement should also serve as a stark reminder to charterers and managers alike, documentary obligations, although they might seem trivial or arduous, go to the root of the contract and can have potentially very expensive consequences in damages if the Vessel is withdrawn, not just in loss of profit, but potentially damages sought by any sub-charterers or cargo interests further down the chain.