BARECON 2017 – a broad brush revision of a widely used form

BIMCO has today, 13 December, released the new BARECON 2017 – a revision of its 16 year old predecessor BARECON 2001. This represents an important update to one of the most commonly used maritime contracts – regularly applied for all types of maritime assets across all sectors in the shipping and offshore industries.

BARECON is a bareboat charter where the charterer obtains possession and full control of the vessel along with the legal and operational responsibility for it. As such, the form is a key element in project finance transactions, commercial fixtures between shipowners and operators and more generally in relation to inter-company chartering between affiliates.

BARECON 2017 follows the same general lay-out as its predecessor, and we summarise some of the main updates below:

Delivery condition:
Delivery of the vessel under a bareboat charter is a key milestone, as after it has accepted delivery, the charterer is generally prevented from asserting any claims based on the condition of the vessel. In terms of condition on delivery, the new form maintains the general requirement that the vessel shall be delivered in a seaworthy condition, ready for service under the charter and in accordance with the particulars set out in the charter. However, whilst the owners previously only had an obligation to exercise "due diligence" to satisfy these requirements, compliance is now made an absolute obligation which may increase the owner's liability should the vessel fail to meet the requirements. If the charterer has conducted an inspection prior to delivery it is now also a requirement for the vessel to be delivered in the same condition (fair wear and tear excepted) as she was at the time of such inspection. It is further made a requirement that the vessel's class certificates shall be free from any conditions or recommendations on delivery.

Time of delivery:
With respect to the time of delivery, the new form generally requires owners to keep the charterers informed of the vessel's itinerary. The parties are now required to expressly state the number of day's approximate and definite notices to be given (as the standard fall-back position in BARECON 2001 of 30 days' preliminary and 14 days' definite notice have been removed in this latest iteration of the form). The owner is now also required to only permit the vessel to be employed on voyages / contracts that can reasonably be expected to be completed prior to the agreed delivery date.

Familiarisation and surveys:
The charterer is now allowed to place two representatives on board the vessel for familiarisation purposes for a reasonable period prior to delivery under the charter. In addition to the general surveys to determine the condition of the vessel at the time of delivery, charterers are also granted the option to arrange an underwater inspection by a diver appointed by the classification society. Similar rights of familiarisation and surveys (including underwater inspections) are also extended to the owner prior to redelivery of the vessel.

Payment of hire:
Payment of hire is of course the key obligation for the charterer. BARECON 2017 contemplates separate hire terms for option periods. Whilst the remedy period in case of late payment was left for the parties to specify in the previous form, it is now fixed at 3 banking days after the charterers received the owner's notice before the owner is entitled to terminate the charter. The standard default interest is changed from 2 per cent over three month LIBOR to 3 per cent over 1 month LIBOR.  A requirement for the charterer to gross-up its payments in case of withholdings was previously often included in rider clauses, but is now expressly set out in the standard text.

New class and regulatory requirements:
A timely and substantial change is made to the provisions regarding new class and regulatory requirements. Considering that the shipping and offshore industry is subject to an increasing number of regulatory requirements, in particular related to environmental issues, this change will likely be of significant practical importance. Whist BARECON 2001 had a somewhat generic reference to how the costs of such requirements should be distributed between the parties; BARECON 2017 now sets out two alternatives. The first alternative (and default position if no selection is made) is that all costs shall be for the charterer's account. The second alternative is based on a formula with three main scenarios:

  1. The starting point is that the costs of the required modification up to an agreed amount shall be for the charterer's account.
  2. If the costs exceed the agreed amount and the required modification is expected to last for the remaining life of the vessel, the charterer's portion shall be based on a formula where the costs of the required modification is divided by the vessel's expected remaining life in years and multiplied by the remaining charter period in years.
  3. If the costs exceed the agreed amount and the required modification is not expected to last for the remaining life of the vessel, the charterer's portion shall be based on a formula where the costs of the required modification is divided by the modification's expected life in years and multiplied with the remaining charter period in years. 

Insurance and repair:  
The insurance and repair provisions are split out and made more easily accessible. However, one of the most important changes in BARECON 2017 is intended to negate the effect of the recent "Ocean Victory" case by clarifying that the co-insurance arrangement is meant to ensure payment under the insurances as a first resort to cover the loss without excluding or settling liability between the owners and the charterers or affecting recovery against third parties.

Termination:
The provisions regarding terminationdue to the other party's breach of contract are more or less the same, except that the charterer is given a right to terminate in case the owner fails to take out insurance where required to do so in accordance with clause 17(c).

Some important changes are however made in respect of the special circumstances that can lead to termination:

  1. The war risk clause has been removed, and BARECON 2017 has thus eliminated the possibility for termination in case of outbreak of war between specified countries and also other flexibility extended by the clause.
  2.  The charter will still be terminated however in cases of total loss or requisition of title (but not requisition for hire).
  3. Additional termination rights are also included in case of the other party's breach of the newly included anti-corruption and sanctions clauses.

Part III – Newbuilding:
The revised optional Part III regarding newbuilding vessels also includes some important amendments. The specification of the vessel under the bareboat charter is still based on the specification in the building contract which shall not be amended without the charterer's consent. In BARECON 2017 the charterer is however also given the ability to request change orders against covering the costs of same. Termination of the building contract is still a trigger for termination of the bareboat charter, but in the new form it is the owner (and not the charterer) who makes the decisions regarding such termination.

Part IV – Hire purchase:
In the optional Part IV the previous hire/purchase mechanism is replaced with a new purchase option. Whilst the previous solution provided for transfer of title simultaneously with payment of the last hire at expiry of the charter period, the new solution caters for the charterer to be given several options to purchase the vessel at certain specified times and at pre-determined prices  by giving at least 6 months' prior irrevocable notice.

Part V – Bareboat registration:
The optional Part V regarding bareboat registration remains, and now also includes a provision requiring the charterer to arrange for deletion of the bareboat registration upon termination of the bareboat charter.

Summary:
In summary, the widely used BARECON has been broadly revised based on various recent rulings from the English courts as well as changes in chartering practice adopted by the industry. Whilst several new features are included, the basic structure of the form remains the same and it should still be suitable for bareboat charters for a variety of transactions and assets. Furthermore, several of the simplifications, clarifications and other updates should make the form easier to use in conjunction with rider clauses crafted for the specific transaction.

Although it often takes some time for a new form to be adopted, we expect BARECON 2017 to quickly become the standard form bareboat charter across the shipping / offshore sectors.