BAREBOAT CHARTERS – charterer’s maintenance and redelivery obligations

Difficult market conditions motivate cost savings wherever possible and this includes expenditure relating to the general maintenance of vessels. There has been an increase in disputes concerning the condition of vessels at the time of redelivery under a bareboat charter. Questions arise as to what is the charterers’ duty of maintenance under a bareboat charter and how can the parties best position themselves to avoid disputes?

The Barecon form published by BIMCO is generally accepted as the industry standard bareboat charter, and has seen few disputes.However, difficult market conditions in segments of the maritime sector have forced the parties to save costs and vessels are increasingly redelivered in a worse condition than the mere aging of the vessel would account for.

Under Barecon 2001, as under most bareboat charters, the charterers are obliged to redeliver the vessel in the “same or as good structure, state, condition and class as that in which she was delivered, fair wear and tear not affecting class excepted”, cf. clause 15. Accordingly, the charterers are liable for any costs associated with repairing damage to the vessel above and beyond what can be considered “fair wear and tear”, regardless of whether class is maintained, while not bearing responsibility for the fact that the ship becomes older.

What is “fair wear and tear”?

Issues naturally arising under normal use, such as marine growth, will typically be for the owners’ account. Additionally, if the vessel was chartered and used for a particular purpose, “fair wear and tear” should be interpreted by reference to the purpose for which it has been used.

Owners would for example have to accept a higher level of wear and tear where the vessel was chartered for navig ation in ice covered waters or for military purposes such as conveying of troops and equipment.

Looking specifically at the issue of lack of general maintenance, some initial guidance can be found in the charterers’ duty under clause 10(a)(i) to maintain the vessel (i) in a “good state of repair”, (ii) in “efficient operating condition”, and (iii) in accordance with “good commercial maintenance practice” during the charter period. While these obligations must all be complied with, charterers will not automatically be in breach just because a defect has occurred. For a breach to arise, charterers must have failed to act promptly to remedy the defect.

The obligation of maintenance puts the burden on charterers to keep the vessel in a good state of repair. Failing to establish a sufficient maintenance system according to manufacturers’ guidelines may well amount to a breach of “good commercial maintenance practice” and damage and/or decline caused by this would therefore not be considered “fair wear and tear”.

Further the obligation of keeping the vessel in a “good state of repair” is not dependent on knowledge of the defect. That being said, the obligation does not arise if the defect is not reasonably discoverable.

The position under Norwegian and English law

There is little case law regarding the charterers’ duty of maintenance under Barecon 2001 under either Norwegian or English law or what is the threshold of “fair wear and tear”. Few other sources give any real guidance on the question of what level of deterioration owners have to accept.
Even after establishing a relevant threshold, the issue of proving that each particular item of damage and the corresponding loss is above “fair wear and tear” remains. Any ensuing litigation would revolve around the facts of the matter, and while it can be argued that the charterers, at least initially, would have the burden of proof, litigation would in practice come down to the opinion of experts as to what part of the vessel’s condition on redelivery can reasonably be expected and where a failure to maintain has occurred. This is likely to lead to a “battle of experts” which can often be an expensive and risky form of litigation.

Safeguarding owners’ interests

The issue concerning how one assesses the condition of the vessel on redelivery should be borne in mind when maintaining current charters and negotiating new charters.

In respect of current charters, owners should take particular care to comply with the provisions relating to off-hire surveys found in clause 7, ensuring a joint survey where possible. Independent verification of the state of the vessel at redelivery will give owners a much stronger position when faced with charterers’ breach, whether trying to reach an amicable solution or if litigating the claim becomes necessary.
It is also advisable for owners to take advantage of their right to inspect the vessel pursuant to clause 8, consistently keeping records throughout the charter period, noting any observed failures of the charterers. Should a dispute arise in relation to the charterers’ failure to maintain and/or repair the vessel, owners will have first-hand evidence with which to support their case.

When negotiating and drafting new charters, owners should give careful consideration to their expectations at the redelivery stage of the charter, and may wish to set out charterers’ specific obligations concerning the duty of maintenance and the state of the vessel on redelivery. A definition of what falls within “fair wear and tear” would also be advisable.

Examples of other safeguards would be to make it a condition precedent for owners taking redelivery that charterers’ tender the vessel in the same or as good state of repair, fair wear and tear not affecting class excepted. Owners could further make charterers’ maintenance obligations a condition of the charter.

It may however, be difficult to agree on more onerous maintenance obligations for the charterers, especially under a much-used standard form and in the current market conditions. Thus owners should at the very least take advantage of the rights already afforded to them under the standard Barecon charter. This includes the right to inspect the vessel, and to carry out an on-hire survey. Securing evidence of the vessel’s condition on delivery is in the interest of both parties, but of particular importance when establishing deterioration over the course of the charter.

Quantum of damages

Where charterers are found to be in breach of their redelivery obligations then owners have the burden of proof to show the loss that has been caused. Establishing the facts is typically secured by survey reports prepared either jointly or individually by each party. However the ability to document losses suffered by the improper technical condition of the vessel may be impacted by the owners’ disposal of the vessel upon it being redelivered.

Where owners take over the vessel for own trading, the burden of proof is relatively easy to meet by obtaining quotes for repair work deemed necessary to bring the vessel back to the required condition. If however the vessel is sold upon redelivery, quantum of damages may be more challenging to prove. Owners may well argue that the buyer would have been willing to pay more for the vessel if the redelivery condition had been as expected under the bareboat contract. Proving this may however turn out to be difficult, and in event of a dispute owners may not succeed with their claim in full, unless such facts are established by documenting the arguments from the buyer during negotiations for the purchase price agreed.