BARECON classification obligation is absolute
A Court has held that the obligation to maintain a vessel in class under a BARECON ’89 form was both an absolute obligation and a condition of the bareboat charterparty. In doing so, it disagreed with the Tribunal’s findings, which had resulted in the Tribunal refusing to grant the Owners an injunction requiring delivery up of the vessel on the grounds of the Charterers’ breaches of the bareboat charterparty.
The background facts
On 17 October, 2012, the Owners bareboat chartered the vessel to the Charterers under an amended standard BARECON ’89 form for a period of 15 years. The vessel was delivered into the charter service on or about 18 October, 2012. She arrived at the Caspian port of Astrakhan for repairs and maintenance on 31 October, 2017. She was classed by Bureau Veritas (BV), but her class certificates expired on 6 November, 2017, before she entered dry dock for repairs.
On 7 December, 2017, the Owners sought to terminate the Charterparty because, among other things, the vessel’s class had expired. They alleged that the Charterers were in breach of the classification obligation in Clause 9A) of the charterparty, which provided as follows:
“9. Maintenance and Operation
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, 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 (I), 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. 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 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 obligation had an obvious temporal element, because the vessel’s class had to be maintained ‘at all times’
The Owners also alleged unpaid hire and a failure to maintain the vessel in a good state of repair. They demanded the return of the vessel, but the Charterers resisted that demand and denied any breach, contending that the charterparty remained alive. They argued that the Owners were well aware that the vessel was undergoing scheduled maintenance works. The vessel had arrived at the dock prior to expiration of the documents and representatives of BV were constantly monitoring the vessel during her repairs and maintenance works. The vessel was not out of class. Upon completion of the works, the BV surveyors would undertake a final inspection and a new set of documents would be issued accordingly.
Decisions
The Owners sought a final injunction requiring delivery up of the vessel from the arbitral Tribunal, but the Tribunal dismissed the application. The Tribunal equated the Charterers’ obligation to maintain class with the obligation to maintain and repair the vessel. These were not absolute obligations, but only obligations to exercise reasonable diligence.
The Tribunal further held that the obligation to maintain class was not a condition of the charterparty contract which, if breached, would allow the Owners to immediately terminate the charterparty for breach of condition and/or repudiatory breach of contract by the Charterers. Rather, it was an intermediate condition that would allow the Owners to terminate only if the breach was serious enough to deprive them of the substantial benefit of the charterparty. If the Charterers were in breach of their obligations to maintain/repair the vessel and to maintain her class, they had to take immediate steps to carry out the necessary repairs and reinstate the class certificates within a reasonable time, failing which the Owners could then withdraw the vessel from service. However, the burden of proof was on the Owners to establish that the Charterers were in breach of their obligations as of 7 December 2017. On the evidence, the Tribunal did not think that the Owners had established this.
The Owners appealed, and the Court has allowed the Owners’ appeal. The Court distinguished between the maintenance obligation, which was one of reasonable diligence, and the classification obligation, which was an absolute one to keep the vessel with unexpired classification of the relevant class and with other required certificates in force at all times. The two obligations were different in quality. There was a distinction to be drawn between a vessel’s physical condition and her classification status. A vessel’s class was a matter of status and the classification obligation was essentially documentary. Unseaworthiness was not a matter of status. The Charterers could be in breach of the classification obligation without being in breach of the maintenance obligation. The Court stated that the reference to “other required certificates” in Clause 9A) reinforced the fact that the classification obligation was not targeted at maintenance. While the two obligations were related, they were not part and parcel of a single obligation, as the Tribunal appeared to have found.
The Court further found that the classification obligation was a condition of the bareboat charterparty. The obligation had an obvious temporal element, because the vessel’s class had to be maintained “at all times”. Either the vessel was in class or it was not. Only one kind of breach was possible. The obligation was clear and absolute with a fixed time element, suggestive of a condition. The Charterers’ obligation to keep certificates valid was an integral feature of a bareboat charter because loss of class could have potentially adverse consequences not only for the parties but also third parties and regulatory authorities. It could affect insurance, ship mortgage and flag. Additionally, damages for breach of the classification obligation might be difficult to assess.
The Court distinguished non-payment of hire under a time charterparty. Unlike breach of an obligation of punctual payment, which may be very trivial or minor, breach of the obligation to maintain the vessel in class was likely to be serious. To treat the classification obligation, therefore, as a condition would not risk allowing trivial breaches to have disproportionate consequences.
This decision reflects the importance of a vessel’s classification status under a bareboat charter because of the serious consequences that can result from loss of class.
Silverburn Shipping (Iom) Ltd v. Ark Shipping Company LLC (M/V Arctic) [2019] EWHC 376 (Comm)
Michael Volikas and Reema Shour are Partner and Professional Support Lawyer respectively at Ince Gordon Dadds, an international law firm. Contact Mr Volikas on +44 (0) 20 7481 0010 or by emailing michaelvolikas@incegdlaw.com. Contact Ms Shour on the same number or by emailing reemashour@incegdlaw.com.