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Legal 500, 2021


Vessel operators need to show a bit of class

April 16 2019

Expired Class Certificates
Silverburn Shipping (IOM) Ltd V Ark Shipping Co LLC (THE M/V “ARCTIC”) [2019] EWHC 376 (Comm)

In “The Artic”, the High Court provided a definitive reminder to owners and bareboat charterers of the importance of keeping a vessel in class, finding that the obligation is absolute and a condition of the charterparty. In other words, failure to keep the vessel in class may well entitle the other party to terminate the charterparty early.

The MV Artic, a newbuild classed with Bureau Veritas, was demise (bareboat) chartered, under an amended Barecon 89 form, for 15 years. The vessel’s class expired in November 2017, while in port for repairs and maintenance, including dry-docking in preparation for her special survey. A month later, the owners purported to terminate and withdraw the vessel from the charterparty on the basis that charterers had failed in their obligation under Clause 9A, which was a condition of the charterparty. Clause 9A relevantly provided that:
“[the charterers] 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”
It should be noted that the form allows for the obligation to keep the vessel in class to be shifted to the owners, but that was not done here.

The dispute was first considered by an arbitration tribunal. The tribunal dismissed the owners’ argument, concluding that the charterers’ obligation under Clause 9A was not an absolute obligation and not a condition of the charterparty. In the absence of any prevailing authority in a bareboat charterparty context, the tribunal compared the situation to that of a time charterparty, specifically the NYPE form, which requires owners to “maintain [the vessel’s] class and keep the vessel in a thoroughly efficient state in hull, machinery and equipment for and during the service”. The tribunal considered that this wording only imposed an intermediate obligation to exercise reasonable due diligence to maintain the vessel’s condition and class. Unlike the unconditional nature of an absolute obligation, an intermediate obligation would only allow termination of the charterparty if the breach was serious enough to deprive the party of the substantial benefit of the contract. The tribunal did not distinguish the position under time charterparties from that of bareboat charterparties: it held that the charterers’ obligation to maintain and repair the vessel was part and parcel of their obligation to maintain class. Accordingly, charterers’ obligation to keep the vessel in class was qualified to the extent that they were required to return the vessel to class within a reasonable time.

On appeal, the High Court reversed the tribunal’s ruling. The judge, Mrs Justice Carr, agreed with the owners that the tribunal’s drawing of an analogy between the classification obligation under Clause 9A with the NYPE wording was wrong, as the contracts are fundamentally different in both language and commercial context, describing the “essential difference” between bareboat and time charterparties as being that: “In the latter, whilst the charterers have the commercial use of the vessel, the vessel’s operation stays with the owners. In a bareboat charter, charterers have full possession and operational control”.
She also commented that the consequences of the loss of class is far more serious to an owner than to a time charterer.
She held that there was a natural and ready distinction between a vessel’s physical condition/maintenance status and its classification status. In order to permit charterers to return the vessel to class within a reasonable time, express wording to that effect would have had to have been included in the classification limb of Clause 9A. In the absence of such wording, the classification obligation was absolute.
Further, Mrs Justice Carr determined that the obligation to keep the vessel in class was a condition of the charterparty, enabling owners to terminate upon charterers’ breach. She concluded that any breach of the classification obligation was immediately, readily and objectively ascertainable. She also considered that the Clause had “an obvious temporal element” by virtue of the requirement that the vessel had to be in class “at all times”. In summary, she held that the classification obligation was “clear and absolute with a fixed time limit, redolent of a condition”.

The High Court’s clarity on this issue recognises the commercial and practical arguments of a vessel on bareboat charter being kept in class at all times.
Unlike, for example, a breach of an obligation of punctual payment, which can vary from significant to trivial (1), the breach of a classification obligation can have wide-reaching consequences for owners under a demise charter. The vessel is entirely at the charterers’ disposal, providing the owners with significantly less control to intervene and ensure that the vessel is kept in class, and at risk of suffering adverse consequences in the event that it is not. Such consequences could include invalidating insurance cover, flag state compliance issues and/or default with mortgage lenders. To label a classification obligation as being less than a condition of the charterparty would risk owners being powerless to terminate the charter and face the unwelcome prospect of being unable to retrieve a vessel that is potentially uninsured and/or non-compliant, due to their charterers’ breach.
Readers are reminded that this principle does not apply in the same way to time charterparties. In time charterparties, it is the owners who bear responsibility for maintaining class and (unless different terms are agreed) they are only required to have the vessel in class at the date of the charterparty: there is no continuing strict obligation on the owners to ensure that the vessel remains in class. It is usual, however, for time charterers to impose on the owners an obligation to maintain the vessel’s class during the charter and, where appropriate, reinstate class within a reasonable time.
Lastly, it is not clear whether the High Court’s decision would have been the same if the parties had agreed that the obligation to maintain class at all times had rested with the owners. On the one hand, the exact words that were used contributed significantly to the decision but, on the other, the commercial factors that argued in favour of the innocent owners being protected would not apply in the same way for innocent bareboat charterers.

The authors, Kevin Cooper and Freddie Courtney, welcome any questions or comments on the subject of this article.

(1)See Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2016] 2 Lloyd’s Rep 447

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