Auteurs

Introduction

Reported cases involving bareboat charters are rare. The recent English Court of Appeal decision in Ark Shipping Company LLC v. Silverburn Shipping (IOM) Ltd [2019] EWCA Civ 1161 (The "Arctic" ) should therefore be of interest to everyone involved in ship leasing. 

The Respondent Owners bareboat chartered their vessel on the amended BARECON 89 Form to the Appellant. The sole question of law on appeal was whether Clause 9A (“the Clause”), obliging Charterers to:

"keep the Vessel with unexpired classification of the class indicated in Box 10 and with other required certificates in force at all times."

was a condition or an innominate term. 

Owners have a clear and automatic right of termination for breach of condition. Breach of an innominate term, however, requires an examination of the consequences of the breach to determine if Owners were deprived of "substantially the whole benefit of the contract", a 'wait and see' approach which is susceptible to differing interpretations.

English law draws a fundamental distinction between bareboat charters and time charters1: the Charterers, rather than the Owners, are in possession and control of the vessel in a bareboat charter. Classification status, a prerequisite for insurance coverage, is thus integral to the protection of Owners’ rights in an arrangement where the management of their asset lies entirely beyond their control. 

The Clause

In the present bareboat contract, Cl. 9A was drafted in the following terms, with emphasis added:

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(l), they shall keep the Vessel with unexpired classification of the class indicated in Box 10 [i.e., BV] 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 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.

Contractual interpretation

To construe the Clause, the Court of Appeal adopted the test in Wood v. Capita Insurance Services [2017] UKSC 24, which calls for an ‘iterative process’ involving both textualism and contextualism. 

Textualism 

The two principal arguments relied on by the Charterers were, first, the Clause had never been labelled as a condition, and second, the need to keep “other required certificates” unexpired “at all times” was unrealistic. On these grounds, they submitted that the term must be innominate. Whilst the Court of Appeal accepted Charterers' arguments, the conclusion that the Clause was merely innominate is open to question. 

First, the labelling of the Clause is immaterial following Hong Kong Fir Shipping Ltd v. Kawasaki Ltd [1962] 2 Q.B. 26. The case laid down the approach of substance over form, and the court must assess the contract holistically to ascertain the status of the Clause. 

Second, it is admittedly unrealistic that every possible “required” certificate must be kept unexpired “at all times”, including trivial, minor, and purely administrative ones. At the outset, the word “required” could be interpreted in one of two ways: certificates required as a matter of purely administrative compliance, or certificates required to support the very purpose of the clause (i.e. to ensure effective maintenance). By interpreting the word according to the latter understanding, only documents such as classification status and those integral to the very purpose of the clause will amount to a condition. 

This interpretation is consistent with the evolution of BARECON 89 to BARECON 01, where the term “other required certificates” was substituted with “all other necessary certificates” – with the term “necessary” connoting a higher importance than being merely “required” for administrative reasons. 

Indeed, it is implausible that the Drafting Committee of BARECON 89 intended the term “at all times” to apply only to “other required certificates”. “At all times” is the only temporal term in a single sentence which concurrently refers to both class certificates and other required certificates. 

The fundamental need to keep Class at all times is highlighted in the commentary to BARECON 012. The intention regarding Class and its validity is unequivocal:

In the Maintenance and Operation Clause of BARECON 89 the charterers were required by sub-clause 9(a) to ‘keep the Vessel with unexpired classification’. This phrase was felt to be slightly unclear and has been re-worded in the sub-clause 10(a)(i) of BARECON 2001 to read ‘keep the Vessel’s Class fully up to date.’”

To construe the Clause as innominate and thus requiring Class to be reinstated only “within a reasonable time” would be a substantial re-wording of the contract. With reference to the second and third sentences of Clause 9A (emphasis added): 

Second sentence of 9A: 

they shall keep the Vessel with unexpired classification of the class indicated in Box 10 [i.e., BV] and with other required certificates in force at all times”.

Third sentence of 9A: 

The Charterers to take immediate steps to have the necessary repairs done within a reasonable time”.

The Court of Appeal’s ruling in favour of Charterers arguably amounts to a transferral of the phrase “unexpired classification” from the second to the third sentence. 

Contextualism

The ruling took into account as part of the context the lack of serious consequences which arose on this occasion from the breach. However, contracts should only be construed with reference to the circumstances at the time of contract formation. This is so even if those circumstances were used to gauge the likelihood, rather than actual occurrence, of serious consequences arising from the breach – the likelihood of which must also be ascertained at the point of contract formation.

Insurance is also of paramount importance to an Owner whose ship has been leased to a bareboat Charterer. In practice, losing Class would lead to the vessel being off-cover. And further, failure to maintain the vessel’s insurances is invariably an event of default, entitling the third party mortgagee bank to re-possess the vessel.

It is immaterial that the mortgagee bank may not opt to do so; this is not evidence that the consequence of breach is ‘trivial’.

The fact that a certain consequence is not bound to happen does not mean that the term must never be a condition. The overarching intention to maintain Class and insurance in bareboat charters where Owners have relinquished control of their own property has been defeated once a third party becomes entitled to re-possession, regardless of whether they choose to exercise that entitlement or not.

All in all, construing the term as innominate rather than conditional could open a can of worms – for example, if the vessel becomes a total loss in the interim period after the expiration of Class but before it becomes ‘unreasonable’ for the charterers not to reinstate it.

Conclusion 

For Owners who have relinquished control of the vessel, there is no such thing as a “minor” or “technical” breach of the Class obligation, since it exposes them to loss of insurance and also the risk of re-possession.

For these reasons, Owners and Lessors should consider carefully whether their bareboat charters should be drafted to stipulate expressly that loss of Class entitles them to terminate.


1 Per Lord Esher in Baumwoll v. Gilchrest [1892] 1 Q.B. 253 at p. 259

2 BIMCO Bulletin No. 2, 2002