A matter of approval

Oct 24 2013

New York arbitrators have considered the implications of oil major approval clauses under charterparties.*

Maritime arbitrators in New York recently awarded a shipowner $7.45 mill in damages after finding that a charterer was in breach for cancellation and premature redelivery of the owner’s vessel, which had achieved the necessary approval of three oil majors under the terms of the charterparty.

The dispute had its origins in a two-year timecharter on the Shelltime (1984) form between Falcon Carrier Shipping, as owner of the 68,147 dwt oil tanker Falcon Carrier, and timecharterer ST Shipping and Transport, the shipping and chartering arm of Glencore.

Falcon Carrier had been chartered on a number of occasions by ST Shipping, dating back to 2004, but the charterparty at issue in this dispute was a two-year agreement dated May 2008. Just before delivery under the charter, the vessel underwent a SIRE (Ship Inspection Report Programme) by a BP inspector. (The SIRE programme was launched in 1993 to specifically address concerns about substandard shipping). BP subsequently advised Falcon that the vessel was rejected and unacceptable for BP Group use. Shortly thereafter, ST Shipping issued notice to cancel.

She subsequently underwent another three SIRE inspections. Falcon contended that these were favourable and the vessel was acceptable to the oil major named under the charter. But ST Shipping maintained that the results were negative and therefore began issuing cancellation notices and arranging for redelivery of the vessel at Cristobal, Panama.

Two days after the vessel’s arrival at Cristobal, ST Shipping reversed its position and said it intended to continue with the timecharter. It issued voyage orders, which Falcon agreed to comply with provided ST Shipping’s redelivery notice was withdrawn and ignored.

Some 11 days later, while the vessel was performing the nominated voyage, ST Shipping claimed that, while it considered the redelivery notices withdrawn, it still deemed the original cancellation notice to be in force.

Thereafter, the vessel performed five further chartered voyages before ST Shipping issued a second notice of cancellation and redelivery, pursuant to physically redelivering the vessel on 3rd March, 2009.

The principal issue in dispute was whether ST Shipping’s cancellation of the charter and its early redelivery of the vessel were wrongful and in breach of Clause 48 of the charter.

The clause had more than a hundred additional riders, the most relevant of which stipulated, in pertinent part – ‘The vessel shall hold at least three out of the following oil majors – Conoco / Chevtex / Exxonmobil / BP Amoco / Shell / Statoil… If during the charter any of the approvals will be withdrawn or expired, owners shall take necessary steps to rectify the faults and/or maintain acceptance… Should owners fail to maintain at least three approvals … charterers to notify owners and owners to have 45 days after notification, or three discharge ports, whichever occurs later, to rectify same. If after such time vessel still fails to maintain at least three oil company approvals … charterers have the option to cancel the charterparty by giving redelivery notice…’


Standard clause

Falcon maintained that a plain reading of Clause 48 indicated that it was one of ST Shipping’s standard rider clauses and that any ambiguity in its terms should therefore be resolved in favour of the owner. It further argued that approval clauses in tanker charterparties are a misnomer and a carry-over from pre-Erika days, and that the tanker industry now fully understood that there are no such approvals.

ST Shipping, meanwhile, contended that Clause 48 was not a charterer’s clause and that, once it had made a prima facie showing that the vessel lacked the required Clause 48 approvals, it was then the owner’s burden to prove that the vessel did in fact have the requisite approvals. The only means to determine whether, or not, a vessel was approved, maintained ST Shipping, was for the vessel to be offered to an oil major for charter, or for loading, or discharge.

Arbitrators Manfred Arnold, Jack Berg and John Martin agreed that oil majors no longer issue approvals as such. But they sharply disagreed as to the proper construction of the Clause 48 approval provision. The three issues to be decided were: whether the Clause 48 notice remained in effect after Falcon accepted early redelivery of the vessel and after ST Shipping subsequently agreed to continue with the time charter; whether the vessel had three oil major approvals when ST Shipping gave its notice of redelivery; and whether the notice of redelivery satisfied the time requirements under Clause 48.

The arbitrators agreed that Falcon had every reason to believe that ST Shipping had agreed to waive the Clause 48 notice when it decided to continue performing under the charterparty after initially redelivering the vessel at Cristobal. It was noted that Falcon had conditioned its agreement to perform the ST Shipping sub-charter on ST Shipping’s agreement to withdraw all prior redelivery notices.

They noted that, by waiting 11 days to contest Falcon’s assertion that its performance of the sub-charter was conditioned on its understanding that the Clause 48 notices were deemed withdrawn, ST Shipping severely prejudiced Falcon’s right to refuse the voyage instructions and to retain commercial control of the vessel. It was therefore held that ST Shipping had waived any right to claim that the Clause 48 notice remained in effect.


Not in breach

The arbitrators found that Falcon was not in breach of the three oil major approvals at the time of the redelivery notice being issued. It was noted that Clause 48 provided Falcon with the time and opportunity to have additional SIRE inspections performed before the vessel could be redelivered, but did not mention an actual acceptance of the vessel for a voyage by an oil major.

Since it was ST Shipping which controlled the vessel’s employment and the actual tendering of the vessel to a particular oil major, ST Shipping’s construction of the Clause 48 provision of time for additional SIRE inspections provided no protection to Falcon, which would have no way of compelling ST Shipping to offer the vessel to any oil major for a voyage and no way of knowing that the vessel had been rejected by an oil major, which had previously approved the vessel.

Emphasising that not every rejection of a vessel by an oil major indicates that the vessel is totally unacceptable to that oil company, the arbitrators noted that, once there has been a successful SIRE inspection and the oil major has indicated that the vessel is acceptable in a manner similar to the December 2008 inspections carried out by Shell and BP on the Falcon Carrier, the owner should be deemed to have the approval of that oil major.

Once an owner has completed a successful SIRE inspection, said the arbitrators, the owner may consider the vessel approved by the oil major conducting the inspection unless and until the charterer can demonstrate that the oil major subsequently determined that it would not accept the vessel for any purpose without an additional SIRE inspection.

Noting that the vessel had approval from BP and Shell in February 2009, the arbitrators found that Falcon had done all in its power to obtain the approval and that it was likely that the vessel would be accepted at least for some voyages by those companies. While there was no record of any other current SIRE inspection that would have indicated approval of the vessel by a third oil major in February 2009, the record indicated that some oil majors might employ the vessel based on recent SIRE reports, which are posted on the OCIMF website.

They also noted that, in connection with a sub-charter in January 2009, ST Shipping had stated that the vessel was not unacceptable to ExxonMobil, Shell, BP, and Statoil Hydro. ST Shipping, said the arbitrators, could not subsequently assert that the vessel was not acceptable to these oil majors. In conclusion, it was held that, in February 2009, the vessel had the requisite Clause 48 approvals. Moreover, since the vessel had the required approval, the redelivery notice by ST Shipping was improper.

The arbitrators awarded Falcon Carrier Shipping the sum of $7.45 mill in respect of cancellation damages, redelivery hire, off-hire, interest and legal fees.

*Society of Maritime Arbitrators Award Service reference 4217, New York, 20 September 2013.

Footnote - The implications of the Falcon Carrier dispute will form the subject of a major discussion at the Society of Maritime Arbitrators (SMA) seminar to be held in New York on 21st November this year, as part of the SMA’s 50th anniversary celebrations.

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