Ship Leasing: Does Loss Of Class Entitle Owners To Terminate?

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...