A brief commercial look at tanker charters in the wake of "The Kriti Filoxenia"

March 2016

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In ST Shipping & Transport Inc. v. Kriti Filoxenia Shipping Co SA [2015] the Commercial court reviewed the relationship between the cancellation clause (Clause 17) and the re-nomination clause (Clause 24), in a standard BPVOY3 form. The court was asked to determine whether the Charterer could still exercise the right to cancel after nominating an alternative load port.

The standard BPVOY3 provides that:

Clause 17.2: “If it appears to Charterers that the vessel will be delayed beyond the cancelling date, Charterers may require owners to notify Charterers of the date on which they expect the vessel to be ready to load, whereupon Charterers shall have the option to cancel this charter and such option shall be declared by Charterers within 96 hours, Sundays and holidays excepted, of the receipt of the said notification from Owners.”

Clause 24.2: “If after loading or discharge port or place has been nominated, Charterers desire to vary such port or place, owners shall issue such revised instructions as are necessary at any time to give effect to Charterers’ revised orders…”

Background Facts:

The dispute arose whilst the vessel was en-route to the first nominated load port, Tuapse. The Charterer requested the vessel’s ETA for Tuapse and two further ports from within the permitted range. The Charterer was informed that the vessel could only reach Tuapse and Sevastopol before the cancellation date; however, the Charterer exercised the right under clause 24 and re-nominated the third port, Batumi, as the new first load port. From the time the vessel left her previous discharge port she would never have been able to reach Batumi by 16:00 on the cancellation date; therefore, it was not the timing of the re-nomination that hampered achievability. Upon confirmation the following day that the vessel’s ETA for Batumi remained after the cancellation date, the Charterer gave notice to cancel the Charterparty. The Owner accepted Charterer’s notice as a repudiatory breach and succeeded at arbitration in the claim for damages in the amount of US$737,303.

On appeal to the High court:

The Charterer raised two questions of law:

“Q1. Whether, on the true construction of the Charterparty, the Charterers’ right to cancel the Charterparty pursuant to clause 17 thereof survives a re-nomination of the first load port pursuant to clause 24. (and)
 Q2. If the Charterers’ right to cancel the Charterparty pursuant to clause 17 does survive a re-nomination of the first load port, whether on the true construction of the Charterparty Charterers are nevertheless not entitled to cancel the Charterparty in circumstances where the re-nomination was made at a time when the ETA for the re-nomination port was after the Cancelling Date.”

The court upheld the Tribunal’s conclusions on both questions.

The court stressed that the BPVOY3 Charterparty is a carefully drafted document and that if the parties had intended for the cancellation clause to survive re-nomination it would have been expressedly provided for. The Charterparty was intended to be read using the ordinary and natural meaning of the words used, remembering the inherent commercial responsibility within any Charterparty that both parties should do their utmost to assist the vessel in performing under the Charterparty and not prejudice any of the clauses. It therefore follows that under the cancellation clause the Charterer has a duty not to impair the achievability of the cancellation date.

The two competing commercial interests were clear. The absence of a re-nomination clause would provide Owners with certainty of instruction; however, the clause offers the Charterer the flexibility to align their shipping and cargo commitments. It was the Owner’s interests that prevailed.

Mr. Justice Walker found that the vessel was under no obligation to anticipate the re-nomination of the first load port. The initial nomination was contractually binding and not “written in pencil.” Therefore at the point of initial nomination the vessel’s duty was only to ensure that it arrived at the initial port prior to the cancellation date.

If Charterer’s argument had been successful, and the right to cancel survived re-nomination, the result would be that the vessel would be compelled to steam to the initial load port at such a speed as necessary to allow for any potential re-nomination within the permitted range. Otherwise the Owner risks cancellation if, at the time of re-nomination, the vessel cannot arrive at the re-nominated port before the original cancellation date. This is clearly unfair on the Owner and commercially undesirable.

The Judge emphasised, taking into account the importance of Charterer’s duty of co-operation, that when a re-nomination is made the Charterer does not look back to the point prior to the original nomination. It looks to the vessels current position. Had the Charterer nominated Batumi originally they would have been able to legitimately exercise their right to cancel because the vessel could never have made the cancellation date. However, the duty to reach any other port in the range ceased once the Charterer nominated Tuapse. The duty of cooperation meant that the Charterer could not cancel if the vessel’s ETA at the re-nominated port was after the cancellation date at the time of re-nomination.

Tanker charters moving forward:

The more prevalent tanker charters in circulation provide for the cancellation clause to survive re-nomination, with the period of delay arising from the re-nomination being added to the cancellation date. Charterers therefore preserve their right to cancel, whilst Owners maintain an acceptable level of certainty.

In comparison to BPVOY3, the BPVOY4 provides:

Clause 22.2.1: “If solely by reason of Owners’ compliance with such revised Charterers’ Voyage Orders, the Vessel suffers delay causing her to arrive at the nominated port after the Cancelling date stated in section G of Part 1 or new cancelling date determined under Clause 16.1, the then Cancelling Date or the new cancelling date, as the case may be, shall be extended by the period of such delay.”

If the same facts as above were to occur during a BPVOY4 charter, would the vessel have incurred any delay “solely by reason of Owners’ compliance with such revised Charterers’ Voyage Orders”? The port of Tuapse was en route to the port of Batumi and the vessel was not required to deviate. The loss of time suffered by reason of the renomination was that the vessel had slow steamed to Tuapse, not expecting a renomination to a further port. Even with the cancellation date extended to incorporate the time lost resulting from the slow steaming, the evidence suggests that vessel would still have provided an ETA after the new cancellation date. At the moment of confirmation the Charterer would have been entitled to cancel without being concerned with any implied duty of cooperation. The position would be the same under the SHELLVOY5 or 6 charters, which both preserve the Charterer’s right to cancel after re-nomination. Under an EXXONMOBILVOY 2005 form the Charterer would have had to wait until the cancellation date had passed before notifying the Owner of their intention to cancel, but the Owner would be equally susceptible to cancellation.

When contracting under a BPVOY3 charter, if Charterers wish to preserve their right to cancel after re-nomination, the standard form must be amended so that this right is expressly provided for. Otherwise if similar circumstances arise, Charterers will have to balance the commercial importance of re-nominating the load port against losing their right to cancel on a voyage by voyage basis.

To balance the commercial scales, Owners may seek to ensure that the repercussions of any delay or deviations are explicitly for Charterers’ account, which may include the vessel’s future employment. The BPVOY4, EXXONMOBILVOY 2005, SHELLVOY5 & SHELLVOY6 charters hold Charterers liable for the additional steaming time and excess bunkers consumed. As a result of amendments to the (1999 Amended) SHELLVOY 5, Charterers are no longer at risk of having to compensate the owner for any loss and expense, other than for deviation or delay at the demurrage rate. Prior to this amendment Owners under a SHELLVOY5 could claim for any loss or expense as long as Charterers were promptly notified. This limitation clearly benefits Charterers’ interests. The remaining charters are silent on this point. The amendment to the SHELLVOY 5 standard form probably represents current market conditions.

Although the right to re-nominate should be exercised within a “reasonable time” none of these other forms mentioned set a specific time-limit on Charterers right to re-nominate the load port. If the vessel has tendered NOR at the originally nominated port then that should bring an end to the renomination option; however each case will turn on its own facts and it may be arguable that the right is lost at an earlier time. Any change in voyage orders may result in losses to Owners well in excess of the demurrage and bunker amount. Depending on the vessel’s schedule, future contractual responsibilities may be jeopardised by Charterer’s delay. Owners may therefore wish to consider the vessel’s future employment ventures before contracting to limit their compensation in any way. Alternatively they can of course factor in the additional risk and look to reflect it by increasing rates.

The Kriti Filoxenia serves to remind both Owners and Charterers of the importance of incorporating clearly drafted clauses to protect their commercial interests. This is true both in terms of preserving rights and when considering their repercussions.

BPVOY5 came into force on 21 March 2016. Whilst beyond the scope of this article, the cancelling clause under the new charter form (cl 7) is more or less the same as BPVOY4 (cl 16), but there are differences between these forms and BPVOY3. Similarly there are differences between the Revised Voyage Orders clauses of BPVOY4 and 5, and BPVOY3.

Article by Edward Barnes, Syndicate Executive

edward.barnes@simsl.com