Time Charter - Shelltime 4 - Charterers' Notice on Vessel Condition

December 2001

In a recent arbitration a panel of three London arbitrators gave a decision on the meaning and effect of a notice under clause 3 of the Shelltime 4 form.

The relevant terms of clause 3 are as follows:

(i)

Throughout the charter service Owners shall, whenever passage of time, wear and tear or any event…requires steps to be taken to maintain or restore the conditions stipulated in Clauses 1 and 2(a), exercise due diligence so to maintain or restore the vessel.

(ii)

If at any time whilst the vessel is on hire under this charter the vessel fails to comply with the requirements of Clauses 1 [description and condition of the vessel], 2(a) or 10, then hire shall be reduced to the extent necessary to indemnify Charterers for such failure. If and to the extent that such failure affects the time taken by the vessel to perform any services under this charter, hire shall be reduced by an amount equal to the value, calculated at the rate of hire of the time so lost….

(iii)

If Owners are in breach of their obligation under Clause 3(i) Charterers may so notify Owners in writing; and if, after the expiry of 30 days following the receipt by Owners of any such notice, Owners have failed to demonstrate to Charterers' reasonable satisfaction the exercise of due diligence as required by Clause 3(i), the vessel shall be off hire, and no further hire payments shall be due, until Owners have so demonstrated that they are exercising such due diligence…

A vessel was chartered on an amended Shelltime 4 form for a period of 5 years. During the period of the charter, Charterers sent messages to Owners:

- purporting to give notice under clause 3(iii) of the charterparty in relation to the condition of the tank coatings; and

- instructing and/or requesting the Owners to carry out repairs to the vessel's tank coatings.

Owners' initial response was to seek a declaration from a tribunal (which had already been constituted to hear other disputes under the charterparty) that the Charterers were not able to compel them to carry out the repairs. However, it proved impossible to obtain a speedy ruling on this question so Owners decided to take the vessel out of service and to repair it immediately. They then sought an arbitration award, inter alia, on the following preliminary issues:

On the assumption that Owners had previously exercised due diligence in discharging the duties of maintaining the vessel laid upon them by the charterparty, whether:

1. (a) the notice under clause 3(iii) amounted, in all the circumstances, to a breach of contract on the part of the Charterers; and

(b) the said instructions and/or requests amounted to a breach of contract on the part of the Charterers.

2. Insofar as Owners suffered losses as a result of the vessel being off-hire for the period of the repairs, whether such losses were recoverable as damages for the aforesaid breach or breaches of contract.

3. Insofar as Owners suffered losses as a result of the vessel being off-hire for the period of the repairs, were they entitled to an indemnity in respect of such losses, whether or not the Charterers' notice and/or requests and/or instructions amounted to a breach or breaches of contract?

4. Whether the Owners waived their right to such damages and/or indemnity by reason of complying with the Charterers' requests and/or instructions.

The arbitrators found as follows:

1. A clause 3(iii) notice amounts to an allegation that at that date the Owners are guilty of a breach of their obligations under clause 3(i), that is that they had failed to exercise due diligence to comply with their obligations as to the vessel's condition. According to the tribunal, the position regarding the clause 3(iii) notice is analogous to orders to proceed to a particular port which carry with them the implied promise that the port is safe, i.e. that the conditions for the giving of a legitimate order have been satisfied. An illegitimate order made by Charterers to Owners is not merely ineffective but is treated as a breach of contract. Similarly, the tribunal held, giving a clause 3(iii) notice carries with it an implied promise that the conditions for the giving of such a notice are satisfied. In addition, the giving of a clause 3(iii) notice amounts to an implied request to the Owners to rectify the situation which justifies the giving of the notice. On the assumption that the Owners had previously exercised due diligence in discharging the duties of maintaining the vessel imposed by the charterparty, the clause 3(iii) notice was illegitimate. In this case, Charterers also made an express request to Owners to rectify the situation, which the tribunal held was also a breach of the charterparty.

2. The tribunal held that Owners' losses incurred due to the breach of the charterparty by Charterers were recoverable.

3. The tribunal held that even if the notice and/or request and/or instructions did not amount to a breach, in accordance with an overwhelming mass of authority, a party who complies with another's uncontractual request is entitled to an indemnity in respect of the losses which he suffers as a result of his compliance.

4. The tribunal held that Owners did not waive their right to damages and/or indemnity by reason of complying with the Charterers' requests and/or instructions.