Time Charter - Oil Major Approval Clauses

August 2000

(Sea Venture Volume 19)

The drafting of additional charterparty clauses and the responsibility for obtaining and keeping Oil Major approval was considered recently by the High Court in the case of the "Seaflower"¹.

Following the loss of the "Erika" there has been an apparent change in attitude by the Oil Majors to the approval and vetting of vessels. This change in attitude reinforces the importance of having clear charterparty clauses which address the responsibility for obtaining and keeping Oil Major approval.

The "Seaflower" was time chartered for a period of one year. The charterparty included an additional clause, which specified the Oil Major approvals the vessel had at the time of the charterparty. The clause was worded as follows:

"Vessel is presently MOBIL (expiring 27/1/98), CONOCO (expiring 3/2/98), BP (expiring 28/1/98) and SHELL (expiring 14/1/98) acceptable. Owners guarantee to obtain within 60 (sixty) days EXXON approval in addition to present approvals. On delivery date hire rate will be discounted USD 250 (two hundred and fifty) for each approval missing, i.e. MOBIL, CONOCO, BP, SHELL, EXXON. If for any reason, during the time-charter period, Owners would lose even one of such acceptances they must advise Charterers at once and they must reinstate same within 30 (thirty) days from such occurrence failing which Charterers will be at liberty to cancel charter party or to maintain same at reduced rate as stipulated above. Hire rate will be reinstated once Owners will show written evidence of approvals from Major Oil Companies."

Exxon approval had not been obtained by the time of delivery of the vessel to the Charterers. The vessel traded for two months without the need for Exxon approval. Charterers then fixed the vessel on subjects to Exxon and advised Owners that Exxon approval was required.

Owners failed to obtain Exxon approval for the vessel prior to the cancelling date for the Exxon fixture. Charterers terminated the charterparty and re-delivered the vessel.

The Court held, despite the additional clause in the charterparty, which provided, "Owners guarantee to obtain within 60 days Exxon approval…" that Owners’ failure to obtain Exxon approval, whilst a breach of charterparty, entitled Charterers to claim damages alone. The reason that only damages could be claimed is that the court found that Charterers had not been substantially deprived of their contractual entitlement by Owners failure to obtain Exxon approval. The Court considered the fact that the contract catered for the absence of Exxon approval by an agreed reduction in hire of $250 a day indicated that the intention of the parties was that the absence of Exxon approval was only significant to the extent of 3% of the hire rate.

The conclusion of the Court was that Charterers’ re-delivery of the vessel was a breach of charterparty, which entitled Owners to claim damages for the lost hire resulting from the early re-delivery.

The correct approach Charterers should have taken was to keep the vessel on charter and to claim damages for the lost trading opportunity of the vessel in that she could not be employed on Exxon fixtures without approval.

In summary, a number of lessons can be learned from this decision:

1. It is important to ensure that additional clauses to charterparties are drafted clearly so that there can be no mistake as to the intention of the parties.

2. The provision in a Major Approvals clause of a discounted hire rate if approval is missing on the delivery date may indicate that approval is not necessary for full performance of the contract by Owners. Failure to obtain approval will therefore not allow Charterers to terminate the charter party on that basis.

3. Unless the contract provides to the contrary (see point 1 above) Oil Major approval (or lack of it) whilst a breach of charterparty, will ordinarily only result in a claim for damages.

4. In practice, the calculation of damages for lost trading opportunity will be difficult. If Owners realise they are in breach of an Oil Major Approvals clause they should try to keep records of the available market and hire rates for similar tonnage at the time of the breach.

 

With thanks to Stephen Mackin of Eversheds for preparing this article.

¹ QBD (Com Ct) (Timothy Walker J) 19 April 2000

Click here to view report of the Court of Appeal decision in "Sea Venture" Vol.20