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RightShip Approval Clauses - The Right Idea?

SSM Roundel

Steamship Mutual

Published: February 01, 2012

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Arbitrators and maritime counsel usually become involved in a shipping dispute only after one party’s expectations are disappointed.  Charterers often find out about a vessel’s shortcomings when it fails to perform as anticipated, is detained in port due to deficiencies, or is rejected by a shipper.  RightShip, the Australia-based ship vetting company, is attempting to bridge the information gap by supplying an ocean of data on commercial vessels and even rating vessels’ suitability for a given voyage. 

RightShip holds itself out as an independent ship vetting company that provides reliable and transparent ratings for virtually any commercial vessel afloat.  Users log into RightShip’s Ship Vetting Information System (SVIS) and enter basic information about the proposed voyage.  RightShip analyzes the user’s request and its own database of information on the vessel.  Based on this information, RightShip provides a 1- to 5-star rating, which indicates whether the vessel is acceptable for the voyage or requires further review.  Users can also view information about the vessel from RightShip’s database.  RightShip may even conduct physical inspections of low-scoring vessels to determine whether they can be approved.  

RightShip operates under the premise that most marine incidents are caused by relatively few vessels, and that these vessels can be identified through objective criteria.  By focusing resources on questionable vessels and giving the rest a pass, RightShip says it can deliver reliable recommendations efficiently and cost-effectively.

RightShip’s users are primarily charterers, but also include shippers, ship owners, insurers, regulators, terminals, and others.  RightShip claims that ship owners and managers reap benefits from high ratings in the form of lower insurance costs and higher charter rates.  RightShip helps shippers and charterers choose vessels with a lower risk of lost cargo and delays from casualties or detentions.  Insurers, port state controls, terminals, and others can use the information to decide whether a vessel is likely to be involved in a claim or cause a delay in port.                                                                                                                                                        

RightShip was founded in 2001 as a joint venture between BHP Billiton and Rio Tinto Shipping and, initially, provided its vetting services for the coal and iron ore cargoes of those two companies.  However, RightShip quickly saw interest from third parties including Cargill Ocean Transportation, which joined the partnership in 2006.  According to RightShip, over 50% of its vetting services are now performed for parties other than the three owner-partners.

RightShip is headquartered in Melbourne, Australia and maintains offices in London and Houston.             

How it works

The RightShip system starts with a database of information on virtually all commercial vessels over 500 tons – over 72,000 vessels at present.  RightShip collects data from a number of “partners,” including the International Association of Classification Societies, Lloyd’s Register, IHS Fairplay, Lloyd’s MIU, port state controls, terminals and even ship owners.  RightShip also considers other criteria, including whether the vessel has an environmentally-friendly Green Award certificate or if the owner is a member of Intertanko.  In the case of older vessels and vessels of special concern, RightShip conducts physical inspections.  Finally, users can provide their own criteria for acceptable vessels, such as age restrictions or limitations on past cargoes. 

RightShip uses the data to score vessels on over fifty factors, such as yard, owner, operator/manager, age, casualty history, port state control history, flag, conditions of class and class changes, terminal inspections, ISPS certificate data, trading patterns, and cargo history. 

To vet a vessel, the user provides the name of the vessel, the intended cargo, and the load and discharge ports.  The user’s criteria and RightShip’s data are then passed through an algorithm to determine a gross score for the vessel.  That score may be adjusted if the vessel has an environmentally friendly Green Award certificate or if the owner is a member of Intertanko. 

A rating of 1- to 5-stars is assigned based on the final score, and the vessel is either instantly approved or flagged for further review.  In any case, the user can review the individual risk factors underlying the rating.  According to RightShip, a rating is valid only at the time it is given and is subject to change as RightShip constantly updates the underlying data in its system.

A vessel that is rated three stars or higher is automatically RightShip “approved”.  For vessels with one or two stars, RightShip will conduct a more detailed review of the vessel, including a physical inspection if necessary.

In addition to vetting, RightShip recently launched Environmental Ratings for vessels.  The environmental rating system considers data such as pollution incidents, MARPOL deficiencies and any environmental certifications held by the vessel.  RightShip rates a vessel’s environmental friendliness on a 5-star scale similar to the SVIS and also grants letter grades for greenhouse gas emissions on an A-G scale.  RightShip claims it can estimate the amount of CO2 that will be produced, and the fuel that will be consumed, during a particular voyage and then allows users to compare these values between vessels. 

Legal Considerations

Given RightShip’s perceived ability to provide an objective rating for virtually any vessel, it may come as no surprise that charterers are demanding “RightShip approval clauses” in their charters.  Approval clauses may require a vessel to maintain a certain number of stars or simply remain an “approved” vessel during the charter period.  Perhaps equally unsurprisingly, owners are wary of approval clauses that are dependent, in part, on factors entirely outside their control.

So-called RightShip approval clauses may turn out to be as vexing to the dry bulk cargo trade as have the “approval by oil majors” clauses common in tanker charters.  One of the main concerns is the “time limited” nature of RightShip approvals.  Because RightShip ratings are based on data available at the time the vet is conducted, they are essentially a “snapshot” of the vessel’s suitability for a specific voyage.  Ratings can change along with the fifty or so inputs, some of which are entirely outside the ship owner’s control.  Thus, it may not be possible to “maintain” a RightShip rating throughout a charter period, as some approval clauses require.  It may simply be a promise that even the most diligent owner cannot keep.

These concerns may be justified, considering an ordeal faced by the owners of the “Anarchos”.  As reported in TradeWinds (11 February 2011), the owners found their RightShip rating suddenly lowered from 5 stars to 2 stars after a Belfast port state control detention concerning documentation.  A 2-star rating would significantly impair the vessel’s commercial options and charter rate.  Here, RightShip ultimately agreed to reverse the deduction, but only after the owners offered extensive proof that the detention was unwarranted.  A happy ending perhaps; but not one that will prevail in all instances.  For ship owners, a 2-star rating translates to a real loss of earnings as demand for their vessels declines.

In a decision of the English Commercial Court, Mr. Justice David Steel considered whether RightShip approval could be implied in a charter party based on the NYPE form.  In Seagate Shipping Ltd. v. Glencore International AG, (Commercial Court, 31 July 2008), reviewed on the Steamship Mutual website in Requirement to Obtain Rightship Approval (September 2008)  the charterer argued that a clause requiring the vessel to maintain all certificates necessary to participate in trades permitted by the charter party included RightShip approval.  The charterer also sought to have RightShip inspectors board the vessel pursuant to the charter party clause requiring the vessel to follow the charterer’s instructions “as regards employment.” 

In the underlying London arbitration, the panel agreed with the charterer on both issues.  The panel found that the “all certificates” clause “would have conveyed to reasonable people with all the background knowledge reasonably available” that a RightShip-approved vessel was required of the owner.  The panel also found that the owner was required to permit RightShip inspectors aboard the vessel.

On appeal, Mr. Justice Steel rejected the tribunal’s interpretation of the “all certificates” clause.  He noted that RightShip approval was not mentioned in the charter party and that the owners had specifically rejected a RightShip approval requirement during pre-fixture negotiations.  Moreover, RightShip approval differed from the types of certificates referenced in the charter party (flag, port, etc.) insofar as RightShip approval was not mandated by law. 

The Seagate Shipping decision was not a total win for the ship owner, however.  Mr. Justice Steel sided with the charterer concerning RightShip inspections.  The court concluded that, as a matter of commercial reality, RightShip inspections were legitimate charterers’ orders “as regards employment”.

New York arbitrators or courts have not yet had occasion to rule on RightShip approval clauses, but tanker vetting clauses provide a familiar analogue.  As a general rule, New York arbitrators uphold vetting clauses. (See David W. Martowski, Vetting Clauses, 26 Tul. Mar. L. J. 123 (Winter 2001)).  Tanker vetting awards may guide the resolution of RightShip approval disputes when, inevitably, they are arbitrated in New York.

The panel’s award in “American Energy” S.M.A. No. 3141 (Arb. N.Y. 1995), illustrates the difficulties owners face in complying with vetting clauses.  Here, the charterparty required the owner to keep the vessel “in a standard acceptable to all major chemical producers and all major oil companies (e.g. BP, Shell, Exxon, etc.)” for the duration of the charter.  The owner argued that the clause merely required the vessel to be in a condition that could pass the majors’ vetting requirements, but that actual vetting was unnecessary.  The panel disagreed, finding that the clause “required vetting by the majors and not simply an unspecified and unquantified standard of acceptance by those companies.”  Indeed, the panel dismissed as “pointless” the owner’s plaint that “the vetting process is subjective and ever-changing and thus should be viewed with caution.” 

The panel in “Harold K. Hudner” S.M.A. No. 3619 (Arb. N.Y. 2000), acknowledged that the many formulations and occasional ambiguity of vetting clauses has led to a variety of remedies for their breach.  These include allowing the charterer lump-sum deductions, restitution and placing the vessel off-hire.  Here, the panel concluded that the charterers properly placed the vessel off-hire while the vessel lacked required vetting approvals, as that remedy was clearly prescribed by the charter party.  On the other hand, in “Opal Sun” S.M.A. No. 3664 (Arb. N.Y. 2001), the panel set a “vetting value” of $2,000 for each day the vessel failed to comply with a clause requiring the vessel “to hold at all times during this time charter the vetting approvals of EXXON, SHELL(PECTEN), MOBIL, TEXACO, CHEVRON, BP, PHILLIPS 66, SUN OIL and DOW Chemical.”

In contrast to the holding in “American Energy”, the panel in “Diamond Park”/”Emerald Park” S.M.A. No. 3576 (Arb. N.Y. 1999) interpreted a vetting clause to impose a hypothetical obligation only.  The vetting clause provided that “the vessel will meet the screening requirements and pass the inspections of all major oil and chemical companies.”  The panel found that this language imposed “neither a promise nor a guarantee of 100% vetting coverage.  What the clause requires is that the vessel, when put to the test, will successfully pass the vetting inspections . . . .  If, when called upon, the vessels fail the inspections and/or vetting applications, Owners become liable for Charterers’ damages.”  Consequently, the panel limited charterer’s damages to “vetting losses” solely for the period of time the vessel was in non-compliance.

Perhaps the quantitative nature and immediate availability of RightShip approvals will remove much of the uncertainty seen in the tanker vetting cases.  After all, who can argue with an algorithm that considers more than 50 input factors?  However, this may be one of RightShip’s vulnerabilities.  How do these multiple factors reasonably translate into a five-star rating system?  Which of these factors, if altered during the course of a charter’s performance, may result in a reduction of a star rating and possible breach by the owner?  Are the owner’s undertakings concerning RightShip’s approvals sufficiently specified so as to assure that the owner knows what is required?

Whether RightShip ultimately will drive charterers to quality vessels and operators, with the benefit of reducing claims and costs (and putting lawyers and arbitrators out of work), remains to be seen.  The scope of the company’s vetting activities is certainly growing.  However, until a body of case law and S.M.A awards is developed, there are likely to be plenty of disputes making their way to tribunals in New York and London.

 

With thanks to Peter Skoufalos of Brown Gavalas & Fromm for preparing this article, with contributions by Patrick O’Mea and Keren Busani-Halevi.

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