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Charterers in the middle – mind the gap

Member Advisory

It is common in the chartering business for a vessel to have three or more parties in the charterparty chain. A relatively simple (and usual) pattern is that the headowner charters the vessel to a time charterer, who then sub-charters vessel to a voyage charterer. Longer charterparty chains are often-seen as well. The chain may include headowner – bareboat charterer – long-term time charterer – medium-term time charterer – time-charter-trip charterer – voyage charterer. Some charterers in the middle may be under a misconception that, as a party in the middle in the chain, they may simply pass claims up or down the line and their exposure is minimal. The purpose of this article is to highlight the exposures of charterers in the middle and recommend precautions which charterers should exercise to avoid or minimise their risks.

Essential clauses

Whether the charterparty in question is a time charter or voyage charter, it is important for charterers in the middle to check the terms carefully to ensure that the essential provisions concerning the following are back-to-back up and down the chain:

  • governing law
  • arbitration clause
  • Clause Paramount
  • war risks areas
  • safe port warranty
  • general average clause
  • cargo liquefaction clause
  • Both-to-Blame Collision Clause
  • New Jason Clause

Some charterers assume that all standard charterparty forms contain the necessary protective clauses, but such assumption is dangerous. For example, Gencon 94 does not contain any clause paramount. Charterers in the middle may put themselves in a dire position if there is a clause paramount in the charter up the chain but none in the subcharter. In the absence of a clause paramount, the owners are deemed to have given an absolute warranty of seaworthiness, as opposed to an obligation to exercise due diligence to make the ship seaworthy. Further, the one-year time limit under Hague-Visby Rules will not be applicable. Therefore, where there is a clause paramount under the head charter but not the subcharter, the charterers in the middle are at risk of receiving a cargo claim from subcharterers say two years after the date of discharge – which is within the limitation period for a breach of contract claim under English law – whilst being unable to pass it up to owners above as it is time-barred.

Having arbitration clauses which are not back-to-back is another recipe for disaster. If the two charterparties provide for different seats of arbitration (e.g. LMAA arbitration under the charter above and Hong Kong arbitration under the charter below), the arbitrators in the head reference and sub-reference are likely to be different. Not only will it be difficult (if not impossible) to have the two references dealt with concurrently or consolidated, charterers in the middle also face a risk that the two panels may reach inconsistent decisions. Imagine a case where owners bring a claim for unsafe port against charterers, and charterers in turn bring a claim against subcharterers. It is possible that the tribunal in the head reference decides that the port is unsafe, whereas the tribunal in the sub-reference takes a different view. In such case the charterers in the middle will become liable to headowners, with no recourse against subcharterers.

Time-charter in, voyage-charter out

There are greater risks for charterers in the middle to fall into gaps where the charters up and down the chain are a time charter and a voyage charter respectively, and hence with rather different terms. Problems which are often seen include the following:

  1. Time loss: It is not unusual for voyage charters to include extensive laytime/demurrage exceptions; as a result if an event under the exception clause applies, laytime/demurrage will stop running. Charterers in the middle should note that, whilst laytime has stopped counting under the subcharter, the vessel may nevertheless remain on hire under the charter up the chain. Charterers in the middle may end up bearing the time loss themselves. If possible they should include the exceptions in the charter up the chain (e.g. where they enter into the subcharter before chartering in a vessel under a trip time charter).
  2. Load port requirements: It is common for voyage charters to specify the name of terminal and port where the cargo will be loaded, as well as providing that owners are responsible for complying with terminal requirements and draft restrictions etc..  In contrast, under a time charter charterers give voyage instructions to the vessel, subject to the trading limit set out in the charter, and the charter will not specify any port which the vessel will be calling. Therefore, if, say, the vessel is delayed because she fails to meet certain requirements peculiar to the terminal, and if such failure is not caused by any breach by owners up the chain, charterers in the middle may become liable for time loss and additional port costs as a result of the non-compliance, with no recourse against owners above.
  3. Force majeure clauses: It is common for force majeure provisions to be included in voyage charters, whereas such terms are rarely seen in time charters. If such provision is in the subcharter but not head charter, there is a risk that subcharterers may be excused for e.g. failing to provide any cargo for shipment, whereas charterers in the middle remain obliged to perform the charter up the chain. If for commercial reasons the charterers in the middle are unable to reject force majeure provisions in the subcharter altogether, they should try to limit the scope of force majeure events, insist on the giving of force majeure notice and the submission of supporting evidence within a specified period, and impose an obligation on the invoking party to take steps to limit or avoid losses to the other party.
  4. Cargo claims: Most time charters for dry bulk vessels incorporate the InterClub Agreement (ICA) for the purpose of apportioning liability for cargo claims. In contrast, provisions which impose responsibility for cargo claims on charterers are rarely found in voyage charters. If the charterers in the middle are held liable under the ICA, they will not be able to pass the claim on to the voyage charterers unless they can prove that the damage resulted from a breach of contract by the voyage charterers (or there is some other unusual contractual right to do so). This problem is particularly relevant for cargo claims for deterioration of quality arising out of delay under charterers' orders. This would likely be 100% for time charterers' account under the ICA (if the "Yangtze Xing Hai" [2017] 1 Lloyd's Rep. 212 is to be followed) but would not necessarily be a breach of a voyage charterparty. The charterers in the middle may end up paying the whole amount.

Even if all major terms are back-to-back

Some charterers may think that if the charterparties up and down the chain are both time charters with similar terms their position will be secure, and all liabilities can be simply passed up or down. Unfortunately this may not be the case.

If say the time charter up the chain is for about two years, and the charterers subcharter the vessel out one year later under a six-month time charter with similar terms, even though all speed and consumption warranties are back-to-back, if the vessel underperforms under the subcharter, it is possible that the charterers in the middle may be liable to subcharterers for underperformance, without recourse to the headowners. This is because, unless the speed and consumption warranty is stated to continue throughout the duration of the charter, such warranty applies at the start of the charter only. Where the start of the charter above well predates the start of the subcharter, charterers in the middle can no longer pass the claim up the chain on the basis of the speed and consumption warranties. They might be able to make a claim against owners above if they can prove that the underperformance resulted from owners' failure to properly keep the vessel in a thoroughly efficient state during the service, but proving a failure to maintain the vessel is more difficult than establishing a failure to reach warranted speed and consumption.

Charterers in the middle may face a similar problem when it comes to hold cleanliness. It is common for rider clauses of time charters to say that the holds must be clean and washed down upon delivery or latest upon arrival at the first load port. If delivery of the vessel under the subcharter takes place after the vessel has performed a laden voyage under the charter up the chain, the position of charterers in the middle will not be back-to-back.

Even if the position of charterers in the middle is entirely back-to- back, and even if the governing law and arbitration clauses up and down the line are identical, the charterers in the middle should note that there are still risks of costs exposure if the disputes are referred to arbitration.

Imagine again a case where owners bring a claim for unsafe port against charterers, and charterers in turn bring such a claim against subcharterers, but in this occasion both arbitrations take place in London and the tribunals in both references consist of the same arbitrators. If the headowners' claim is successful, charterers in the middle may pass the claim down and claim the costs in the head reference against subcharterers as damages for subcharterers breach of contract. Yet, if subcharterers succeed in defending the claim, charterers in the middle will not be able to seek an indemnity of their own costs and costs liability in the sub-reference against owners up the chain; in such case the real cause of their loss will be deeded to be their decision to bring a failed claim against subcharterers, rather than a breach by owners up the chain. This is the legal position confirmed in the English court decision "Vakis T" [2004] 2 Lloyd's Rep 465. Therefore, when charterers in the middle deal with a claim from above or below, they should not assume that they may simply pass the submissions and liabilities up/down the chain. Instead they must carefully scrutinize the claims and try to minimize their costs exposure.

Recommendation

The above demonstrates that it is dangerous for charterers in the middle to assume that they may simply sit back and pass claims and liabilities up or down the chain. It is recommended that efforts should be made to make the charterparty terms as back-to-back as possible, or ensure that the potential risks are adequately compensated for by hire/freight rates. Whilst it might seem commercially sensible to accept pro-subcharterer terms in order to secure a charter with good hire/freight rates, it is important to bear in mind that liabilities can easily outweigh profits if things go wrong.

Contact

Rita Lau

Assistant Vice President, Lawyer
Direct: +852 2836 4721 Mobile: +852 9022 7625 E-mail: