How to defend yourself against actions of unfair shipowner under the Bareboat Charter

• Shipping
• Transport & Logistics

Today, cargo transportation by sea is one of the most profitable and varied methods of cargo delivery.

The sea carrier is often not the original shipowner, but the charterer, whose contractual relations are governed by charter parties. In practice, the English law applies to govern such relations at the international level. In view of history and traditions, English law has a wide range of regulatory instruments and remedies in relations between the parties. Such instruments are mostly reflected in standard proforma charter parties being widespread in sea carriages.
At the legislative level of Ukraine, charter parties are governed by the Civil Code of Ukraine and by the Merchant Shipping Code of Ukraine. Despite the obvious restrictions of mechanisms proposed by Ukrainian law in this industry, they apply in contractual relations between shipowners and charterers operating in Ukraine.

Meantime, irrespective of the applicable law, the shall must approach carefully to drafting the charter party, not only with reference to standard proformas, but also by means of necessary modifications thereof, in order to reflect clearly relations between the parties in the framework of a certain carriage. Such modifications may depend on the route, type of cargo, restrictions at the loading/discharge port etc. Special attention should be drawn to modifications in the form of crossing-out the text or additions to the standard proformas. Incorrect modifications in the form of deviation from standard provisions may finally cause essential risks.

In view of competition for demand and understandable commercial desire to obtain maximum profit form the transaction, the parties should know and understand clearly both their own and the counterparty’s contractual rights and obligations, in order to avoid being deleted from the contractual chain for some reason by taking advantage of your ignorance of your own contract.

This article, based on our case study, covers the risk borne by charterers, related to loss of their rights due to the shipowner’s unlawful actions.

First of all, let us remind the charterer’s basic rights in the framework of Bareboat Charter. The Charterer:
• is authorized to dispose of the vessel during validity term of the Charter Party at its own discretion as the owner;
• shall bear all responsibility and costs of the joint venture;
• shall obtain possession and full control over the vessel, jointly with legal and financial liability for her;
• shall pay all operating costs, including bunker, crew, port dues, insurance;
• is entitled to change flag of the vessel and to mark on board its own brand names;
• may conclude on its own behalf sub-bareboat charters with third parties for the whole validity term of the Bareboat Charter or a part thereof.

Our Client, acting as the Charterer under the standard Bareboat Charter (BIMCO proforma, BARECON-89), accepted the vessel for operation for 5 years.

At the moment of vessel delivery to the Charterer, she was not in seaworthy condition, i.e. was not in proper technical condition in order to perform the Charter Party. From the moment of her acceptance and until the dispute arose, the vessel was under repair, with repair costs borne by the Charterer. Despite the fact that the Charterer was unable to operate the vessel, he regularly paid rent in favour of the Shipowner.
Obviously, during the vessel repair period, the Shipowner received a more attractive offer and therefore decided to withdraw the Vessel from the charter.

The Shipowner notified the Charterer on termination of the Charter Party, allegedly due to violation of its provisions by the Charterer, namely: failure to conclude an insurance agreement and non-submission of quarterly reports.
In fact, formally the above violation of the Charter Party by the Charterer may serve as grounds for the vessel withdrawal from the charter, followed by termination of the Charter Party.
But the Shipowner, with regards to certain circumstances, had no legal grounds for it.

The Charterer has fulfilled its obligation in due time and to the full extent, in particular:
- concluded the Water Transport Voluntary Insurance Agreement, whereunder it insured proprietary interests related to possession, use and disposal of the vessel;
- submitted promptly to the shipowner quarterly reports, which contained all the necessary information regarding the vessel in accordance with terms of the Charter Party;
- carried out vessel repair;
- facilitated obtaining the Classification Certificate.

Also, the Bareboat Charter provided an exhaustive list of cases when the vessel may be withdrawn from the Charter while the Charter Party itself shall be deemed as terminated, namely: on the grounds of the court decision only.
Further, the Shipowner committed actions whereby it violated provisions of the Charter Party, namely conducted inventory of the property on board of the vessel, allowed the governmental bodies to arrive on board of the vessel for inspection and finally disembarked the crew members employed by the Charterer.

But according to the Charter Party inventory could be carried out in two cases, namely conclusion and termination of the Charter Party, while the fact of inventory procedure should have been certified by appropriate documents, such as the Vessel Acceptance/Return Certificate.

Admission of the governmental bodies on board without notifying the Charterer and without the latter’s consent in fact was unlawful and there were no grounds to conduct such a survey.
Actions against the crew members obviously were groundless and violated terms of the Contract.
The Charterer faced an attempt to terminate the Charter Party without reasonable grounds and to withdraw the vessel from the charter, jointly with the Shipowner’s unlawful actions. Finally, it applied to Interlegal for defense of its rights under the Charter Party. 

Solution search

In such cases, in order to restore the Charterer’s violated rights, several possible mechanisms apply in Ukraine:
1. To file an official request to the Shipowner, with regards to the Charterer’s violated rights, jointly with the necessary supporting evidence;
2. To initiate negotiations with the Shipowner in order to settle the dispute amicably;
3. To initiate criminal proceedings upon the fact of offense committed by the Shipowner.
Obviously, engagement of experienced experts, who have skills of negotiators, plays a crucial role in such matters. Interlegal practice shows that nearly 70% cases have been settled at the stage of claims handling, while only 30% have been subject to court proceedings.

Result

For this case, application of the first two mechanisms turned out to be enough. Solid negotiations held by Interlegal team – with strong arguments and obvious willingness for the counterparty to initiate criminal proceedings – played a crucial role in this case. Our cooperation resulted in vessel return to the Charterer jointly with the necessary documents.

Irina Maltseva

maltseva@interlegal.com.ua

Ellina Romanova

romanova@interlegal.com.ua