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Tuesday, October 16, 2018


English High Court considers vetting clause - Charterers' termination of time charter invalid

The High Court of Justice in London, Queen’s Bench Division (Com Ct) (Timothy Walker J) recently gave its decision in the case of B S & N Ltd v Micardo Shipping Ltd (The “Seaflower”).  The case concerned the tanker Seaflower that was on time charter from 20 October 1997 for a period of 11 months, maximum 12 months at charterers’ option. The charter contained the following major oil company approvals clause:

“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 days EXXON approval in addition to present approvals. On delivery date hire rate will be discounted US$ 250 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 the acceptances they must advise charterers at once and they must reinstate same within 30 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.”

The vessel was delivered to charterers on 5 November 1997, at which time the vessel was not accepted by Exxon. Between delivery and 30 December 1997 the vessel performed three voyages for the carriage of fuel oil. On 30 December 1997 charterers fixed the vessel “on subjects” to load a cargo of Exxon products. Charterers’ broker then sought clarification from owners as to whether the vessel was now approved by Exxon. Notice was given requiring owners to obtain the Exxon approval by 5 January 1998. Owners replied that it was unlikely that the vessel would be so approved by that date. Consequently charterers terminated the charter and redelivered the vessel.

Charterers brought proceedings and claimed damages for the hire paid in advance and the bunkers remaining on board and other expenses. Charterers alleged that owners were in breach of a condition and therefore they were entitled to terminate the charter if the acceptance by Exxon was not obtained within 60 days of the charter. On an earlier application to the Commercial Court, Aikens J held that the guarantee given by owners to obtain Exxon approval was not a condition giving rise to an automatic right to terminate in the event of breach but an in nominate term, which had no such automatic right.

Charterers then amended their claim and argued, amongst other things that owners failure to obtain the Exxon approval was a repudiatory breach of charter. Owners counter claimed for damages for wrongful repudiation of the charter.

Held, the test of whether a party had committed a repudiatory breach of contract was a strict one, it was necessary to:

“…look at the events which had occurred as a result of the breach at the time at which the charterers purported to rescind the charterparty and to decide whether the occurrence of those events deprived the charterers of substantially the whole benefit which it was the intention of the parties as expressed in the charterparty that the charterers should obtain from the further performance of their own contractual undertakings.” (per Diplock LJ in Hongkong Fir Shipping v Kawasaki Kisen Kaisha [1961] 2 Lloyd’s rep 478 at page 495)

The immediate consequence of the breach was that the charterers could not conclude the fixture for the Exxon cargo, however, the charterers did not advance evidence of the financial consequences of that. Between delivery into charter and the alleged repudiatory breach, nonetheless charterers had obtained continuous employment for the vessel. The Court recognised that the charters knew at the time the vessel was taken on charter that it did not have Exxon approval and also that agreement had been reached as to a reduction in the daily hire rate of US$ 250 (some 3% of the daily hire rate) if the approval was not obtained. The intention of the parties was that in the event that Exxon approval was not obtained the hire would be reduced by 3% and no automatic right to cancel had been agreed.

Expert evidence was adduced by the parties as to the effect of the vessel not being approved by Exxon. Charterers’ expert said that the marketability would be “adversely affected”, whereas owners expert said that the marketability of the vessel “would not have been significantly impaired”. The Court preferred the owner’s expert’s evidence. The Court held that that absence of the Exxon approval did not begin to satisfy Lord Diplock’s strict test of depriving the charterers of substantially the whole benefit of the contract. Accordingly, the charterers were not entitled to terminate the charterparty on 30 December 1997 for breach of an in nominate term.

Charterers also alleged that owners had misrepresented that the vessel would be Exxon approved within 60 days. The Court rejected this claim on the basis that it was not shown that a representation separate from the negotiation of the contract had been made. All that charterers had adduced in evidence was a written statement from their broker that showed that the parties understood that the Exxon approval “would be obtained” within 60 days. The Court held that this was mere statement of charterers’ intentions. It could only constitute a misrepresentation if the statement was of an intention not honestly held at the time it was given. On the facts owners honestly intended to obtain Exxon approval within the time specified.

Accordingly, charterers’ claim that they had validly rescinded the charter failed.


This is an interesting case, which illustrates the application of the strict test that an innocent party must satisfy if they are able to rescind a charterparty for breach of an innominate term. Also a court will not readily hold a term to be a condition giving an automatic right to terminate the contract unless the term is very clearly worded to have this effect. Members should bear this case in mind when considering vetting clauses in period charters and in particular when charterers claim that they are entitled to terminate the charter or declare the vessel to be off-hire due to owners' failure to comply with the vetting clause.

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