Shipowners' Obligations in Respect of RightShip Approval
December 03 2008
The recent judgment in The Silver Constellation(1) is of significance to owners and operators of older bulk carriers that have no RightShip approval. The practical effect of the judgment is that in the absence of express provision in the charter, a term will not be implied that the vessel must be RightShip approved. However, the court held that under Clause 8 of the New York Produce Exchange form, an owner is obliged to permit a RightShip inspection of the vessel and other RightShip vetting procedures as and when required by the charterer.
Facts
The case concerned concurrent hearings involving back-to-back claims arising under back-to-back charterparties. The appellant shipowner purchased the 1986-built Capesize bulker of 146,351 dead weight tons from Swissmarine in June 2003 and chartered it back to Swissmarine for 24 months. In November 2003 the owners chartered the vessel ahead to Glencore for 24 months on redelivery from the Swissmarine charter. In May 2006 Glencore sub-chartered the vessel to Swissmarine for a period of 18 to 24 months. After the vessel incurred substantial damage in a grounding incident, it was delivered into the Glencore charter and the Swissmarine sub-charter in August 2006.
In 2002 and 2003 RightShip gave the vessel a three-star rating, which was downgraded to two stars in 2004 when the vessel was 18 years old. Nonetheless, the vessel performed a number of voyages at that rating until February 2007, when it was 21 years old. In February 2007 the charterers sought approval for the vessel to be inspected by RightShip, which the owners refused. The dispute was referred to arbitration and the arbitrators held that the owners were obliged by Line 38 and Clause 31 of the charterparty to obtain and maintain RightShip approval.
Line 38 of the charter obliged the owners to keep the vessel "in a thoroughly efficient state... with all certificates necessary to comply with current requirements of all ports of call”. In addition, under the heading "Certificates, Laws and Regulations", Clause 31 provides that:
"It is a condition of this [c]harter that the vessel is and will remain in all respects eligible for trading to the ports, places or countries specified or not excluded in this [c]harter and that at all necessary times vessel and/or owners shall have all valid certificates, records and other documents required for such trade. Furthermore, it is a condition of this [c]harter that the vessel complies with and will continue to comply with all applicable laws and regulations of the ports, places and countries specified or not excluded in this [c]harter."
Arbitrators' Decision
The arbitration tribunal took a commercial approach and decided that it was reasonable for the owners to understand when entering into the charter in November 2003 that they should obtain and maintain RightShip approval, having (i) regard to the importance of RightShip approval for Capesize bulkers in iron ore and coal trades, and (ii) industry knowledge of the importance of obtaining RightShip approval after the system’s inception in December 2001.
The first principal issue in the appeal was whether the charterparty terms obliged owners to provide a vessel with RightShip approval and to maintain such approval for the currency of the charterparty.
The owners contended that they were under no obligation to provide a vessel with such approval as there was no express reference to RightShip approval in the charterparty. The owners argued that the word 'eligible' in Clause 31 meant either 'legally qualified', in which case RightShip approval was irrelevant, or 'fit to be chosen', which was solely directed to the physical state of the vessel and thus was unconcerned with compliance with the broad range of more than 50 factors taken into account in Right Ship's algorithm software analysis, on which RightShip approval is based. The court noted that only 10 of those factors were disclosed on RightShip’s website and therefore the owners argued that the basis of approval was obscure. Thus it was argued that the effect of the arbitrators’ decision was to imply an obligation into the charter that required the owners to comply with a private vetting scheme and exposed the owners to the unpublished requirements of a third party with no grace period.
Appeal
The court held that the charter terms did not require owners to provide a vessel with RightShip approval. It was the court's view that 'eligible' meant that the relevant person or object was fit for selection as satisfying the relevant conditions for selection. As to whether the vessel was fit for selection, the requirements of Lines 22 and 38 focused on requirements legally imposed either by the law of the flag, the law of the country to which the vessel had been ordered or the laws of the port of call. RightShip approval was not lawfully required by the ports at which cargo might be loaded. It was a commercial requirement that had become progressively more widespread since its inception.
Furthermore, when read as a whole, the relevant terms of the charters focused on certification and documentation, which in turn established fitness and eligibility. The RightShip system does not give rise to the provision of any documentary form of certification and the court accepted that the basis of approval remains obscure. In particular, the court noted that it is not an answer that approval, or lack thereof, is recorded on the computer hard drive of RightShip. Thus RightShip approval formed no part of the certification referred to in Line 38 and Clause 31 and the arbitrators had erred in finding that it did.
On the appeal's second central issue, the court held that the owners were obliged to permit a RightShip inspection of the vessel and other RightShip vetting procedures. The owners argued that RightShip approval is a standalone obligation, like class, and that a charterer is not entitled to insist on an inspection by a class surveyor merely because of concern over the vessel's classification. The court rejected this argument, noting that RightShip approval should be obtained on a voyage-by-voyage basis, dependent on the requirements of the relevant shipper or loading terminal and that approval is very different from classification. Classification is a continuous survey system by the selected class society, paid for by the shipowners and conducted in accordance with the rules of the selected society.
The court concluded that the arbitrators had correctly held that under Clause 8 of the form, the charterers had the power to order the owners to allow RightShip inspectors aboard the vessel to carry out a vetting inspection, consistent with observations made by the House of Lords in the Hill Harmony Case about a charterer's right to exploit the earning capacity of the vessel. If RightShip vetting were excluded, the charterers would be stymied as to nominating any loading port or any cargo. In short, although hire would remain payable, the vessel would be unemployable by the charterers.
Endnotes
(1) [2008] EWHC 1904 (Comm).