Breach of Maintenance and Redelivery Obligations in Bareboat Charterparties

Even allowing for fair wear and tear, a vessel under a bareboat charter must still be fit for purpose at redelivery. So when does worn machinery cross the line from acceptable use to breach of charter?

Written by Egil André Berglund and Ray Luukas

In this article, our aim is to analyse some of the complex legal and technical obligations of bareboat charterers concerning vessel maintenance and redelivery, with a focus on how these obligations are interpreted in practice.  By examining some of the leading cases on these issues, we have attempted to provide industry stakeholders some guidance on redelivery standards, the application of “good commercial maintenance practice,” and how disputes in this area are typically resolved. 

Introduction

1. Bareboat charterparties are common in the maritime industry, and we often see disputes arise between the bareboat owner and the bareboat charterer at the time of redelivery of the vessel (or the offshore unit) to the owner.

2. In our experience, such disputes seldom find their way to be decided in the Court systems and in most, the cases end in commercial settlements or confidential arbitration awards. As a result, as maritime practitioners, we have only a few leading cases to rely on when advising clients in a manner that reflects a comprehensive, precedent-supported interpretation of the obligations and rights that the parties bargained for when entering into the contract.

3. A couple of months ago, the Oslo District Court delivered a judgment which addresses some of the commonly disputed issues in connection with redelivery.  It is acknowledged that the case is under appeal so the final outcome, and how the legal principles will ultimately be construed, remains to be seen.  However, the focus in this article will be on the legal principles and contractual issues which are of wider interest, those that were discussed in this Norwegian Court judgment and a collection of other recent and not so recent foreign judgments and arbitration awards.  These highlight bareboat charter redelivery issues which we hope that legal practitioners in future redelivery disputes can refer to for guidance.

4. For this article, we also have the privilege of having, as co-author, marine engineering expert Ray Luukas[1] of Brookes Bell, a well-known name in the industry and one of the world’s leading technical consultancy firms often instructed as technical consultants and experts in maritime disputes and more specifically on bareboat charter redelivery disputes.  Ray Luukas will set out his views on best practice for a claim procedure from a technical perspective.

The Legal Features of a Bareboat Charterparty

5.  Most of our readers will be familiar with bareboat charterparties, but in order to set the tone for the issues that were addressed in the recent Norwegian and foreign cases, we shall recap the main features of the bareboat charterparty which distinguishes it from other hire agreements in the maritime and offshore industries.

6.  A main feature of a bareboat charter is that the possession and control of the vessel pass from the registered owners to the bareboat charterers and the bareboat charterers become the disponent owners.  Charterers pay all operating costs of the vessel including all stores and bunkers and employ the Master and crew.  The natural consequence of owners passing the possession of the vessel to charterers is further that charterers take on the responsibility for maintenance and repairs during the lease period.

7. When the vessel is about to be redelivered, the main issues that parties often disagree on, are (i) whether charterers have maintained the vessel at a standard agreed in the contract and (ii) whether the vessel is redelivered in same or similar condition with fair wear and tear excepted.  There is a connection between the two as a failure to maintain the vessel will invariably have an effect on whether the vessel is redelivered in same or similar condition fair wear and tear excepted.

8. The most common bareboat contracts are based on BIMCO’s standard BARECON form.  The first BARECON forms were introduced in 1974 and named BARECON A and B.  These were then revised and reintroduced as one document in 1989 known as the BARECON 89.  Following changes in the industry demands and to make the form more lean and user-friendly, the BARECON 89 was further amended in 2001 leading up to the latest version being launched in 2017, named the BARECON 2017.  The main features in the contract have by and large stayed unamended with regard to the obligations on maintenance, the specific state and condition the vessel should be in during the charter period and at redelivery. The reference to classification has, however, been slightly amended through the various revisions.

9. The obligation on the bareboat charterer, i.e., the disponent owner, is to “properly maintain the Vessel in a good state of repair, in efficient operating condition and in accordance with good commercial maintenance practice”.

10. The bareboat charterers also have the responsibility to “maintain the Vessel’s Class with the Classification Society”.  This provision is well known to most practitioners in the shipping industry as the importance of the considerations of the Classification Society cannot be overstated.

11. In the earlier BARECON 89 it provided that the vessel shall be kept “with unexpired classification of the class” whilst in BARECON 2001 the wording was amended to read that at all times shall the vessel’s class be kept “fully up to date with the Classification Society”.  In the latest BARECON 2017 version, the wording was modernised, so that bareboat charterers are required to “maintain the Vessel’s Class with the Classification Society”.  The consequence of the latter change was that bareboat charterers were given some leeway and flexibility regarding the seriousness of the condition or recommendation by Class and whether the concerns had to be rectified immediately or within a specific period of time.  However, the essence would still be that the bareboat charterers’ obligation to maintain and repair the vessel goes hand in hand with their obligation to maintain Class, as stated by the Arbitrators in the arbitration award given in the “Arctic”[2] which went up to the English Court of Appeal.

The Correlation Between the Maintenance Obligation and the Redelivery Obligation in a Bareboat Charterparty

12. “Good state of repair”, “efficient operating condition” and “good commercial maintenance practice” also work together and have direct implications on how the redelivery obligations are applied.

13. In a previous Nordisk case that was subject of an Arbitration, the charterers presented expert evidence arguing that a claim for a defect cannot be made if it is a consequence of deterioration over a period of time due to normal use.  The conclusion of the charterers’ appointed expert in that case was that it was “fair wear and tear”.  This, in our view, is misconceived.  For example, if a seawater pump mechanical seal is leaking, it may probably have reached that condition due to deterioration with age and normal use, i.e., normal wear and tear.  However, if the seal no longer serves its purpose, it is therefore not in a “good state of repair”, it is not in an “efficient operating condition” and it has not been subject to “good commercial maintenance” with the caveat that the due date for the particular maintenance of the seawater pump falls within the period when the vessel is on hire to charterers.  This was also an issue in another unpublished arbitration awards we are aware of, where the tribunal accepted the owners’ contention that fair wear and tear must be viewed in the context of a properly maintained vessel which means that it was maintained in a “good state of repair”, “in efficient operating condition” and “in accordance with good commercial maintenance practice”.  And rightly so, because if it were not so, it would be difficult to establish what fair wear and tear would otherwise mean in the provision dealing with redelivery.

14. Another way of looking at this issue, is that a machinery component or equipment is allowed to be subject of fair wear and tear, but it should also be capable of still serving its purpose and remain in service at the time of redelivery.  For example, a diesel engine piston which has fair wear and tear of the ring grooves, but they must remain within the makers’ limits.  The piston rings may also be subject of fair wear and tear but that will only be acceptable at the time of redelivery if that wear and tear has not been allowed to exceed the maker’s limits.  The opportunity may be taken to replace the piston rings anyway at redelivery, just as good practice, even if it is not because of an apparent defect or a lack of maintenance.

15. The standard of “good commercial maintenance practice” is long standing and one would expect that there is comprehensive guidance from the Courts and Arbitral tribunals on this issue, however, that does not seem to be the case.

16. In our view, the starting point must be that one should compare the standard of maintenance with the usual maintenance practice of a prudent owner.  As we have previously suggested, and in our experience, this still stands the test of time, the reference to “commercial” maintenance suggests that one should take into consideration the reasonable cost of carrying out the maintenance work in question compared to the urgency and necessity of doing it.  For this, the owner should aim to manage the maintenance requirements with an eye to the itinerary of the vessel’s operation and how imminent the need for maintenance and repair is. Therefore, if a prudent owner could await doing the repair until after a cargo operation has taken place or even postpone it to a time when more substantial works are being scheduled, applying the same logic a bareboat charterer may also do so.  However, if the same prudent owner is expected to do the work immediately to avoid rapid increase in the wear and tear or imperil the safety of the crew, vessel or cargo, the bareboat charterer is likely to be in breach of the charterparty by delaying the repairs and be hostage to fortune.  The vessel’s Classification Society may be best placed to provide guidance on whether the work can await a scheduled drydocking or whether it needs to be done immediately.

17. A guiding principle when it comes to the redelivery obligation is that as long as the bareboat charterers have followed their planned maintenance system (“PMS”), Class Certificates are valid and any necessary repairs are made during the charter period, the wear and tear of the vessel at redelivery will be considered “fair” and bareboat charterers would have complied with their redelivery obligation.  Owners could argue that the PMS is systemically deficient and fall below industry standard, but generally, the planned maintenance systems we have seen in use tend not to be contested for systemic flaws.

18. This principle was recently illustrated in a Singapore arbitration award  from 2021[3], where the Arbitrators held that: “if the respondent [bareboat charterers] had performed their obligation to maintain the vessel in a good state of repair, in efficient operating condition and in accordance with good commercial maintenance practice during the duration of the charter, even if there were some defects present on redelivery, the respondent would not be in breach of the CP”.

19. This was also discussed in a Norwegian unpublished arbitration award[4] in 1994, where the sole arbitrator concluded when discussing: “good commercial maintenance practice” that at the time of redelivery a vessel might not be in as good condition as it would have been if such periodic works had just been carried out.  The arbitrator held that this would not necessarily amount to a breach of the maintenance obligation as long as the maintenance programme which had been followed was in itself acceptable.

20. An issue concerning the apparent contradiction between the maintenance and the redelivery obligations is that bareboat charterers often argue when facing claims of breach of their maintenance obligation that the vessel was arguably delivered in such bad condition that by the charterers following good commercial practice the vessel’s condition would have been significantly better compared to that at the time of delivery.  This, they argue, would mean that the vessel is redelivered in better condition than what follows from the redelivery obligation, i.e. “in the same or as good structure, state condition and class as that in which she was delivered…” and that goes beyond their obligations.  This point was argued before the tribunal in the above-mentioned Norwegian arbitration reported in 1994.  The Arbitrator held that the main purpose of the maintenance obligation was to ensure that the vessel’s condition on delivery would be kept at the same standard throughout the charter. Therefore, “good commercial maintenance practice” would not mean a duty to generally improve the condition of the vessel to a condition better than it was at the time of delivery.

21. This decision is at odds with another English unpublished arbitration award we are aware of where the tribunal held, with reference to two rather old English Court cases “Payne v Haine”[5] and “Proudfoot v Hart”[6], that the obligation to maintain in a state which “good commercial maintenance practice required it to be in, obliged bareboat charterers to put the vessel into that state even if the vessel was not in that state on delivery”.  We think that the conclusion reached by the tribunal in this English arbitration fits better with the rationale behind BARECON’s provisions with regard to the parties’ delivery obligations, the maintenance obligations throughout the charterparty and the requirements on redelivery.

22. The maintenance obligations presuppose that the vessel was in the requisite contractual state of seaworthiness and in every respect ready when it was delivered.  If it was not, that matter should have been taken up with owners prior to delivery or at least early in the charter (bearing in mind some defects may not emerge until the vessel is in commercial service).  The thresholds within the maintenance obligations, i.e., “good state of repair”, “efficient operating condition” and “in accordance with good commercial maintenance practice” are well established in the industry and supplemented with requirements of Class surveys confirming the standard of the vessel and her equipment.  It would be uncommercial if those standards are diminished by accepting that the repairs could be ignored to avoid the vessel’s condition being better than it was at delivery.  Such a proposition would further be at odds with the considerations sanctioned in several UK decisions, as discussed in the section below on ‘betterment’ where it is concluded that charterers’ liability for repair and maintenance would not be reduced because the vessel’s condition was better than it was before the repair was done.  We agree with the rationale supporting these decisions, and we think that the conclusion in the 1994-unpublished Norwegian award would not be upheld now if the same issues were tried again under Norwegian law.

The Correlation between the Maintenance Obligation and the Obligation with Regard to the Classification Society

23. In the above section, we discussed whether an item or equipment which is considered to be deficient or defective, but repairs was not considered immediately necessary, may still be fair wear and tear because the work as per PMS fell due after redelivery.  The requirements that stem from compliance with the Classification Society is arguably two-fold.  Firstly, there is a formal requirement that certificates must not have expired.  By “formal” it means that this does not take into consideration whether the actual condition of the particular equipment linked to the certificate is approved by Class. It only relates to the documentary requirement as to whether the certificate is expired or not or if there are conditions or recommendations issued by Class.  Secondly, the question arises as to whether there is a substantive requirement from Class beyond the formal requirement at the time of redelivery.

24. In the redelivery provisions, it follows that the condition of the vessel and its equipment shall not affect Class even if it is “fair wear and tear”, with reference to the requirement on the bareboat charterers to redeliver the vessel “in the same or as good structure, state, condition and class as that which she was delivered, fair wear and tear not affecting class excepted”.

25. A question then arises - whether this provision is a substantive requirement as to the actual condition of the vessel at the time of redelivery, and not only a formal requirement that the vessel would be redelivered without any formal conditions or recommendations outstanding?

26. In the Norwegian arbitration case[7] from 1994 referred to above, this issue was considered by the sole Arbitrator[8].  In that matter, the owners had asked a Class surveyor after redelivery to carry out a survey which resulted in numerous recommendations covering items which had been passed during the annual survey prior to redelivery.  Additionally, the surveyor also made recommendations on items which would normally not be subject to inspection until the next special survey (which in this case was due about one year after redelivery).  Nordisk represented bareboat charterers in this case and argued that the reference in the redelivery provision was a formal requirement, not a substantive one.  If, on construction, the requirement is deemed to be on the substance rather than a formality, the standard of the Class surveyor appointed by owners after redelivery would outrank the findings of the Class surveyor that surveyed and passed the vessel during the course of the charter period.  This would be a rather untenable situation for bareboat charterers as their tool to maintain the vessel during the charter period is to follow the PMS, which is understood to be based on acceptable industry practice, and the directions from Class in the form of conditions and recommendations and in the absence of those, bareboat charterers should be entitled to assume that they had done what was expected of them.  In this arbitration in 1994 the sole Arbitrator construed the provision of “fair wear and tear not affecting class excepted” as a formal requirement.

27. However, it does not mean that the Class surveyor’s findings after the redelivery would be less important.  It would be part of the evidence concerning the true condition of the vessel at the time of redelivery instead of a final and conclusive finding confirming that the condition was beyond wear and tear at the time of redelivery.

28. The Singapore arbitration award mentioned above[9] summarised the BARECON 2001 wording and the correlation between the maintenance and the redelivery obligations.  But the tribunal was not requested to consider whether the Class requirements were related to the substance of the relevant issue or only in form and in this case, there were more than ten outstanding class issues at the time of redelivery which were under consideration. The tribunal confirmed that the words “fair wear and tear not affecting class” should be interpreted so that on redelivery, if there were any defects which affect class, the charterer was obliged to rectify those defects before redelivering the vessel even if those defects arose from fair wear and tear. 

Recent Case for Oslo District Court dealing with Bareboat Redelivery

The Facts of the Case

29. The recent case from Oslo District Court relates to a lease agreement between an owner of a semi-submersible ultra deepwater harsh environment drilling rig, built in 2008 and bareboat chartered to an operator that owns and operates a fleet of drilling rigs (the “Seadrill Judgment”).  The lease arrangement was agreed to expire in 15 years with a sale and purchase agreement whereby the bareboat charterer was obliged to purchase the rig thereafter.  Due to financial difficulties, the sale and purchase agreement was replaced by a new lease agreement with a new purchase obligation.  As part of a Chapter-11 process in the US, the lease agreement was continued in 2021 through an Amendment Agreement.  This Agreement changed some of the key obligations previously agreed, including the purchase obligation, so that this lease agreement changed from a financial lease to an ordinary operational lease agreement - and the most crucial change being that the bareboat owner would have the rig back at end of the lease period.  As is common in bareboat redelivery cases, the owner argued that the rig was in a considerably worse condition at redelivery than it was agreed that it should be, namely in the same condition fair wear and tear accepted.  Unsurprisingly, the bareboat charterer argued the opposite, relying on specific factual allegations related to the Amendment Agreement that the starting point for evaluating the parameters for comparing the condition of the vessel at the time when the Amendment Agreement was agreed and at redelivery.

30. Except for the specific factual arguments, which the District Court dismissed outright, the main argument for rejecting liability for the costs that the bareboat owner claimed follows from breach of the bareboat charterer’s maintenance and redelivery obligations which are similar to what we normally experience in bareboat redelivery disputes.

The Norwegian Court’s Consideration of the Redelivery Obligation

31. The redelivery obligation in the agreement were amended from the standard bareboat wording, but the essence had remained the same, which was that the rig should be in a “ready to drill state and in an operational state where it is able to work”.  The rig should not be “damaged or worn beyond ordinary wear and tear or have damage that affects class”.  The maintenance obligation was also similar to the general bareboat wording - that the rig should be “maintained in accordance with good maintenance practices, prudent offshore drilling unit operating standards and established manuals and practices adopted by the Charterer”.

32. The charterer argued that the reference to “ready to drill” only related to equipment onboard the rig and not the rig as such.  The Court, however, found that the rig at redelivery should be in a condition so that it could continue to do drilling operations and for the owner/operator to be able to use it under new drilling contracts.  This would also mean that the rig was in compliance with governing rules and regulations.  Such construction seems to be in line with the general approach under a standard bareboat charter wording.

33. The next issue for discussion for the Court was the wording: “damaged or worn beyond ordinary wear and tear or have damage that affect class”.  The rig also had to comply with the head charter and the wording therein was the usual BARECON wording that provided that the unit should be “redelivered to Owners in the same or as good structure, state, condition and class as that in which she was delivered, fair wear and tear not affecting class excepted.”.

34. The Court approached the threshold of “fair wear and tear not affecting class excepted” in a slightly different way than what we have seen from the cases referred to above from Singapore and UK.  Whilst foreign courts and tribunals appear to have approached the redelivery obligation by scrutinising the maintenance obligations of charterers on the assumption that if the PMS was followed, any defects or issues would be fair wear and tear, the Norwegian Court’s starting point was slightly different which was to establish the condition of the rig  compared to what was normal wear and tear for a deepwater rig that had been in use for 15 years, and also to take into account regular maintenance and that it had to comply with Classification records.  But the Norwegian Court seems to take a similar analysis and concludes accordingly (as what we have seen in the UK and Singapore referred cases) that regardless of defects being considered “fair wear and tear” or “normal tear”, it will still be a breach of contract if it affects Class. 

The Norwegian Court’s Consideration of the Maintenance Obligation

35. The crucial wording in the subject contract was slightly different to the ordinary BARECON wording, but in essence relatively similar.  The obligations on bareboat charterers were that the rig should be “maintained in accordance with good maintenance practices, prudent offshore drilling unit operating standards and established manuals and practices adopted by the Charterer”.  Additionally, the head charter included the regular BARECON wording of “good commercial practices”.

36. The Court construed “good commercial practice” to mean that the responsible operator needed to apply normal maintenance practice in accordance with his planned maintenance system pursuant to the original equipment manufacturer’s recommendations.  The Court put little emphasis on the assumption that “commercial” would indicate that regard should be given to focus on de minimis maintenance so to avoid having to take the rig onshore for substantial repairs but relied heavily on whether charterers had followed their own planned maintenance program.  The reference to maintenance being compliant with the charterers’ PMS is not very surprising given that there was an express requirement in the maintenance provision that the maintenance should be in accordance with established manuals and practices adopted by the charterers.  As mentioned above, when construing the regular BARECON provisions, this assumption can be made even without such express provisions.

Claims for Compensation for Breach

37. If the bareboat charterers fail to rectify the breach within the contract period, the bareboat owners will usually pursue a claim for damages equivalent to the cost of putting the vessel in the condition it should have been in, had bareboat charterers redelivered the vessel in the contractually agreed condition.  One question then arises as to whether bareboat charterers can argue that owners can only recover what would be reasonable expenses and that one must take into consideration commercial concerns, for instance, whether the relevant equipment or spares are necessary or can the owners simply carry on using the vessel without rectifying the defects.  In other words, can the charterers argue in their defence that the owners’ claimed costs cannot be recovered if those costs are disproportionate to the benefit to be obtained?

Cost of Cure or Cost in Proportion to the Benefit under English law

38. The general starting point under English law[10] is that the injured party is entitled to be put in the same position so far as a monetary award can do it as if the contract had been performed.  However, where cost of cure has not been incurred prior to the claim being made in arbitration/court, there is legal precedence under English law that the cost would need to be “reasonable” for a claimant to be able to recover it[11].

39. This principle has been followed in many cases and in a bareboat redelivery context the English Commercial Court referred to it in the “Rozel”[12] case.  The Arbitral tribunal had found that the measure of the damage was the cost of putting the vessel and her Class record into the condition that the contract required them to be at redelivery.  The charterers appealed the Arbitrator’s award and contended that the Arbitrator had applied the wrong test in law to the assessment of damages.  The appeal was admitted to the English Commercial Court.  The Commercial Court held that where a contract makes specific provision for the condition or attributes of a vessel upon delivery or redelivery to her owners, the owners will not necessarily be able to recover as damages the cost of remedying a failure to comply with the provision.  Such cost will only be recoverable if this represents reasonable expenditure, and this will be judged on the basis of the commercial implications of the breach of contract.  The Judge further concluded, after reviewing previous cases, that it had been demonstrated that in a commercial context a claimant will not recover damages on a “cost of cure” basis if that cost is disproportionate to the financial consequences of the deficiency.

40. An illustration of this issue, as considered by the Commercial Court in the “Rozel” case, can be found in the judgment in the “Alecos M”[13].  In that case, the sellers agreed to supply a vessel that was equipped with a spare propeller.  But they supplied a vessel without a spare propeller.  The issue was the measure of damage for such a failure, but the problem was that there was no market for spare propellers at the time of delivery.  The cost of fitting the vessel with a spare propeller was very high compared to the price of the vessel.  At the date of the hearing, the buyers had not bought a spare propeller for the vessel and there was no credible evidence that they would do so.  The English Court of Appeal found that such spare propellers have now gone “out of fashion in respect of new buildings, and it appeared very uncommercial and impractical to supply such an expensive spare to a 14-year old vessel when the chance of using such a spare was so remote”.  The Court of Appeal agreed with the Arbitrators that it was not reasonable to order one to be specifically manufactured and that the commercial value of such propeller on the ship was no more than its scrap value.

41. Consequently, the cost of reinstatement remains the prima facie measure of damages, but this will not apply if reinstatement was found to be, based on the facts under consideration, unreasonable such that where the cost of reinstatement is out of all proportion to the benefit which would be obtained by reinstatement.  In other words, the Claimant would not be able to recover damages on a “cost of cure” basis if that cost was disproportionate to the financial consequences of the deficiency.

General Principles for a Claim for Damages under Norwegian law

42. Under Norwegian law, there are basically three main conditions that need to be fulfilled in order to claim damages.  There has to be a negligent breach, a foreseeable financial loss, and a causation between the breach and the loss suffered.

43. A similar outright reservation for “costs of cure”, as found under English law, seems to be missing under Norwegian law.  However, in the qualification that any financial loss must be “foreseeable” lies also the requirement that the loss shall not be too remote and the Courts may consider that cost which is disproportionate to the financial result of the rectification is too remote and not contemplated by the parties when entering into the contract.

44. In the Seadrill Judgment[14] and in context of a bareboat charterparty, the Norwegian Court summarised the issues that had to be determined for a claim of damages to succeed.  The Court concluded that it had to consider the principles for determining the claim for costs due to the breach of maintenance and redelivery obligations of the bareboat charterers.  The Court held that the claimant had to prove that (i) the rig had defects on redelivery, (ii) the defects were caused by the bareboat charterers’ actions or inactions, (iii) that specific costs were incurred for rectifying the defects and (iv) adequate evidence had to be provided substantiating the lack of maintenance in the form of inspection reports, maintenance logs and technical expert reports. 

Is Breach of Contract sufficient or does the Breach need to be Negligent?

45. Under English law, it would suffice that there is a breach of contract, whilst under Norwegian law the breach also has to be negligent in order to claim damages.

46. When representing owners, we often find bareboat charterers argue that the breach of the maintenance obligation was not negligent, therefore, there is no basis for a claim for damages.  Such defence is almost always misconceived, and when it comes to a breach of a maintenance obligation the starting point will be that there is negligence involved when the obligation is not fulfilled.  The essence of maintenance is a diligent caretaking of the vessel, and if the maintenance is ignored or failed in any way, the caretaking has not been diligent.  Therefore, as a rule, failed maintenance will generally be considered negligent, absent special circumstances beyond the caretaker’s control.

47. It was therefore not surprising, when this argument was tested in the matter before the Oslo District Court, that the Court simply concluded without much deliberation that the party’s failure to fulfil his obligation to maintain the rig is per se negligent, unless it can be justified that the contractual breach was caused by events beyond the bareboat charterers’ control.  In fact, under Norwegian law, one traditionally treats as separate the duty ‘to perform’ (“innsatsforpliktelser”) and duty ‘to deliver a result’ (“resultatforpliktelser”).  An obligation that falls under the first category is by definition a duty to perform diligently.  Thus, if a party in breach of a duty to perform, then it has not done it diligently and therefore by definition is deemed to have been negligent.  For the defendant to question negligence in such matters is meaningless.  In redelivery disputes, we have seen that maintenance and redelivery obligations go hand in hand.  The discussion of ‘negligence’ is futile also insofar as breach of redelivery obligations are concerned, as they fall under a duty “to deliver a result” and the failure to do so falls within the principles of the control liability (“kontrollansvaret”) and then liability is established regardless of negligence.  An argument of negligence as a condition for claiming damages for breach of the redelivery obligation is, therefore, not helpful to charterers under Norwegian law. 

Claim for Loss of Income

48. In redelivery disputes under bareboat charterparties, we often see that bareboat charterers have neglected maintenance duties in the last part of the charter period. Performing such repairs during the charter period would be on the bareboat charterers’ time, as there are no off-hire provisions in a regular bareboat charterparty.  In such matters, the owners will consequently be entitled to claim damages for the loss of time or loss of income whilst performing these repairs after redelivery.

49. In this regard it needs to be established what amount of time that owners are required to spend in order to have the vessel repaired to the contractual condition that charterers should have redelivered the vessel in, and the court or the tribunal would then decide what was the market loss incurred during this period.  The latter issue is, in most cases, fairly easy to establish unless the vessel is unique and as result it becomes difficult to establish a market value for it.  The first issue concerning the time incurred for the repairs, however, is often difficult to determine.

50. For commercial reasons, the owners often attempt to combine the repair work they do to rectify the defects on redelivery together with other owner-related work, inter alia, often to cater for requirements from new charterers or simply to upgrade or modernise the vessel to new rules and regulations.  It then needs to be considered whether that extra work could have been done in parallel and/or if the contractual work needed to rectify charterers’ breach was the sole reason or cause for the particular delay.

51. There is also a further issue, which is whether the amount of work that the owners initiate would incur extra time and costs for the repair work related to the defects on redelivery.  The latter aspect was considered in the Seadrill Judgment with reference to a Norwegian Supreme Court judgment[15].  The Supreme Court provides some guidelines as to whether work that fell on one party interrupted or delayed the work that the other party was responsible to do.  The essence of the guidelines was that the party arguing interruption and efficiency loss/delay had to prove that there were events that fall on the other party that caused the alleged disruption or further costs and such allegations need to be substantiated with supporting evidence.

52. The Oslo District Court did not put much reliance in the Supreme Court judgment mentioned above and found that the bareboat charterers’ lack of cost control of the rectification work done by owners were substantially caused by their actions/inactions.  The Court gave weight to the fact that bareboat charterers intentionally redelivered the vessel knowing that there were defects that they were liable to rectify.  This seems to follow a pattern by Norwegian Courts of adding a punitive element to the consideration when they evaluate the losses suffered, the causation and the calculation of the damages.  This is not to say that the courts are justified in adding punitive damages which exceed the actual losses suffered, as that would go against the principle in Norwegian law of being entitled to claim only up to actual losses suffered by the claimant.  However, if gross negligence or wilful misconduct is established, this may influence the burden of proof, the margin of doubt applied by the court and it can also have an effect on how the court construes the casus mixtus when multiple causes for the losses suffered are involved.

53. The Oslo District Court also referred to the fact that the owners had invited bareboat charterers to participate in the rectification work and that status reports and updates regularly were given to the bareboat charterers without any input or response from bareboat charterers.  This, we think, is good guidance for owners in future redelivery disputes, i.e., that it would serve them well to invite bareboat charterers to participate when deciding and performing rectification work and also to provide regular progress reports during the period doing the work which ultimately will end in a damages claim against bareboat charterers.

Betterment

54. A discussion that often arises in a bareboat charter-context is whether charterers can reclaim costs or claim deduction in the damages on the basis that they have redelivered the vessel in a better condition than it was delivered.  For instance, if the bareboat charterers repair the vessel to a standard which was better than it was at delivery as a result of new steel plates replacing old ones that were already worn at delivery, better quality equipment or similar.

55. In the cases we have seen that have been referred to arbitration, the tribunal’s starting point has been to consider whether owners had a choice and whether they chose the more extensive solution.  The legal precedence in English law for this proposition, is the English House of Lord’s decision in Lagden v O`Connor[16].  The House of Lords concluded that: “it is not enough that an element of betterment can be identified. It has to be shown that the claimant had a choice, and that he would have been able to mitigate his loss at less cost…[the wrongdoer] is entitled to demand that, where there are choices to be made, the least expensive route which will achieve mitigation must be selected…But if it shows that the claimant had no other choice available to him, the betterment must be seen as incidental to the step which he was entitled to take in the mitigation of his loss and there will be no ground for it to be deducted.”.                                 

56. This was also addressed in the earlier mentioned Singapore arbitration award where it was concluded that: “…if the respondent had complied with their obligations pursuant to clause 10 (maintenance obligation …), and that results in the vessel being in a better condition on redelivery than when it was delivered to the respondent, it was what the respondent had contracted to do.”

57. The observations on betterment in the Singapore arbitration award may seem slightly less sophisticated and particularised than the guidelines set out in the above English House of Lord’s decision, but that may depend on how the claim for deduction was presented and whether there was a choice or not for the owners. Under English law, we are familiar with at least one unpublished arbitration awards where the tribunal has applied the rationale set out in the above cited passage from Lagden v O’Connor, to the effect that the amount claimed by owners was only to be reduced if the owners had a choice and would have been able to mitigate their loss at less cost.  If they had no other choice, there is no ground for any deduction to be made for betterment.  This seems to be the guiding principle for betterment under English law.

58. One might question whether this solution would follow also under Norwegian law. Do enrichment principles (“berikelsesgrunnsetninger”) under Norwegian law support an argument that the party returning the other party a better product than at the start of the hire period can claim compensation for the enrichment/betterment?  There are some examples in law for such enrichment principles, but scholars have advocated that it will be difficult to justify application of such principles outside the boundaries of the specific law-regulated areas.  That being said, claiming damages under Norwegian law is based on the principle that the claimant will only be entitled to the least burdensome solution if a choice can be made.  Also, in terms of a duty of mitigation, as a starting point, the claimant will be rewarded with the least expensive mitigation if a choice can be made, however, the wrongdoer will not be entitled to claim of the injured party that unreasonable actions or sacrifices are made to mitigate his damages.  Therefore, we would assume that the position under English law as set out above – regarding when a choice can be made by owners - would be similar under Norwegian law.  If no choice is vested with the claimant, we do not think that Norwegian Courts or tribunals will accept a deduction in the claim for damages.

Claim Procedure from a Technical Perspective

59. In this section we discuss how redelivery disputes can become unnecessarily fractious resulting in disproportionate delays in the dispute resolution process and lead to excessive legal costs.  This most commonly occurs when there is (a) a lack of proper on-hire survey, (b) a lack of proper off-hire survey and (c) incorrect claims procedure following the surveys (even after litigation has commenced).

On-hire Survey

60. Ideally, there should be a thorough on-hire survey of the vessel performed jointly by independent surveyors.  Indeed, depending upon the type of vessel, this may involve Master Mariners together with Marine Engineers in order to have the correct expertise for the different departments (i.e., nautical, cargo and hull and machinery) and reduce the timeframe for the survey.  If an agenda can be established for the testing of equipment and machinery during the ‘without prejudice’ (“WP”) joint survey, that is helpful (and can even include sea trials if agreed).

61. Access to Class records (online) even before the on-hire survey can be helpful and save time both in recording the status of Class and statutory surveys. Any defects which may be subject of Class Recommendations (Conditions of Class) and/or Memoranda can also be identified and then inspected during the on-hire survey.

62. Bearing in mind the bareboat charter provision for familiarisation (i.e., where charterers are allowed to have technical representatives onboard for two weeks before delivery) it may often be the case that an agreed defect list has already been established before the on-hire survey.  Such a list can be helpful to the on-hire surveyors and save time for the joint inspections.

63. Most vessels now have a computer-based planned maintenance system (e.g., AMOS-D) which belongs to the vessel.  Access to the system should be made available to the surveyors so that any overdue items are identified (and such lists are retained as hard copies). The PMS should remain onboard and followed during the bareboat charter.  The machinery running hours should also be made available so that the next scheduled maintenance and overhauls can be performed by the charterers. It would also be helpful if copies of the Engine Logbooks and main engine performance reports (of at least one or two months) can be kept onboard so the charterers’ engineers can follow the same operational parameters for main and auxiliary engines.

64. The nature and extent of defects should be properly documented (identified and photographed/annotated) on a WP joint basis to establish the “Alleged Defect List” (preferably in the form of an Excel schedule, and if applicable, to include both “Agreed” and “Disagreed” columns).  The surveyors should avoid entering into contentious arguments as to whether or not an alleged defect is a matter of fair wear and tear, lack of maintenance or other reasons (e.g., pre-existent or latent defect) which will be a matter for expert opinion in due course.  The main objective is to properly document the alleged defects factually from a technical perspective.

65. For example, if the seawater pump is running and the mechanical seal is seen to be leaking, the surveyors could agree upon that observation and may even agree it is a defect (or not).  The idea is to leave this issue as it is for the time being until the PMS and Class records can be reviewed (as part of the desktop work) in order to establish the maintenance history of the pump[17].

66. There are instances where the parties have already agreed upon defects which should be rectified for the owners’ account and, indeed, may be rectified before the bareboat charter commences and confirmed by the parties or during a follow-up   on-hire survey.

67. If, for commercial reasons, agreed defects cannot be rectified before commencement of the charter (and provided such defects can be safely deferred) the parties may agree that the bareboat charterers carry out the work later, perhaps supported by quotations and final service reports and invoices for reimbursement by the owners to the charterers.

68. For example, ballast tank coatings in poor condition that is an agreed defect, may await the next scheduled docking and the parties can arrange a further follow-up joint survey, agree scope of repair and eventually the reasonable costs of those repairs.  There have been such examples for agreed machinery defects that can be deferred to the next routine overhaul based on running hours.

Off-hire Survey

69. If an on-hire survey has been carried out, then the report(s) should be made available to the joint off-hire surveyors so that the scope of inspection can be followed (or increased if necessary).  Again, the PMS and Class records should be made available to confirm that proper maintenance has been carried out during the course of the bareboat charter.

70. Bearing in mind that owners’ Technical Superintendent may well have performed periodical inspections during the charter as usually provided for in the charterparty, including drydocking, and that charterers are allowed to have technical representatives onboard for two weeks before redelivery, an ‘Agreed/Disagreed’ defect list may have already been established.  Such a list can then be provided to each of the WP joint surveyors even before they attend the off-hire survey.  The list can then be the basis for a Defect Scott Schedule[18].   

71. Again, the off-hire survey should be thorough and include agreed tests of equipment and machinery.  The nature of defects should be factually documented with each having photographs with proper descriptions.

72. Where the agreed or disagreed defects are numerous and serious, a vessel may have to be docked immediately after redelivery because she may not fit for entering into a new bareboat charter.  For example, a crude oil tanker with serious defects in cargo and ballast tanks, pump rooms, etc., would not be accepted by an oil major.  In such cases, it is recommended that the WP joint off-hire survey continues with follow-up surveys during the docking including recording the nature and extent of repairs required.

73. For rectification of defects carried out by owners post-redelivery, it is recommended that charterers are kept informed and ensure that they invited to attend such repairs.  Repair specifications, quotations, service reports, photographs and invoices should be made available to charterers.  Class survey reports for any repairs to defects which affect Classification should also be made available to charterers.

Claims Procedure

74. Following redelivery, a dispute may arise regarding any defects which are disagreed because charterers consider the alleged defect to be, for example, only a matter of fair wear and tear, normal on-going maintenance, etc.  There may be disputes regarding overdue maintenance routines, the nature and extent of the defect, or the scope of repair and costs.

75. Consider a situation where an owner who is making such claims against the charterer for defects which they consider to be damages beyond fair wear and tear or because of lack of maintenance.  The claims procedure in these circumstances should start with the on-hire and off-hire survey reports and the defect lists which feature the surveyors’ WP joint observations supported by the annotated photographs.

76. The full PMS records and all Class records will also be required to be produced in support of such claims.  All contemporaneous documents should be collated, including drydock reports, service reports, owners’ and charterers’ Technical Superintendents’ reports, fuel and lube oil analyses reports, monthly performance reports for main and auxiliary engines.  The deck log and engine logbooks will also be needed for the full charter period.

77. As for rectification of alleged defects, the supporting documents will include repair specifications, quotations, spare parts requisitions and receipts, service reports, Class survey reports and, of course, final invoices. For the avoidance of doubt, it is not sufficient for owners to just submit invoices to charterers as the only proof of a defect.

78. If the dispute results in commencement of arbitration proceedings, all of the above documents will usually be needed in support of claims for defects and should ideally be easily cross-referenced in a Scott Schedule which can, for example, include columns for:

• Claim Number;
• Description of Alleged Defect;
• Document References;
• Costs Incurred;
• Claimed Amount;
• Claimants’ Position (to include columns for “Damage”; “Lack of Maintenance”; “Fair Wear & Tear”);
• Defendants’ Position (to include columns for “Damage”; “Lack of Maintenance”;  “Fair Wear & Tear”);
• Costs Approved/Not Approved by Experts.

Conclusion

79. A bareboat charterparty is one of the cornerstones of the maritime industry, yet few cases have found their way to dispute resolution before a court or an arbitral tribunal that may serve as guidance for shipping practitioners.  However, the few we have seen indicate that the legal position favour owners in that the charterers usually have a higher threshold to overcome when defending against defects discovered at, or after, redelivery and the subsequent claim for damages for losses suffered and costs incurred.  However, owners often fall short when it comes to properly substantiating their claim.  Better preparation including transparency and invitations to opponents to participate in repair works and surveys when establishing the need for repairs are all recommended.

80. In the litigation process, the above-mentioned Scott Schedule is generally used by the Court or the Arbitral tribunal to add columns for comments on liability and quantum in the Final awards as it helps to focus on the key issues and facilitates a more efficient resolution of disputes.  It is preferable that all claimants aim to present their claim in this format as it can often help them to put forward complex information in a more transparent and comprehensible manner for all parties.  

81. We hope that readers find this analysis useful and we welcome their feedback. Nordisk remain available to assist Members should they have any questions on this topic and they should feel free to reach out to their contact at Nordisk, or reach out to the authors of this article at eaberglund@nordisk.no and ray.luukas@brookesbell.com.

[1]              Ray Luukas is frequently appointed as technical expert in English and international Arbitrations.  He is a Supporting Member of the LMAA and a Fellow of the Chartered Institute of Arbitrators.  He has successfully applied what is known as a “Scott Schedule” setting out in a transparent and controllable system all items of the claim which tribunals in arbitration easily can follow when determining the claim items after liability has been established.

[2]              Silverburn Shipping (IoM) Ltd v Ark Shipping Co LLC (The “ARCTIC”) [2019]2 Lloyd’s Rep 603, see p607.

[3]              3/21 from Singapore Chamber of Maritime Arbitration.

[4]              Previously commented on in the Nordisk Medlemsblad in 1994 - see further reference to this matter in paragraph ‎26 below.

[5]              (1847) 153 E.R. 1304.

[6]              (1890) 25 QBD 42.

[7]              This case was discussed in Nordisk Medlemsblad in the same year by our former colleague Trond Solvang, who is now a professor at the Scandinavian Institute of Maritime law.

[8]              He was also a professor at the same Institute of Maritime law as Trond Solvang.

[9]              See paragraph ‎18 of this Article.

[10]            Ref. Robinson v Harman [1848] 1 Ex 850.

[11]            The principle was first set out in the decision in “Ruxley v Forsyth” [1996] A.C.344.

[12]            [1994] 2 Lloyd’s law Report 161.

[13]             Sealace Shipping Co. Ltd. v. Oceanvoice Ltd. (The “ALECOS M”) [1991] 1 Lloyd's Rep 120.

[14]            Ref. ‎29 above. 

[15]            Ref. HR-2019-1225.

[16]            [2004] A.C 1067.

[17]            One issue that often arises is: whether the pump was due for a routine overhaul shortly before redelivery, the scope of which included mandatory replacement of the seal in accordance with the manufacturer’s recommendations – this should feature in the PMS.

[18]            A schedule often used in litigation before the English Courts, particularly where the Court is being asked to make findings about disputed allegations or facts and is used to clearly set out allegations, responses, and the findings.  Also see further description at paragraph ‎78.

Authors of this article: Egil André Berglund and Ray Luukas