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By Knut Erling Øyehaug, Tom Pullin and Ian Fisher 
A typical feature in most charterparties, is that the charterers have liberty to sub-let the vessel and/or assign the charterparty to a third party. In the offshore sector, where the oil companies typically have their own standard charter forms, charterers may not only be entitled to sub-let or assign, but may also have a right to “loan” the vessel to a third party, “transfer” the contracts, “release” the vessel to a third party etc. The wider variety of charterers’ rights to utilise the vessel in the offshore sector reflects how the development and operation of offshore oil fields are organised, where vessel capacity may be shared between operators of different licences etc.
Based on our day-to-day experience where we encounter a wide variety of charterparties, it seems that the potential consequences of accepting the various clauses may not always be apparent. In this article, we will discuss some main principles, and comment on some clauses we have encountered which may involve unexpected challenges.
The most common right, which is found in all segments of shipping, is charterers’ right to sub-let (or sub-charter) the vessel. Given the concept of “privity of contract” in English law, a sub-let from charterers to a third party does not create any contractual relationship between the owners and the sub-charterers. However, an express right to sub-let avoids any discussion as to whether there is an implied right to sub-let in the absence of an express provision.
A number of charterparties also provide the charterers with a right of assignment to a third party, sometimes limited to related companies but other times to third parties in general. English law recognises a difference between an assignment and a novation. The former transfers the benefit of a contract from one party to a third party. Where an assignment is permitted, there are generally no formalities to observe, such as a requirement to give notice to the non-assigning party (usually the shipowner), unless such formalities are specifically required by the contract. There is some logic to this, as an assignment will not transfer the burden of a contract, only the benefit. The assigning party, therefore, will remain liable to the non-assigning party for performance of its obligations. It should, therefore, make little or no difference to the non-assigning party as he can still look to the original party for performance.
However, under a novation, both the burden and the benefit shift to a third party. Although this is often treated as a transfer, in fact, a novation serves to extinguish the original contract and replace it with another contract, between the new parties, on identical terms. As a novation will affect the non-novating party’s rights (he can no longer look to the novating party (novator) for performance), English law requires that notice of the novation be given to the non-novating party. As a new contract is being created, that contract will require consideration (the novatee must give something of value) unless the contract is to be executed by deed. (Under English law a deed is a particular type of agreement which must be in a specific form. Unlike a normal contract where a simple signature is sufficient to bind the parties, a deed requires certain formalities to be observed when it is executed. Deeds do not require consideration and claims under a deed are subject to a longer limitation period (12 years) than normal contractual claims (six years).)
Whether an assignment clause is intended to create privity of contract between the owner and the assignee (i.e., a novation) is a question of construction. In certain circumstances, a clause may be construed to the effect that the owner is deemed to have authorised the charterer to conclude, on the owner’s behalf, another identical charter with a third party. It is suggested (in Voyage Charters, 3rd ed., para. 83.3) that if charterers have a liberty to assign the charterparty in addition to the liberty to sub-let, and provided there is no requirement that the original charterer shall remain responsible in case of assignment, this will indicate an intention that the original charterer drops out and is replaced by the assignee. Provided the assignee consents to becoming a party to the charterparty, the law does not prevent this intention from taking effect.
Clauses allowing sub-let and assignment often require that “the original Charterers shall always remain responsible to the Owners for due performance of the Charter Party” (Supplytime 2005, clause 20 (a)). In the case of a sub-let, this proviso merely confirms what would otherwise apply, and in the case of assignment it makes it clear that it is only the benefits of the contract that are assigned and that the original charterers are not released in respect of their obligations.
Another common restriction on charterers’ right to assign or sub-let is that it is made “subject to the Owners’ prior approval”, often combined with a requirement that such approval “shall not be unreasonably withheld” (e.g. Supplytime 2005, clause 20 (a)). Defining the meaning of “reasonable” is not straight forward, but in a Commercial Court decision in 2011 (Porton Capital Technology Funds and others v. 3M UK Holdings Ltd [2011] EWHC 2825 (Comm)) the Commercial Court provided some helpful guidance. The Court stated that the burden is on the party requesting consent to show that the refusal is unreasonable, that what is reasonable depends on the circumstances of each case, that it only needs to be reasonable in the circumstances (not generally), that the party whose consent is required is entitled to take into account his own interests, and that he does not have to balance his own interests with those of the party requesting consent.
With these general principles as background, we shall now comment on some more special provisions encountered in the offshore sector.
Where a charterer is entitled to “sub-let” the vessel, there is sometimes a requirement that the sub-let has to be to someone “not competing with the Owners”. This is the case both in Supplytime 2005 (where the requirement also applies to “assigning or loaning the Vessel”) and in certain oil company contracts.
Some clauses allow not only sub-letting and assigning, but also “loaning” of the vessel to a third party (e.g. Supplytime 2005). The exact meaning of “loan” or “loaning” is not clear, but generally is meant to cater for situations where another party is allowed to use the vessel on a different contractual basis than a straightforward sub-let or assignment, e.g., operators of adjacent oilfields agreeing to share vessel capacity. The specific meaning must be determined in each case. In Supplytime 2005, “loaning” is subject to the same requirements as sub-letting and assignment, i.e., that it shall not be to companies competing with owners, and shall be subject to owners’ approval, which shall not be unreasonably withheld etc.
In one oil company standard charter, charterers are not only permitted to assign but also to “re-assign (whether on one or several occasions)” the charterparty to “any other person”. Presumably, this means that charterers, after having assigned the vessel to a third party, may thereafter “re-assign” the vessel to another third party in direct continuation. Possibly, it also covers A assigning to B, who re-assigns to C.
Another oil company charter states that the charterers may “transfer” the contract to their “affiliated or associated companies, or … Joint Venture Partners”. This wording alone is not clear as to whether the original charterers shall remain responsible under the contract. However, the contract goes on to say that the “transferee shall be deemed to replace Charterers and assume all rights and obligations”. This seems to make it clear that the original charterers are released and that the transferee has taken over the charter (similar to a novation), but somewhat surprisingly, the same provision then goes on to say that “however, Charterers always to remain ultimately responsible for fulfilment and payment to Owners …”. Apparently, therefore, the end result is an assignment where the original charterers are not released from the obligations under the charterparty. To avoid uncertainty, it would be preferable to delete the second sentence (referring to “all rights and obligations”).
Another variation is the following: “Neither Owner nor Charterer may assign or sub-let this Charter Party .. to any third party, without the prior consent of the other party, which will not be unreasonably withheld …”. Pausing there, the wording so far is straightforward, perhaps with the exception that a “sub-let” from owners would be an unusual concept. The clause then states that notwithstanding the above, the “Charterer may assign its rights and obligations to its co-venturers, joint operators, other operators or affiliated companies of Charterer”. This apparent right to novate to related companies is not subject to owners’ approval (although English law would imply an obligation to give notice). Then the clause ends by saying that “This charterparty shall inure to and be binding upon the respective successors and assigns of the parties hereto”. This language would seem to create a right to novate the charterparty rather than simply a right to assign the benefit.
One rather unusual arrangement is found in another oil company contract, where the charterers have the right to “require owner to perform alternative work for other operators”. Whether this is meant as an amendment to the general scope of work of the contract, or as an alternative to sub-letting, assignment etc., is not clear. However, in the same contract, charterers also have a general right to “assign, sub-contract or transfer any or all of its rights or obligations”, without any need for prior approval from owners or similar restrictions. By accepting such a provision, owners must be prepared to accept that the charterparty may be transferred to any other third party, on the basis that the original charterers are released from the obligations, and that the new charterers can “require owner to perform alternative work for other operators”. Whether the reference to “alternative work” may also include work of a different nature than the agreed scope is perhaps arguable, but we think not.
In some cases, charterers’ right to assign/novate the charterparty to a third party is contingent upon the requirement that “Charterer can demonstrate that the third party assignee has the financial strength required to fulfil Charterer’s obligations under the Charter”. Provided charterers fulfil their obligation to demonstrate financial strength, it is perhaps not obvious that the original charterers are released from the time of the assignment, but this would seem to be a fair interpretation of the parties’ intention.
As a final example of the intricacies found in some of these clauses, we quote the following (taken from an oil company contract):
“Charterer shall have the right to release any Vessel(s) and may redeliver the Vessel to Owner for the purpose of releasing to any third party. The points of delivery and redelivery are to be agreed between Charterer and Owner. … Following any release, Charterer agrees to accept the Vessel back on term charter in direct continuation at the end of the period of release. Owner agrees to credit Charterer the full hire rate (or part thereof if the charter hire rate is less than the term charter rate) due under the Charter Party whilst the Vessel is released to and on hire to any third party.”
Such a clause raises a number of questions. Is the charterparty suspended and replaced with another charterparty during the period of release? The first part of the clause suggests so, but the last part indicates that hire remains payable under the original charter, since owners are to credit the original charterers with hire earned under the (release) charter. Is the requirement that the parties agree the “points of delivery and redelivery” an unenforceable “agreement to agree”? Do the terms and conditions of the original charter apply to the third party, or can the vessel be made available to the third party on any terms and conditions? In the latter case, are owners entitled to be indemnified and held harmless by the original charterers as if the original charter were still in place?
The above examples illustrate that a wide variety of clauses are in use, and that owners’ legal position may vary quite substantially in the various circumstances. Although charterers’ need for flexibility may be described as a “fact of life”, particularly in the offshore industry, it is worth considering to what extent clauses of this nature are acceptable. One should also bear in mind other potential consequences, such as the need to notify underwriters that an assignee should be included as co-insured etc.
