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Clyde & Co: Can Owners be held liable to pay for bunkers, even if the bunkers are ordered by Time Charterers?

09 Sep 2022

International law firm Clyde & Co LLP on Thursday (8 September) published an insight focusing on who is liable to pay for unpaid bunkers, drawing from a Tribunal case:

In a decision that will likely be welcomed by bunker suppliers and concern vessel owners, a Tribunal has held in a recent London Arbitration (28/22) that both the time charterers and bareboat charterers of a vessel were jointly and severally liable to pay for bunkers stemmed by time charterers.

The decision departs from the traditional view under English law that in general, only a party who has contracted to purchase bunkers is liable to pay for those bunkers. As the decision suggests owners of vessels can be held contractually liable for unpaid bunkers stemmed by their time charterers, the implications are worth considering by bunker suppliers and vessel owners.

Factual background

The Claimant was a bunker supplier who concluded a bunker supply contract with the vessel’s time charterers. The bunker supplier issued a confirmation note by email to the time charterers, which named the time charterers as the “Buyer” together with the registered owners and “vessel in rem c/o the ship operator, time charterers”. The time charterers sent an email confirming the bunker supplier’s confirmation and general terms and conditions (“GTC”).

Clause 2.1 of the GTC provided that the “Buyer” meant the contracting parties named in the Nomination, as well as the “vessel owner and/or charterer and/or operator to which the Products have been delivered to any/or any other party benefiting from the consumption of the Products”.

Clause 15 of the GTC included a number of provisions regarding a maritime lien including:

15.1: “The Seller will have, and may assert a lien against the Vessel …” and “it is expressly agreed between Seller and Buyer that the delivery of Marine Bunker/products creates a maritime lien in accordance with article 46 US Code § 31342 of the United States Federal Maritime Lien Act”.

15.2: “The Buyer agrees and warrants that a lien of the Vessel is thereby created for the Price of Products”.

15.4: “[The Seller] shall not be bound by any attempt by any person or entity to restrict, limit or prohibit its lien or liens attaching to a Vessel unless notice in writing of the same is given to the Seller before it sends its confirmation to the Buyer”

Clause 19.1 provided that “the Agreement and all claims and disputes arising under or in connection with the Agreement will be governed by English Law except that United States federal Maritime Lien Act will apply to any determination of the existence of a maritime lien, attachment or any other maritime claim regardless where the Seller commences any legal action against the Buyer”.

After bunkers were supplied to the vessel, the time charterers defaulted on making payment to the bunker supplier. Separately, the bareboat charterers of the vessel exercised an option to purchase the vessel, becoming the vessel owners.

The bunker supplier commenced arbitration proceedings against both the time charterers and the bareboat charterers. Part way through the arbitration proceedings, the claimant bunker supplier sought to add the registered owners of the vessel at the time of the supply as respondents to the arbitration.

The Tribunal’s decision

The Tribunal held that the bareboat charterers and time charterers were jointly and severally liable for the invoice value of the bunkers, plus contractual interest at 2% per month. The key points of the Tribunal’s decision are as follows:

  1. The Tribunal was satisfied that both the time charterers and bareboat charterers came within the definition of “Buyer” under clause 2.1 of the GTC, and that the time charterers had apparent or ostensible authority to bind the bareboat charterers under the GTC.
  2. The bunker supplier was entitled to the benefit of a maritime lien, which bound the bareboat charterers when they became the owners of the vessel. This was on the basis that the GTCs allowed the Tribunal to determine the existence of the maritime lien by applying US maritime law, and under US law bunkers qualified as “necessaries” and the supply and non-payment of bunkers created a maritime lien under US law. This was notwithstanding that fact that the supply of bunkers would not create a maritime lien under English law.
  3. Whilst the bareboat charter and time charter contained “no lien” provisions, the Tribunal held that notice of those clauses was not given to the bunker supplier before the issuance of its confirmation letter, and under clause 15.4 the “no lien” clauses were ineffective against the bunker supplier.

Analysis: what are the implications for bunker suppliers and owners?

The contractual parties to a bunker contract

The traditional position under English law is that where a time charterer purchases bunker supplies, they are the only party contractually liable under the bunker supply contract, and the bunker supplier has no contractual recourse against the vessel owners. This is supported by the Yuta Bondarovskaya [1997], where it was held that the time charterers purchasing bunkers are contracting in their own right and not as agents for the vessel owners.

Bunker suppliers are placed in a difficult position if the party purchasing the bunkers defaults or becomes insolvent. As a result, bunker suppliers have often used wording in their contracts seeking to widen the identity of the Buyer to cover the vessel and its owners, with the aim of creating a mechanism through which they can pursue their claim against the vessel or its owners. Historically, as a matter of English law, these attempts have generally failed. However, it is notable that in this case, the Tribunal held that both the bareboat charterers and the time charterers were parties to the contract, and that the time charterers had apparent and/or ostensible authority to bind the bareboat charterers to being liable under the GTC.

This decision is a notable departure from the judgment of Clarke J in the Yuta Bondarovskaya who held that it was not “within the usual authority of a time charterer to buy bunkers on behalf of owners or demise charterers”, and stated there was “no warrant for holding a shipowner or demise charterer personally liable without his consent”.

Maritime liens

There is often a battle between bunker suppliers and owners, where bunker suppliers attempt to show that the vessel or its owners are bound by (or have consented to) a maritime lien, and conversely owners take steps which they can use as a basis to assert that they have not authorised the creation of a maritime lien over the vessel in respect of bunker supplies. An example of this is through the use of “no lien” clauses in charterparties.

Notably, in London Arbitration 22/28 the Tribunal held that there was a maritime lien over the vessel, notwithstanding that there were “no lien” provisions in both the bareboat charter and time charter. This was on the basis that notice of these provisions was not given to the bunker supplier, prior to the contract being agreed.

This is an noteworthy decision, in that the Tribunal concluded that a maritime lien would arise under the GTC, unless a challenge was communicated to the bunker supplier prior to the contract being entered to. This contrasts against the more commonly accepted analysis under English law, which is that a maritime lien in respect of a bunker supply cannot be created over a vessel without the vessel owners’ consent.

The Tribunal’s decision also departs from the Halcyon Isle [1981], where the Privy Council held that maritime liens are procedural issues to be determined by the lex fori, and where the lex fori does not recognise a maritime lien in respect of bunker supplies (such as England and Singapore), no maritime lien should be recognised.

Interest

Notably, the Tribunal awarded contractual interest at 2% per month to the bunker supplier. Whilst clauses providing for interest at this level are fairly standard in bunker contracts (and is the contractual interest rate in the BIMCO Bunker Terms 2018), it has been suggested that such clauses could be subject to challenge as a penalty. The Tribunal’s decision suggests that bunker suppliers may be able to recover relatively high rates of interest for non-payment.

The future

London Arbitration 28/22 is subject to an application for an extension of time for leave to appeal and developments are awaited. In the meantime, this decision is likely to embolden bunker suppliers seeking to assert that vessel owners are liable for bunker invoices unpaid by the time charterers stemming those supplies.  That being said, London Arbitration 28/22 is not binding on other arbitrations and vessel owners may continue to rely on the Yuta Bondarovskaya to defend claims.

Whilst in the past, Tribunals and Courts have expressed sympathy for the difficulties faced by bunker suppliers in recovering payment for bunkers they have supplied, this case is noteworthy in that it illustrates that the Tribunal was prepared to go a step further than expressing sympathy and find that in this instance, the bunker supplier had a right to pursue an in personam claim against the vessel owners.

 

Source: Clyde & Co LLP
Photo credit: CHUTTERSNAP from Unsplash
Published: 8 September 2022

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