UK: Commercial Court Construes Oil Major Approval Provision In Time Charter Party

Last Updated: 15 December 2010
Article by David McInnes and Reema Shour

Dolphin Tanker Srl v Westport Petroleum Inc (MT Savina Caylyn) [2010] EWHC 2617 (Comm)

In this case, the arbitrator and subsequently the Commercial Court judge had to construe what the judge described as a "lengthy and somewhat opaque" provision in a time charter relating to oil major approvals. They both chose to interpret the oil major clause in such a way as to give it commercial sense and avoid a construction that would lead to a "commercially absurd result".

Background to dispute

This dispute arose out of the termination by charterers of a five year time charterparty on an amended Shelltime 4 form. The matter went to arbitration and the tribunal held that the charterers were entitled to terminate pursuant to clause 50 of the charter party.

The relevant sections of clause 50 are as follows:

"50. Vessel's approval clause (Amended)

1.1 Upon delivery from shipyard: owners shall use best endeavours to obtain pre-approvals, which shall include, but not limited to, inspection of the vessel in the shipyard or at first bunkering operation if/when possible. If pre-approvals are not obtained when the vessel is in the building yard or at the first bunkering, owners will use best endeavours to obtain the minimum 3 (three) major oil company approvals as soon as possible, however, said approvals must be in place not later than 60 (sixty) days from date of delivery (subject to vessel's trading areas and availability of inspectors)

1.2 (1) If owners fail to secure the 3 (three) minimum approvals after 60 (sixty) days of delivery from the shipyard, charterers have the option to extend the 60 (sixty) day period or to place the vessel off-hire from the date and time that she fails to hold the minimum 3 (three) approvals.

1.3 If owners subsequently fail to secure the 3 (three) minimum approvals after an additional period of 60 days, charterers may, without prejudice to any other terms of this charter, terminate the charter party by serving notice of early redelivery to owners.

2.1 During the currency of this charter party: owners will (if so requested by the charterers) co-operate in having the vessel inspected by oil companies if any current SIRE report has to be renewed.

2.2 Owners will use best endeavours to have the vessel inspected and approved by a minimum of 3 of BP, Shell, Exxonmobil, Chevtex and Total Fin Elf within 60 days of the delivery of the vessel into this charter........

3.1 A failed vetting inspection under the SIRE system by the charterers or any other company shall not of itself constitute a reason for the charterers to put the vessel off-hire or enable the charterers to assert a claim under this charter.

3.2 However should the vessel be failed on three (3) consecutive oil major vetting reviews/inspections due to owners'/vessel's reason, the charterers shall have the option to put the vessel immediately off-hire until the vessel next passes a vetting inspection, such failure shall amount to a breach of this charter and charterers shall have the option to cancel the charter without recourse to either party, giving 30 days notice of such cancellation.

3.3 A vetting review/inspection is defined as a nomination by the charterers to an oil major and the oil major reviewing the vessel by either a physical inspection or latest SIRE inspection report. A failure would consist of the oil major rejecting the vessel during this process."

Events giving rise to the cancellation

The vessel was delivered into service in June 2008 and traded for almost 18 months without any vetting problems. However, the arbitrator held that there was a Qualifying Rejection under clause 50 by ChevTex on 1 December 2009. On 9 December 2009, the vessel undertook a SIRE inspection carried out by BP at the owners' request. The vessel passed that inspection. The arbitrator found that the vessel suffered three further Qualifying Rejections thereafter (by Total and ConocoPhillips on 12 February 2010 and a Rejection by ChevTex on 24 February 2010). According to the arbitrator, there was a total of 4 Qualifying Rejections in a consecutive run and consequently the charterers were entitled to terminate the charterparty pursuant to clause 50.3.2. In other words, he disregarded the BP "pass" because it had not followed a nomination by charterers but was commissioned by owners.

Issues of law on appeal

The appeal to the Commercial court raised three issues of law:

  1. What was intended by the reference to "oil major" in clause 50.3.2.
  2. What was meant by the phrase "failed on three (3) consecutive oil major vetting reviews/inspections" in subsection 3.2.
  3. The significance of the Ship Inspection Report ("SIRE") system in the vetting review.

Commercial Court decision

Meaning of the term "oil majors" in subsection 3.2 of clause 50

Owners had sought to argue that "oil major" has a meaning which is confined by subsection 2.2 to the five named companies i.e. excluding ConocoPhillips and that it was irrelevant how the expression might generally be used. Rather, the owners contended that the contract provided its own definition of the expression and that, for the purposes of clause 50, "oil majors" were only the 5 companies named in subsection 2.2. Mr Justice Simon rejected owners' argument and upheld the arbitrator's finding that the natural and ordinary meaning of the unqualified words "oil major" in subsection 3.2 included all six recognised oil major companies. Furthermore, the judge said that this meaning was supported by the reference in subsection 3.3., which said that "a vetting review/inspection is defined as a nomination by the charterers to an oil major" (emphasis added). This was the commercially sound and consistent interpretation because it made no commercial sense for in-service approvals to be limited to a sub-set of oil majors. Rather, the tradability of the vessel would be affected by a good or poor report from any of the oil majors.

Did the BP "pass" break the sequence of consecutive rejections?

The judge found that it did not. He agreed with the charterers that the wording of subsection 3.3 was clear and required a vetting review/inspection to be a nomination by the charterers. The BP nomination was by owners and did not therefore count to break the run of Qualifying Rejections.

Owners argued that subsection 3.3 meant that a vetting failure could only give rise to a Qualifying Rejection where the latest SIRE Report was the (or an) effective cause of that failure, and that in none of the Qualifying Rejections found by the arbitrator could it be shown that the BP SIRE Report was either the or an effective cause of the Rejection. The judge dismissed this interpretation and agreed with charterers that it was sufficient to found a Qualifying Rejection if the latest SIRE Inspection Report had been considered by the oil major as part of the process of nomination and review. On the expert evidence, the arbitrator had found that oil majors will look at the history of SIRE inspection reports as part of the vetting process and had concluded that the oil majors who had issued the Rejections in this case had "probably" reviewed or referred to the latest SIRE report. The judge detected no error of law on the part of the arbitrator. The appeal was consequently dismissed.

Comment

Given that the issue of oil major approvals in tanker charter parties is critical because without such approvals it is impossible to trade the vessel profitably, this Commercial Court decision is a welcome addition to the rather sparse English case law on the subject.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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