Ready-Made Contracts

BIMCO'S STANDARDIZED CHARTER PARTIES ARE A BOON FOR SHIPOWNERS, PARTICULARLY IN TOUGH TIMES.

View from the E.U.

By Erik Kravets 2017-08-23 13:34:06

(This article was originally published in the 2017 July/August edition)

The Baltic and International Maritime Council (BIMCO), based in Copenhagen, is a shipowner-led organization representing 65 percent of the world’s tonnage. In a region characterized by linguistic, political and cultural diversity, BIMCO aims to create a sense of a European maritime community with a shared legal and economic destiny. Its standardized charter parties are published under intrepid code names like SUPPLYTIME, TOWHIRE and PROJECTCON.

BIMCO addresses the need for transactions between shipowners and charterers to be executed in a standardized, efficient and equitable manner. Both sides know – roughly – what to expect from a BIMCO charter party. Often, if a standardized BIMCO charter party is used, non-legal maritime professionals will be able to settle any differences of opinion by reference to the “four corners of the contract” – and without a lawyer. This can reduce stress and transaction costs, smooth over negotiations, and make it easier to generate more business and more profit.

Take this analogy: A bespoke suit will cost a lot of money and will, if tailored property, fit its wearer perfectly while an off-the-rack suit may cost a tenth of the bespoke suit but still get the job done. You can look stylish without really trying – without the tailor, the long lead times, the expense.

FROM “OFF-THE-RACK” TO “BESPOKE”

BIMCO contracts are like off-the-rack suits. You can pull it out, fill it in, and use it without much fuss. And they are solid in a wide range of situations. If you want to do a little extra, you can also take an off-the-rack suit to a tailor and make it fit better. Likewise, if you give a competent lawyer a BIMCO charter party as a base, he or she can tailor it to suit the circumstances and make it functionally equivalent to a bespoke charter party.

As everybody knows, it’s a tough time for shipping, and shipowners don’t have room for luxury. BIMCO’s standardized approach may not be the most artful, but it is robust. As the Internet has made it easier and cheaper for anyone to buy a bespoke suit, the same technology has also increased the availability, ease of access and flexibility of BIMCO’s standardized charter parties.

A good example is BIMCO’s IDEA2 software, an online member platform using Citrix that allows BIMCO contracts to be modified and finalized for fixing. Unfortunately, the platform is not collaborative. Only one party is able to edit the charter party. If both shipowner and charterer could go online and simultaneously work on it, as in Google Docs, IDEA2 would almost certainly have a wider uptake.

Part of the explanation for the popularity of quick-and-dirty fixture notes – shorthand summaries that incorporate charter party clauses by reference, e.g., “otherwise as per GENCON 94” – is that IDEA2 is not yet versatile enough even if it is undeniably useful and a decisive step in the right direction.

BIMCO’s standardized charter parties are complemented by the BIMCO Bulletin, press releases and various other circulars. These are authoritative even if they are not law in the formal sense. In court and out of court, professionals rely on these publications for guidance.

BIMCO also has a customer service hotline which members may call, similarly to how shipowners can call their P&I Club when they are concerned about a particular insurance provision. These services, on which some shipowners rely exclusively, are free to members. I am told this is cheaper than a lawyer.

Earlier this year BIMCO published the 2017 version of its member guidebook, Check Before Fixing, which contains a curated selection of BIMCO’s biggest hits – i.e., the most-quoted BIMCO Bulletins. The book is supposed to be condensed, concise and practical, but it contains 303 pages of pitfalls and risks shipowners need to be aware of before signing on the dotted line. That’s 303 pages just to cover the most obvious, glaring, dangerous issues that can arise in routine shipping trade.

Regrettably, many shipowners fix without checking because nowadays they are glad to have a job at all. As a result, the choice is often not between the bespoke suit and the off-the-rack suit but between the off-the-rack suit and running around naked. BIMCO’s charter parties can be adapted and deployed quickly so as to grab that opportunity. After all, if the chartering department can’t keep up with the hectic pace, the shipowner may indeed ultimately end up with a finely done contract, but for someone else’s cargo!

PROTECTING THE SHIPOWNER’S INTERESTS

When entering new markets that pose new legal questions, shipowners in Europe look to BIMCO to generate fresh contractual answers. For example, GENCON 94 is not suited to the transfer of maintenance crews in catamarans, the decommissioning of wind farm foundation pieces installed on the ocean floor using huge cranes, or the movement of heavy project cargoes as part of multi-billion-dollar supply chains.

In response, BIMCO has published new standardized charter parties suitable to these new demands, some of which work and some of which don’t. Thus, BIMCO experiments with different practical solutions. Disseminating knowledge and thematically focusing the discussion are a benefit to the diverse European maritime sector.

“It is not events that disturb people, it is their judgments concerning them,” suggested the philosopher Epictetus. Some owners cope with and embrace the new reality of the market while others are frustrated by demanding customers, the pace of change and tough conditions.

But the past is the past, and using a standardized charter party gives shipowners parity when taking on new challenges even if they don’t understand their exposure in all its fullness. Even if charterers are hunting bargains now more than ever, shipowners don’t have to be easy prey.

CHARTERER PUSHBACK

The trouble is that charterers may react skeptically when encountering a standardized BIMCO contract, especially if they know that the organization is balanced and shipowner-led. Take, for example, BIMCO’s popular offshore work charter party, SUPPLYTIME 2005, which was updated this year.

SUPPLYTIME 2017 strengthens the iconic “knock-for-knock/ bury your own dead” clause, which says that damage to anything owned by the shipowner is to the shipowner’s account and damage to anything owned by the charterer is to the charterer’s account regardless of who is at fault. In other words, if the shipowner accidentally damages the charterer’s equipment, the charterer is responsible for the loss even though it is the shipowner’s fault.

Conversely, if the shipowner’s equipment is damaged by an act of the charterer – e.g., if the cargo is improperly packaged – the shipowner is responsible.

SUPPLYTIME 2017 removes some lingering exceptions to the “knock-for-knock/bury your own dead” clause. Now the shipowner is not liable for either direct or indirect consequential losses where before with SUPPLYTIME 2005 he was not liable only for indirect consequential losses.

When charterers engage shipowners to do work on huge projects like building a wind farm and connecting it landside, the losses from any delay can be in the tens of millions of dollars. If operations don’t start on time, electricity can’t be delivered on schedule. The “knock-for-knock/bury your own dead” clause protects the shipowner from liability for mishaps like this.

If the electricity can’t be sold, this is the charterer’s problem even if it’s the shipowner’s fault. Given the vagaries of working on the water, and the fact that the gigantic risks are almost never commensurate with the shipowner’s narrow profit margin, this is fair game. SUPPLYTIME 2017 is fair even if charterers don’t like it.

Although the “knock-for-knock/bury your own dead” clause has been reaffirmed and reinforced by BIMCO, charterers often manifest Lord Acton’s observation that “Absolute power corrupts absolutely.” Since they have the bargaining power to do so, the clause is often removed by charterers. After all, shipowners must “eat or die,” as they say in Germany. In the end, shipowners just pray the job will go through without a hitch.

BIMCO’s limitations are also apparent in SUPPLYTIME 2017 as the “knock-for-knock/bury your own dead” clause is oriented toward English and American law. In some civil law countries, e.g., Germany, such a clause would be invalid without carve-outs for personal injury. BIMCO’s standardized contracts sometimes need to be brought in for additional tailoring when visiting foreign jurisdictions.

TAKING ALL THE RISK

It’s said that the acceptance of a contract depends on its being fair for both shipowner and charterer, but the truth is that nowadays charterers are not so interested in fairness. They just want the shipowner to be liable for everything.

Charterers such as general contractors responsible for building wind farms for consortiums of banks and power companies will pass on the risks for failure to the shipowner using back-to-back clauses. All the penalties and all the exposure in the relationship between the general contractor and the consortium of banks and power companies end up on the shipowner.

BIMCO is aware of this situation. “Sometimes, for commercial reasons, it is not possible to get your counterpart to agree to using a BIMCO contract,” note the authors of Check Before Fixing. Even though shipowners are the ones doing the exhausting, dirty and frequently physically risky work of sailing, carrying, installing and transporting, they regularly only see a tiny share of the profits accumulated by the general contractor even as they take on much of the exposure and most legal risks.

In a tough market, shipowners must often say “yes” even if their legal team is in the background screaming “no.” And that’s something BIMCO unfortunately can’t fix. But I remain hopeful that this unfair race to the bottom won’t – and can’t – go on forever.   MarEx