Vessel Substitution under Time Charters

The principles and limitations

- by Stephen Grainger

The commercial purpose and importance of the ability to substitute tonnage should not be underestimated. A number of principles and limitations, in the absence of a contrary intention, can be identified from reported decisions, which, whilst applicable to the particular facts and commercial contexts of each case, are to be broadly embraced.

Commercial considerations

The essence of a time charter is an agreement between a vessel owner or operator and a charterer where the owner or operator agrees, for consideration, to place the carrying capacity of a particular vessel at the disposal of the charterer for a specified period of time with freedom given to employ the vessel for the charterer's purposes and within the contractual limits.

It may become necessary or convenient for a vessel owner or operator to remove (temporarily or permanently) a particular vessel from the disposal of the charterer before the end of the charter period. Commercial considerations for so doing will include the vessel's commercial opportunities, especially of vessels of rare design and specification, the unscheduled scrapping and carrying out repairs and maintenance where the anticipated repair period exceeds the time permitted in the charterparty.

In the absence of a right to substitute, the charterers cannot be required to accept the service of another vessel. Similarly, in the absence of contractually agreed 'intervals' between voyages,1 the owner or operator cannot temporarily remove a vessel from the charterer's service without being exposed to claims for damages for non-performance.

The right to substitute

English common law does not recognize any unilateral right of a party to substitute a vessel after the conclusion of a charterparty. Any such right must therefore be derived from an express agreement. There are however two circumstances where a vessel substitution is permissible without such an agreement.

First where the vessel is to be built and is identified by a yard number. Limited circumstances exist to transfer a yard number to another new building with a similar specification,2 provided that the construction of neither new building has actually commenced.3

Second where the vessel is described as 'TBN' (to be named). The subject matter of a time charterparty is a vessel, a full description of which is essential for a concluded fixture. The only circumstance therefore where a time charterparty will be capable of being concluded with reference to 'TBN' is invariably where the owners or operators have an identical/sister vessel which complies with the charterparty description and which is capable of being delivered into the charterers service.

Who may substitute? The obligations of the vessel provider under a time charterparty are personal.4 Therefore if the vessel provider is described as owner, a substitute vessel must similarly be owned tonnage, as opposed to chartered in tonnage. In recognition of single ship owning companies, ownership in this context extends to management.5 A vessel provider described as 'contractor'6 or as 'agent or owner'7 will have considerably more scope to substitute tonnage outside it's ownership and management.

Notice to charterers. In the absence of a contractual notice period, reasonable and adequate notice is required to be given so as not to adversely interfere with the charterers own business arrangements. Where a contractual notice period is not complied with, by analogy, this is likely to be construed as a condition precedent and may render the vessel substitution invalid and ineffective.8

What may be substituted? Substitution is limited to the subject matter of any charterparty, namely the vessel itself. 'The word substitute implies that one thing is being put in the place of another thing, one ship in the place of another ship, with the same rights and subject to the same duties...'.9 A failure of a substitute vessel to comply with the terms of the charterparty, for example delivery within the laycan10 may similarly render the vessel substitution invalid and ineffective.11

The option to make a vessel substitute is a right as opposed to an obligation. Accordingly, the owner or operator purporting to make a vessel substitution will be unable to rely on any charterparty exceptions or exceptions at law (such as frustration) to absolve a failure or delay in delivering substitute tonnage.12

Characteristics/suitability of the substitute vessel. In the absence of any express provision detailing the description and specification, a reasonably similar vessel, efficient for the services required by the charterers will be required.13 Whether a prospective substitute vessel complies with this description will depend on the particular requirements of the charterers in each case. Relevant factors will include the age of the vessel, suitability for a particular trade (length and draught), loading capacity (dimensions and deadweight) engines, machinery and fuel consumption.14 The right to substitute is a right to substitute one vessel for another and does not extend to a right to substitute one vessel for two vessels or vice versa.15 There is no requirement per se for a substitute vessel to be in existence at the time when the charterparty was concluded.16

The charterer's prior approval of a prospective substitute vessel or, more usually, of particular specifications, may be provided for. The extent to which charterers can withhold such approval is limited to bona fide grounds of objection as to the suitability or otherwise of the prospective substitute vessel, viewed subjectively, bearing in mind all the circumstances of a particular case.17 Charterers, in addition, have a general right to decline acceptance of a substitute vessel on the grounds of prejudice,18 and in limited circumstances, on the grounds of estoppel.19

Multiple substitutions. Subject to consideration of all the facts of a particular case, especially the duration of a charterparty and the purposes of vessel substitution, a right to substitute will not be construed as being limited to a single substitute but a right to make multiple and successive substitutions when convenient.20 Vessel substitution, by rotatation between two vessels is also permissible.

When may a substitution take place? In cases where the right of substitution is conferred by an 'or sub' provision in the preamble to the charterparty, it is likely that a substitution will be permitted to perform the first voyage. Otherwise, where a vessel substitution clause is silent as to timing, substitution will be permitted only at the end of a voyage.21 Furthermore, substitution will be permitted only where there is a valid and subsisting charterparty under which the original tonnage is operating.22 Substitution will not be possible at a time after the termination of the charterparty, for example by frustration following the loss of the original tonnage. A right to substitute does not therefore permit a suspension of the operation of the charterparty.23

The obligation to substitute

Whether a particular charterparty clause imposes an obligation to substitute is a matter of construction requiring a clear and precise words. Factors such as an alternative mode of performance of the charterparty,24 a clear intention against cesser of the charterparty in the event of a loss, a suspension in the performance of the charterparty and a resumption of hire payments,25 will all be relevant factors.

The obligation to substitute is a positive duty on the owners or operators of a vessel to provide a substitute vessel in circumstances where, for whatever reason, the original tonnage becomes unavailable before the end of the charterparty period necessitating a 'stand-by' vessel available for substitution within a reasonable time. The owners or operators, in these circumstances may be in a position to rely on any charterparty exceptions or exceptions at law to absolve a failure or delay in delivery. This will however depend on the capacity in which the owners or operators are described in the charterparty, where 'agents or owners'26 and 'contractors'27 will broaden the obligation to provide chartered-in substitute tonnage in the event of a lack of owned tonnage.

In contrast to the right to substitute, the obligation to substitute is usually for the charterer's sole benefit enabling the charterers to take advantage of a potentially lucrative fixture in a rising market and any option in the charterparty to extend the charter period or to purchase the vessel at the end of the charter period. However, such an obligation will permit a substitution in circumstances where the option to make a vessel substitution by a vessel owner or operator has been lost.

Substitution by Charterers?

Finally, in circumstances where the owners or operators are in repudiatory breach of the terms of a time charterparty, it may be the charterers, in mitigation of claims for damages under the charterparty, making a substitution. However, such a substitution is not of course a vessel substitution under the charterparty, but rather a substitution, by way of a new fixture for the remaining voyage or voyages contemplated under the original charterparty to fulfill the charterers own commitments.28

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References

1. See The Lily Prima [1976] 2 Lloyd's Rep 487 (CA)
2. The Diana Prosperity [1976] 2 Lloyd's Rep 621( HL)
3. Stocznia Gdanska S.A. v Latvian Shipping Co and others [1996] 2 Lloyd's Rep 132 (CA)
4. Humble v Humble (1848) 12 Q.B. 310
5. Alquife Mines v Miller [1919] 1 Lloyd's Rep 321(HL)
6. Phosphate Co. v Rankin (1915) Com.Cas 248
7. Cork Gas Co. v Witherington (1920) 36 T.L.R. 599
8. The Niizuru [1996] 2 Lloyd's Rep 66
9. Per Mr Justice Atkinson in H.P. Drewry S.A.R.L. v Aristoteles Onassis [1942] 72 Ll.L.Rep 29 at 40
10. H.P. Drewry S.A.R.L. v Aristoteles Onassis, supra. See also, by analogy, Agricultores Federados Argentinos Sociedad Cooperativa Limitada v Ampro S.A. Commerciale, Industrielle et Financiere [1965] 2 Lloyd's Rep 157
11. Cargill UK Ltd v Continental UK Ltd [1989] 2 Lloyd's Rep 290
12. The Marine Star [1993] 1 Lloyd's Rep 329 (CA)
13. The John Knox (1920) 4 Ll.L Rep 185
14. The John Knox, supra. Niarchos (London) Ltd v Shell Tankers Ltd [1961] 2 Lloyd's Rep 496
15. Niarchos (London) Ltd v Shell Tankers Ltd, supra
16. See H.P. Drewry S.A.R.L. v Aristoteles Onassis, supra
17. Niarchos (London) Ltd v Shell Tankers Ltd, supra
18. The Driade [1954] 1 Lloyd's Rep 1 (CA)
19. See The Ballenita [1992] 2 Lloyd's Rep 455
20. The Driade, supra.
21. The Badagry [1985] 1 Lloyd's Rep 395 (CA)
22. Niarchos (London) Ltd v Shell Tankers Ltd, supra. See also Thomas Borthwick (Glasgow) Ltd v Bunge & Co Ltd [1969] 1 Lloyd's Rep 17
23. The Badagry, supra
24. Niarchos (London) Ltd v Shell Tankers Ltd, supra
25. The Badagry, supra
26. Cork Gas Co. v Witherington, supra
27. Phosphate Co. v Rankin, supra
28. See The Fanis [1994] 1 Lloyd's Rep 633

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