Don’t become liable for the charterer’s default

ITIC has dealt with claims where commercial managers have ended up making good the financial default of the charterers who hired their principal’s vessel. 

The starting point, as with most ship management issues, is the management agreement. Contractual terms that impose obligations to conduct unreasonable levels of due diligence on potential charterers must be avoided. Seemingly vague obligations only to fix with “reliable charterers” can cause problems when a charterer fails to perform.

Even when the obligations are balanced it is important for the managers to make sure they follow the procedures set out in the contract. In a recent claim an appendix to the commercial management agreement contained a list of approved charterers. The main body of the agreement provided “the manager shall seek approval before fixing with any charterer that does not appear on the list and shall obtain owners approval before fixing". The vessel was fixed to a charterer that was not on the list. The charterer failed to pay the final hire and ultimately went into liquidation owing nearly US$200,000. 

The manager had sent the owner a message informing the owner that they had put the vessel on subjects for a time charter. They named the charterer and outlined their trading activities. The message also highlighted some provisions the charterers wanted in the fixture. Although the level of information was greater than would have been provided for an “approved” charterer the message did not expressly say that these charterers were not on the list and did not seek the owner’s authority to fix with them.  

The owner claimed the unpaid hire from the managers. The owner’s case was that had the managers actually sought authority that would have triggered a process whereby, as a matter of routine, the owners would have carried out background checks. These, it was claimed, would have included seeking advice from a credit reference agency.  The owner said this would have shown the charterers had been having financial problems for some time. They would not have authorised the fixture. Ultimately the parties reached a compromise with the managers contributing to the losses.

Some managers are given precise limitations on the terms of any agreement. One we have seen was an agreement that provided that the managers could not fix the vessel for more than X number of days without approval. The managers failed to obtain approval for a fixture which (at its longest permitted period) could extend beyond the authority they had. When the market rose towards the end of the fixture the owners claimed for difference between the fixture rate and the prevailing market.

In many fixtures the performance of the charterers is guaranteed by another company. It is important that commercial managers take steps to ensure that any obligations to provide a guarantee are followed through. The guarantee is a separate agreement. The manager should get something from the guarantor. Under English law the guarantee needs to be evidenced in writing signed (not necessarily manually) by the guarantor or someone authorised by him. We have seen situations where the terms of the guarantee have been set out in the recap. Once the fixture was concluded nobody followed up to get the guarantee signed. When the charterer defaulted the guarantee proved to be legally unenforceable. The owner looked to the manager to cover the losses.

In the above cases the commercial manager have, by not following the processes set out in either the management agreement or the charterparty, found themselves covering sums owed by a defaulting charterer.