On December 13 2017 the Baltic and International Maritime Council released Barecon 2017 – a revision of its predecessor, Barecon 2001. This represents an important update to one of the most commonly used maritime contracts, which is regularly applied to all types of maritime asset across all sectors in the shipping and offshore industries.
Barecon is a bareboat charter, under which the charterer obtains possession and full control of the vessel along with the legal and operational responsibility therefor. As such, the form is a key element in:
- project finance transactions;
- commercial fixtures between shipowners and operators; and
- inter-company chartering between affiliates more generally.
Barecon 2017 follows the same general layout as its predecessor. This update summarises the main changes.
The delivery of a vessel under a bareboat charter is a key milestone, as after it has accepted delivery, the charterer is generally prevented from asserting any claims based on the vessel's condition. In terms of delivery condition, the new form maintains the general requirements that the vessel must:
- be delivered in a seaworthy condition;
- be ready for service under the charter; and
- meet the particulars set out in the charter.
However, while owners were previously obliged only to exercise due diligence to satisfy these requirements, compliance is now an absolute obligation, which may increase an owner's liability should its vessel fail to meet the requirements. If the charterer has conducted an inspection before delivery, it is now also a requirement for the vessel to be delivered in the same condition (fair wear and tear excepted) as it was at the time of such inspection. The vessel's class certificates must also be free from any conditions or recommendations on delivery.
With respect to the time of delivery, the new form generally requires owners to keep the charterers informed of the vessel's itinerary. The parties must now expressly state the number of days of approximate and definite notice to be given (as the standard fallback position in Barecon 2001 of 30 days' preliminary and 14 days' definite notice has been removed in the latest iteration of the form). Prior to delivery under the charter, the owner must now also permit the vessel to be employed only on voyages or contracts that can reasonably be expected to be completed before the agreed delivery date.
Charterers can now place two representatives on board the vessel for familiarisation purposes for a reasonable period before delivery under the charter. In addition to the general surveys to determine the vessel's condition at the time of delivery, charterers can also arrange an underwater inspection by a diver appointed by the classification society. Similar rights of familiarisation and surveys (including underwater inspections) are also extended to the owner before redelivery of the vessel.
Payment of hire is a charterer's key obligation. Barecon 2017 establishes separate hire terms for option periods. While the remedy period in case of late payment was left for the parties to specify in the previous form, it is now fixed at three banking days after a charterer has received the owner's notice, after which the owner is entitled to terminate the charter. The standard default interest has been changed from 2% over three-month London Interbank Offered Rate (LIBOR) to 3% over one-month LIBOR. A requirement for the charterer to gross up its payments in case of withholdings was previously often included in rider clauses, but this is now expressly set out in the standard text.
A timely and substantial change has been made to the provisions regarding new class and regulatory requirements. Considering that the shipping and offshore industry is subject to an increasing number of regulatory requirements, particularly relating to environmental issues, this change will likely be of significant practical importance. While Barecon 2001 made a somewhat generic reference to how the costs of such requirements should be distributed between the parties, Barecon 2017 sets out two alternatives. The first alternative (and default position, if no selection is made) is that all costs must be for the charterer's account. The second alternative is based on a formula with three main scenarios:
- The costs of the required modification up to an agreed amount must be for the charterer's account.
- If the costs exceed the agreed amount and the required modification is expected to last for the vessel's remaining life, the charterer's portion will be based on a formula where the costs of the required modification is divided by the vessel's expected remaining life in years and multiplied by the remaining charter period in years.
- If the costs exceed the agreed amount and the required modification is not expected to last for the vessel's remaining life, the charterer's portion will be based on a formula where the costs of the required modification is divided by the modification's expected life in years and multiplied with the remaining charter period in years.
The insurance and repair provisions have been split and made more accessible. However, one of the most important changes in Barecon 2017 is intended to negate the effect of the Occon Victory case by clarifying that the co-insurance arrangement is meant to ensure payment under the insurance as a first resort to cover the loss without excluding or settling liability between the owners and the charterers or affecting recovery against third parties.(1)
In line with recent drafting practice, Barecon 2017 now also includes as standard a set of undertakings and warranties relating to compliance by both parties with applicable anti-corruption and sanctions legislation.
The provisions regarding termination due to the other party's breach of contract are more or less the same, except that the charterer is given a right to terminate in case the owner fails to take out insurance where required to do so in accordance with Clause 17(c) of Barecon 2017.
However, some important changes have been made regarding the special circumstances that can lead to termination:
- The war risk clause has been removed; Barecon 2017 has thus eliminated the possibility for termination in case of the outbreak of war between specified countries and the further flexibility extended by the clause.
- However, a charter will still be terminated in cases of total loss or requisition of title (but not requisition for hire).
- Additional termination rights are also included in case of the other party's breach of the newly included anti-corruption and sanctions clauses.
The revised optional Part III regarding newbuilding vessels also includes some important amendments. The specification of the vessel under the bareboat charter is still based on the specification in the building contract, which must not be amended without the charterer's consent. However, in Barecon 2017 charterers can also request change orders against covering the costs of such changes. Termination of the building contract is still a trigger for termination of the bareboat charter, but in the new form it is the owner (and not the charterer) that makes the decisions regarding such termination.
In the optional Part IV, the previous hire/purchase mechanism is replaced by a new purchase option. While the previous solution provided for the transfer of title simultaneously with payment of the last hire at expiry of the charter period, the new solution caters for the charterer to be given several options to purchase the vessel at certain specified times and at pre-determined prices, by giving at least six months' prior irrevocable notice.
The optional Part V regarding bareboat registration remains and now also includes a provision requiring the charterer to arrange for the deletion of the bareboat registration on termination of the bareboat charter.
The widely used Barecon has been broadly revised based on various recent rulings from the English courts and changes in chartering practice adopted by the industry. While several new features have been included, the basic structure of the form remains the same and it should still be suitable for bareboat charters for a variety of transactions and assets. Further, several of the simplifications, clarifications and other updates should make the form easier to use in conjunction with rider clauses crafted for a specific transaction.
Although it often takes some time for a new form to be adopted, Barecon 2017 is expected to quickly become the standard form for bareboat charters across the shipping and offshore sectors.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For further information on this topic please contact Jonathan Page or Andreas Fjærvoll-Larsen at Wikborg Rein by telephone (+47 22 82 75 00) or email (firstname.lastname@example.org or email@example.com). The Wikborg Rein website can be accessed at www.wr.no.