The “Chem Orchid”: Is Physical Redelivery Necessary To Terminate A Bareboat Charter?
Legal News & Analysis – Asia Pacific - Singapore – Shipping Maritime & Aviation
28 May, 2015
The Singapore High Court, in the recent judgment of The “Chem Orchid”  SGHC 50, considered the requirement of redelivery in the termination of a bareboat charter. This is important in the context of admiralty law, given the crucial implications on the court’s jurisdiction to order the arrest of bareboat or demise chartered vessels.
By a Lease Agreement (Agreement) on 1 February 2010, owners Han Kook Capital (Owners) leased the “Chem Orchid” (Vessel) to Sejin (Charterers) for a period of 108 months. Charterers defaulted on their payment obligations shortly after, and made no payments to Owners from October 2010.
In December 2010 Owners incorporated a new entity HK AMC (HKA) to recover bad debts and transferred to HKA the credits that had accrued under the Agreement.
In April 2011, Owners purported to terminate the Agreement by giving notice to Charterers in accordance with its terms. The termination notice dated 4 April (Notice) was issued by HKA.
Although Charterers did not formally respond to the Notice, there was further communication between parties following its issuance. Of significance is a 15 July letter from Charterers to Owners which stated, inter alia, “we will do our best to return the ship to Korea as soon as possible.”
Despite Charterers’ express intention to redeliver the Vessel to Owners, that was never done because the Vessel was on 28 July 2011 arrested by bunkers suppliers in Singapore. The arrest was based on a claim against Charterers as the demise charterer of the Vessel. Three further in rem writs were issued against the Vessel on 8 August 2011, by sub-charterers and cargo interests respectively.
Owners’ Setting Aside Applications
Owners entered appearance in all the in rem actions and applied to set aside the writs on the basis that the court’s in rem jurisdiction had not been properly invoked. Owners’ case was premised on the fact that the Agreement had been terminated by the Notice prior to the issuance of the in rem writs. If this was correct, the plaintiffs would fail in establishing a crucial jurisdictional fact under section 4(4)(b)(i) of the High Court (Admiralty Jurisdiction) Act, namely that Charterers, as “the relevant person”, were the bareboat charterers of the Vessel at the time the various actions were brought. If that were so, the writs would have to be set aside on the basis that the court had no jurisdiction.
The plaintiffs denied that the Agreement had already been terminated at the time their respective actions were brought. They argued:
a) HKA did not acquire a contractual right to terminate the Agreement.
b) Even if HKA had the right to terminate the Agreement contractually, the Notice was ineffective because this did not comply with the termination provision.
c) At common law a bareboat charter could generally be brought to an end only upon physical redelivery of the vessel. Given that the Vessel was never physically redelivered, she remained on bareboat charter to Charterers when the in rem writs were issued.
This update is focused on (c) i.e. the physical redelivery issue.
The Assistant Registrar (AR) found in favour of Owners in respect of (a) (albeit on the basis of apparent authority) and (b), but held that the Notice per se was not sufficient to terminate the Agreement. Whilst the AR agreed with the general rule as stated in (c), she found that this rule could be contracted out of by the parties. She then considered the terms of the Agreement and found that it was clear physical redelivery of the Vessel was required for effective termination.
Not withstanding the need for physical redelivery, the AR went on to find that a bareboat chartered vessel could be constructively redelivered if there was “some step or acknowledgement by the charterer to give effect to the redelivery”. On this note she found that Charterers’ verbal acknowledgement that the Notice was one of termination constituted constructive redelivery of the Vessel, or alternatively, that Charterers’ declarations of intent to redeliver the Vessel were sufficient to effect constructive redelivery. The AR therefore formed the view that the Agreement terminated on 15 July 2011 at the latest and set aside all the in rem writs. The plaintiffs appealed.
The High Court
On appeal, the High Court held that the Notice was invalid and that Charterers remained the demise charterer under the Agreement at the time the in rem actions were commenced. Whilst this was sufficient to dispose of the appeals, Steven Chong J. proceeded to consider whether, assuming the Notice had been adequate for the purpose of termination, Charterers were nevertheless also required to physically redeliver the Vessel to bring the Agreement to an end.
After reviewing the cases on redelivery, Chong J. summed up the common law position as such:
“A bareboat charter commences only when the twin ingredients of possession and control have been transferred from owner to charterer. It is therefore brought to an end only if there is, by the same token, a transfer back of possession and control. It is difficult to see how that can be effected without a physical redelivery of the bareboat chartered vessel.”
However, Chong J. disagreed that parties can simply contract out of the requirement of physical delivery. He reasoned thus:
“… n my view, allowing a shipowner to contract out of the general rule requiring physical redelivery works unfairness on third parties because, ultimately, in the absence of such redelivery, it is difficult to see how the change in legal status of the vessel can be made apparent to them. A shipowner is fully aware that, by executing a bareboat charter, he vests complete possession and control of his vessel in the charterer who, as the vessel’s owner pro hac vice, can incur liabilities in respect of the vessel’s use vis-à-vis third parties (even to the extent of exposing the vessel to the possibility of arrest). In other words, an owner who lets his vessel out on a bareboat charter does so with his eyes wide open: he knows the risks attendant to such an arrangement and has made a considered commercial decision to proceed. By contrast, a third party has little way of knowing whether the vessel he is dealing with is on bareboat charter, let alone that the bareboat charter has been terminated."
In the premises, Chong J. thought it was only fair for the risk to fall on the shipowner. There was therefore no need to create a doctrine of “constructive redelivery” in Singapore maritime law. In any event, Chong J. was of the opinion that constructive redelivery had not been made out on the facts.
Although the decision on the physical redelivery issue (as well as the constructive redelivery point) in The “Chem Orchid” is, strictly speaking, obiter dicta, the views expressed by Chong J. are instructive given this is a novel question of Singapore law. The judgment illustrates the importance that the courts accord to certainty between parties, which is critical in the shipping trade where there are often complex contractual chains with multiple third party interests involved. Given the Court’s extensive review of the authorities in Australia, New Zealand and Hong Kong on the redelivery issue, we would expect the judgment to be of at least persuasive value should a similar case arise before the UK courts in future.
On a practical level the judgment highlights the potential problems which an owner may face if a recalcitrant charterer chooses to ignore the owner’s notices of termination and refuses to surrender possession of the vessel. Clause 29 of the Barecon 2001 form, unlike Barecon 89, seeks to address the practical difficulties that may be faced by owners in retaking possession of their vessel, particularly when the bareboat charter is terminated while the vessel is on the high seas. The “Repossession” clause is designed to strengthen the owners’ position by, inter alia, requiring the charterers to act as “gratuitous bailee only” to the owners, whereby the charterers must care for the vessel without compensation until the owners can physically repossess her. However, this does not prevent a charterer from continuing to seek employment for the vessel and to load cargoes. In such a situation owners should take steps to guard against incurring liabilities to third parties during the period where the vessel is in “limbo”. The owners should take steps to repossess the vessel, and notify any third parties (if their identities are known) and possibly the shipping community at large (through notices in industry publications) that the Master does not have any authority to issue bills of lading on behalf of owners.
For further information, please contact:
Chris Metcalf, Partner, Clyde & Co
Eileen Lam, Clyde & Co