Does the LNG chartering market need a new form?
- Date: 22/10/2012
- Source: Holman Fenwick Willan
The vast majority of LNG charters are concluded on one form: "ShellLNGTime1". Since its publication in November 2005, "ShellLNGTime1" has been used for every type of LNG carrier charter, from 20-year time charters to single voyage charters.
The success of "ShellLNGTime1" is attributable to familiarity, comprehensiveness and (relative) even-handedness. It was developed from the 2003 edition of the "Shelltime 4" tanker charter, which is a modernised version of the original "Shelltime 4" charter from 1984. The draftsmen of "ShellLNGTime1" were therefore able to analyse how parties typically sought to amend the "Shelltime 4" form and how its provisions had been interpreted by courts and arbitrators. This meant that "ShellLNGTime1" reflected 20 years' worth of practical experience and case law, in addition to technical knowledge of LNG carriers and chartering. It is perhaps unsurprising in the circumstances that, seven years after its publication, "ShellLNGTime1" is still used with relatively few amendments or rider clauses (except in the case of long time charters), and with little doubt about the meaning of its clauses.
Most LNG carriers are fixed on time charters. This reflects a market dominated by long-term offtake and sale and purchase arrangements. "ShellLNGTime1" is well suited to this market environment. However, the "ShellLNGTime1" form is also used for voyage charters, which have been increasing in frequency during the last decade. Parties find it straightforward to adapt "ShellLNGTime1" for use in trip charters, and reliable documentary precedents are readily available.
It is in this context that GIIGNL, the International Group of LNG Importers, introduced a LNG voyage charter form in May 2012, with the stated objective of facilitating spot chartering by enabling parties to conclude transactions more quickly. GIIGNL refer to their form simply as the "VCP". The rest of this article describes the VCP and considers whether it is likely to be a success.
GIIGNL voyage charter
The VCP is a short, simple and conservative document. It follows the usual form of tanker voyage charters, comprising two sections: Part I, which is designed for the insertion of specific commercial and operational terms; and Part II, which contains operational provisions of more general application and legal terms.
Part I of the VCP contains standard clauses relating to vessel description, loading and discharge ports, the laycan, freight, laytime and demurrage. It also contains LNG-specific provisions concerning the condition of cargo spaces upon arrival at the loadport (i.e. whether cold and ready to load, or requiring cooling down prior to loading), Owner's warranties as to boil-off rates and volumes, and the amount of "LNG compensation" per MMBTU that Owner must pay in the event of excess boil-off.
The VCP seems to envisage that Charterer will give unqualified warranties of safety as to the loadport and the discharge port. This resembles the approach taken in older tanker charter forms, such as "ASBATANKVOY", and differs from more recently published tanker charters, such as "SHELLVOY 6" and "BPVOY4", which require Charterer to exercise due diligence as to port safety. Requiring Charterers to guarantee port safety seems a little too Owner-friendly in circumstances where the loadport and discharge port are likely to named into the VCP. To strike the right balance in the risks assumed by the parties, unqualified warranties of port safety ought only be required in voyage charters where Charterers is entitled to nominate one or more ports within a geographical range, and not where Owners agree in advance where the Vessel will load and discharge.
Clause 1 in Part II contains Owner's warranties as to seaworthiness, cargoworthiness and crewing levels and standards. Owner is to provide an unqualified warranty as to the Vessel's condition and crew "at the time that Owner is obliged to proceed to the Loading Port" and a warranty to exercise due diligence as to the Vessel's condition and crew thereafter, up to the end of the Charter period. This differs from "ShellLNGTime1", which contains an unqualified requirement that the Vessel's condition and crew should meet the required standards "throughout the charter period". Charterers may prefer the certainty provided by the unqualified obligation in the "ShellLNGTime1" form, knowing that they can look to Owners for redress if there is a problem with seaworthiness, cargoworthiness or crewing during the course of the charter.
One of the reasons that GIIGNL identified for having a voyage charter form for LNG carriers is that the "ShellLNGTime1" form does not contain laytime and demurrage provisions. The VCP sets out laytime and demurrage provisions in Clauses 3 and 4 of Part II, but takes a somewhat unorthodox approach. Clause 4 stipulates circumstances in which Charterer shall not be liable to pay demurrage (i.e. where delay is caused by fire, explosion, strike etc.), but Clause 3 does not contain the usual list of circumstances in which laytime shall not run (e.g. when the Vessel is on inward passage to the loading or discharging berth, or when time is lost due to a strike, lockout or restraint of labour). This appears to be an error. The omission of exceptions to laytime is unlikely to be intentional, particularly as it might have the result that laytime could continue to run during circumstances in which Charterer would be exempt from paying demurrage.
Part II of the VCP is relatively short. The draftsmen of the VCP plainly anticipated the addition of rider clauses to the form and have not sought to discourage this practice by including a large number of legal provisions. That said, several standard provisions are omitted, including the requirements that Owner comply with the ISPS Code and US Marine Transportation Security Act 2002, the OCIMF "Guidelines for the Control of Drugs and Alcohol on board Ship" and rules and regulations at the loadport and discharge port; although one or more of those requirements may be implied terms of the Charter.
Overall, there is an impression of the baby being thrown out with the bathwater, with too much detail being sacrificed in the interests of economy.
Will the VCP succeed?
The VCP has several advantages. It adopts a familiar voyage charter form, it is relatively short, and it is simply worded. This accessibility may encourage its use.
The VCP does however seem to have several difficulties. Its shortness means that it will inevitably have to be amended and supplemented with rider clauses before it can be widely used in the market. It also contains several provisions that are apparently flawed or surprisingly Owner-friendly. This could discourage Charterers from taking up the VCP, which is surprising, given that GIIGNL must have had Charterers in mind when developing the form with a view to encourage spot chartering.
A further, and possibly more important, obstacle is that "ShellLNGTime 1" works well for voyage charters. It is easy to amend for use as a trip charter party form, and owners and charterers are used to doing so. There was no noticeable clamour for a voyage charter form before GIIGNL introduced the VCP.
In time, there is likely to be a widely recognised and used form for LNG carrier voyage charters. The number of LNG carrier voyage charters is expected to increase further as the sale and purchase market handles greater volumes of LNG and becomes more flexible. The need for a voyage charter form will take on its own momentum in due course. It is more difficult to assess when this will happen, and whether, when it does, the form will be GIIGNL's VCP (in its current or amended form) or a different document.
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