When is it reasonable for an owner to withhold approval of a vessel nominated by the charterer?

In a recent decision, the Commercial Court held that a shipowner's refusal to approve two VLCCs which the charterer had nominated to perform STS transfer operations was unreasonable.

Facts

A vessel was chartered to carry crude from Yemen to the Far East. The charterer also nominated 2 VLCCs to act as storage and receive the cargo at the discharge port by way of STS transfer. The owner of the chartered vessel withheld its approval of the 2 VLCCs and the charterer therefore had to discharge the cargo into smaller vessels to shuttle the cargo into the VLCCs.

Charter Party Terms

The charter party provided that if the charterer required ship-to ship transfer operations, all vessels to be used would be 'subject to the prior approval of owners, which not to be unreasonably withheld...'.It further provided that 'Charterers shall have the option of transferring... cargo... to or from any vessel including, but not limited to, an ocean-going vessel... All transfers... shall be carried out in accordance with the recommendations set out in the latest edition of the 'ICS/OCIMF Ship to Ship Transfer Guide (Petroleum)'.

Judgment

The Court held that the shipowner unreasonably withheld its approval of the 2 nominated VLCCs. On a proper construction of the charter party terms, the shipowner's right of approval was limited to an approval of a nominated vessel by reference to its suitability to the proposed STS operation and did not extend to a right to approve the proposed STS operation itself. In this context, the phrase 'not to be unreasonably withheld' was found to mean that the shipowner which refused approval was not allowed to base its decision on something other than the specific facts of the matter in question.

The shipowner in this case had a company policy of not allowing STS between VLCCs, as a result of a previous incident. This was not sufficient grounds for a reasonable shipowner to decline approval in the present case. There was nothing inherent in the characteristics of the 2 nominated VLCCs that made a veto of the STS transfers involving them reasonable. Although there was no section in the ICS/OCIMF guide specifically relating to STS between VLCCs, this did not mean that STS operations could not be conducted in accordance with it: with adequate planning and precautions, STS could have been performed in accordance with the guide and therefore in accordance with the charter party.

Comment

The Court examined both the terms of the charter party and the specific facts of the case. Although the facts will vary between each case, the judgment does provide guidance on how the Court is likely to construe similar contentions made by shipowners in future, for example facts relating to the specific operation itself will be deemed to be irrelevant. STS between VLCCs should not be regarded as inherently suspect but should be considered on a case-by-case basis.

Court of Appeal

The decision is being appealed, and a further update will follow after the outcome of the appeal hearing, which has been fixed for early 2014.

This update is based on an article by Hattie Sumption, partner at Clyde & Co LLP, which first appeared in July 2013 as soon as permission to appeal was granted. We are grateful for the assistance provided