The GENCON charterparty was first published by the Baltic and International Maritime Council (BIMCO) in 1994, and it has since undergone several revisions since that time. In the last quarter of 2022, GENCON 1994 was revised extensively and the latest edition, GENCON 2022 was born.
There are significant differences between the provisions of GENCON 1994 and GENCON 2022. One of these changes would include Clause 16 of GENCON 2022 which provides the shipowner’s right of suspension and termination of the charterparty in the event of default of payments.
It is significant in that this is an entirely new addition to the GENCON charterparty as there were no express provisions allowing the shipowner to suspend performance or terminate the charterparty in the GENCON 1994 version.
The changes to GENCON do not only affect shipowners and charterers. As charterparties are entered into in order to ship cargoes sold pursuant to the underlying contracts for sale and purchase, there are also implications to the sale and purchase contracts.
In this edition of the Notes from the Bar, we focus on clause 16 of the GENCON 2022 which gives the shipowners a right to suspend and terminate the charterparty in the event of any failure of the charterer to make any payments under the charterparty and the implications to the underlying sale and purchase contracts.
Right to Suspend – clause 16(a)
Clause 16(a) of GENCON 2022 provides as follows;
“Without prejudice to Clause 15 or to any other rights or claims whatsoever that the Owners may have, should the Charterers fail to pay freight, deadfreight, demurrage or other compensation in accordance with the requirements of this Charter Party, the Owners shall be entitled at any time thereafter to suspend the performance of any and all of their obligations hereunder.”
In a sale and purchase contract on FOB terms, it is quite common for the parties to insert a laycan clause in the contract.
In a situation where the vessel arrives at the load port within the laycan as stipulated in the sale and purchase contract, and the shipowner decides to suspend the performance of the charterparty by refusing to commence loading, it may result in the seller being placed in a limbo where the cargo is already prepared but loading was unable to commence due to the charterer’s failure to make payment.
Strictly speaking, once the vessel has tendered NOR within laycan, the seller’s right to cancel is extinguished. If the seller has already prepared the cargo for loading and has incurred cost in either arranging for berth or barges, these costs may be wasted if the shipowner decides to suspend the performance of the charterparty. Unless the sale and purchase contract provides for such situations, there is a possibility that the seller may not have any recourse against the buyer for these wasted expenses.
Another potential issue is whether the seller is at risk of being liable for demurrage even though the delay was through no fault of the seller.
Ordinarily, the sale and purchase contracts would exclude from the laytime calculation any time lost due to problems caused by the vessel. In a situation where the vessel is perfectly capable of loading the cargo but the shipowners suspend the performance of the charterparty, it becomes less clear whether such exemptions to laytime would be applicable.
Right to terminate – clause 16(b)
Clause 16(b) of GENCON 2022 provides as follows:
“If the Charterers fail either to rectify their failure to pay in full or to provide security for such sums in terms acceptable to the Owners within ninety six (96) hours of their receiving a notice from Owners to do so, the Owners shall be entitled to terminate this Charter Party at any time thereafter while such sums remain outstanding and/or to discharge the Cargo at any port or place, and such action shall not be considered to be a breach or deviation under any relevant bills of lading.”
A striking feature of clause 15(b) of GENCON 2022 is that it expressly gives the shipowners the right to deviate or call at some other port other than the agreed discharge port, and to discharge the cargo there in the event the charterer fails to make any payment or provide security acceptable to the shipowners.
In a CIF sale, it is the seller who arranges for the shipment. Where payment is by way of a letter of credit, there are views expressed in case laws and textbooks that a CIF sale may also be regarded as a sale of documents. Usually after the cargo is loaded and the bills of lading issued, the CIF seller is entitled to tender the shipping documents and obtain payment under the letter of credit even though the vessel is still in transit.
If during transit the shipowner decides to exercise its rights under clause 16(b) and discharge the cargo somewhere else other than the discharge port, the CIF buyer may potentially be in a position where he has already made payment under the letter of credit but is unable to take delivery of the cargo.
GENCON 2022 is silent as to what the rights and obligations of the shipowners vis-à-vis the cargo if the shipowners decide to discharge the cargo at some other port instead. Is the shipowner permitted to sell the cargo to recover the amounts owing to the shipowners? If this is not to be considered a breach of the bills of lading, what recourse would the buyer holding the original bills of lading have? Are the shipowners under a duty to safekeep the cargo on behalf of the cargo owners after discharge and whether the shipowners owe a duty in bailment to the cargo owners? Is there a right of sale if nobody comes forth to take delivery?
For a CIF buyer, the risks mentioned above cannot be extinguished by insisting on a “freight prepaid” bill of lading as GENCON 2022 allows the shipowners to terminate for any failure to pay demurrage or other compensation as well.
In our view, clause 16(b) may potentially put the bills of lading holder in a difficult position as what was previously a clear case of mis-delivery may now be not so clear anymore. It appears ironic that a claim in bailment may now be more attractive compared with a claim under the bill of lading.
The indemnity – clause 16(c)
Clause 16(c) of GENCON 2022 provides as follows;
“The Charterers shall indemnify the Owners for all damages, losses, expenses or liabilities that they may incur as a result of the Owners exercising their rights under this Charter Party including any liability that the Owners may incur to third parties by doing so. The Charterers shall promptly provide appropriate security or substitute security to avoid any delays to the Vessel in the event of its actual or threatened arrest or detention. Compensation for time lost to the Owners shall be paid by the Charterers at the demurrage rate.”
Clause 16(c) refers to liability that the shipowners may incur to third parties for exercising their rights to suspend or terminate the charterparty. Apart from the holders of the bills of lading, it is hard to imagine which other third parties may have a right of suit against the shipowners for not completing the voyage and delivering the cargo.
If the charterer is unable to pay freight or provide security in the first place, the value of this indemnity clause becomes suspect in practice.
In our view, clause 16 of the GENCON 2022 may have swung the legal position in relation to the termination and suspension of charterparties too much in favour of the shipowners and may potentially be a problem for commodities traders and holders of bills of lading operationally.
While some of the risks to the traders can be addressed by inserting appropriate provisions in the sale and purchase contracts, the risk of the shipowners deciding to terminate the charterparty whilst in transit and discharging the cargo somewhere else is something that may be challenging to mitigate in the light of the provision at clause 16(b) which provides that it shall not be a breach of the bill of lading.
Given that GENCON 2022 is fairly recent, it is probably a question of time before the issue is brought before the courts to determine whether the rights of the shipowners to terminate should prevail over the rights of the bills of lading holders to delivery of the cargo.
In the meantime, it is recommended that parties seeking to enter into a charterparty based on GENCON 2022 consult with legal counsel to ensure that the terms and conditions of the charterparty are suitable for their specific needs and interests.
Disclaimer: This article is for general information only and not intended to constitute legal advice. We shall not be liable for any errors or omissions, nor shall we be liable for reliance on the contents of this article.