insolvent vessel owners

 

Insolvent vessel owners: problems for commodities traders – and some solutions

Over recent months, there have been a number of trends developing in the global commodities sector. One in particular is likely to give commodities traders cause for concern. The current climate of very low charter rates and high operating costs has increased the number of vessel owners feeling the squeeze. Some have struggled - and ultimately failed - to remain solvent. In the past few months, STX Pan Ocean, Excel Maritime Carriers and Sanko Steamship have all entered into bankruptcy protection to allow them an opportunity to restructure and salvage their business.

Against this backdrop, a number of commodities traders have had to deal with the disruption and inconvenience of unpaid suppliers arresting, or threatening to arrest, vessels and/or bunkers of vessels with their cargo on board. This article considers the problem in more detail and suggests some contractual solutions.

In an FOB contract, the buyer must nominate the vessel. FOB sellers should consider including a clause in their contracts permitting them to reject a nominated vessel and nominate an alternative if the first vessel owner enters into bankruptcy, administration or some other form of insolvency proceedings by a specified date prior to loading. This would offer some protection and flexibility to the FOB seller, without being unduly uncertain for the FOB buyer.

In a C&F contract, it is the seller's responsibility to source a vessel. C&F buyers should consider protecting their position by including an express clause in their contracts obliging the seller to charter in a vessel from a solvent owner. An alternative would be to seek an indemnity from the seller against any losses incurred as a result of vessel owner insolvency. These contractual mechanisms pass the risk of owner insolvency from the buyer back to the seller, as the party responsible for chartering in the vessel. They offer the C&F buyer a contractual remedy against the seller should they incur additional costs as a result of vessel owner insolvency. This is an additional, and specific, layer of protection: most sale contract insolvency clauses do not extend to the chartered tonnage and only concern themselves with the parties' insolvency.

In charters or COAs which specify that the vessel is "TBN" – to be nominated – there is an added risk. Usually this type of charter will specify the characteristics of the "TBN" vessel, allowing scope for including a specific characteristic that the vessel owner be solvent. However, there is a greater likelihood of an owner swapping or subchartering in vessels at a late stage. Charterers and owners should together agree a mechanism to prevent the nomination of unsuitable vessels. This can be achieved by incorporating an obligation on the disponent owner to nominate vessels from solvent owners, coupled with a charterer having a reasonable right of rejection similar to that of an FOB buyer set out above.

In a C&F contract, or a contract providing that the vessel is "TBN", there may be scope to specify in the contract either a list of owners from whom a vessel must be chartered, or a list of owners from whom vessels must not be chartered. Whilst such an approach has the benefit of certainty, it does carry the risk of an unsuitable vessel owner being omitted in error. It may also significantly increase the price. C&F sellers, who will obviously want to ensure that their exposure in relation to owner insolvency is kept to a minimum, may prefer this approach because of the certainty it offers, despite the restriction it will place on their choice of vessel.

The timing associated with any requirement of solvency is likely to require negotiation. For example, C&F buyers and vessel charterers under a COA will ideally want to be able to specify that the owner be solvent at the date of nomination and remain so throughout the duration of the voyage. C&F sellers and vessel owners are unlikely to want to accept a commitment involving future uncertainty.

The risk of vessel owners becoming insolvent is not, of course, entirely new. However, given that the recent market has brought it to the fore, it is important that commodities traders ensure that their affected contracts, both charterparties and sale contracts, address this risk and allocate it adequately so as to avoid disruption to their business.

For further information, please contact Brian Perrott, Partner, on +44 (0) 207 264 8184, or brian.perrott@hfw.com, or your usual contact at HFW.

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