Explanatory notes

• Introduction 
• Clause 1 (Novation)
  
• Clause 2 (Amendments to the Time Charter Party)
• Clause 3 (Charter Hire)
• Clause 4 (Warranties)
• Clause 5 (Effective Time Survey)
• Clause 6 (Mutual Renewal of Guarantees)
• Clause 7 (Assurances)
• Clause 8 (Costs and Expenses)
• Clause 9 (Third Party Rights)
• Clause 10 (Notices)
• Clause 11 (Dispute Resolution Clause)

 

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Introduction

Novation can be expected to include provisions reflecting case-specific party needs and requirements. The new standard agreement addresses core underlying contractual issues. It cannot cover the many and variable situations that might be encountered or required by parties to meet their individual needs.

These notes are intended to provide an insight into the reasoning behind the key provisions of the Novation Agreement for the Transfer of Ownership. However, users are recommended to seek advice in respect of issues that are not covered, are specific to their particular contractual arrangements or require specialist legal guidance.

The agreement

The contract is divided into two sections. The covering box layout is for the insertion of variable information relating to the novation followed by the applicable terms and conditions.

Consideration should be given to the implications of the basis of the change of ownership. If it is by way of sale, it will be important to ensure consistency between the content of the novation agreement and the terms of the sale documentation. A transfer of ownership may require specialist contractual or other arrangements.

The issue of bunkers is not addressed. This is because of concerns about the scope for dispute over title to charterers’ bunkers and possible conflict with the provisions of the underlying time charter party or contractual arrangements for the sale or transfer of the ship. For the same reason, there are no provisions relating to the original owners on board equipment.

Box layout

Details of the Charterers, Original Owners and New Owners are to be entered in Box 2, Box 3 and Box 4 respectively, Vessel details in Box 5 and the date of the underlying Time Charter Party in Box 6. Further information required includes the Date of the Memorandum of Agreement, the Effective Time of novation, the New Owners’ bank and changes to ship information and party guarantors.

Background (Preamble)

This states the parties’ agreement to novate the Time Charter Party from the Original Owners to the New Owners on terms set out in the agreement. In order to ensure consistency, it is expressly provided that terms used in the Novation Agreement shall have the same meaning as terms in the underlying Time Charter Party.

Clause 1 (Novation)

This is the key provision setting out the basis and timing of the agreement to substitute the Original Owners with the New Owners. As a contract is being created to effect the change, consideration is required. This is fulfilled by the parties’ mutual promises in subclauses (b) and (c) where the Charterers and the Original Owners release each other from their obligations under the Time Charter Party. In accordance with subclauses (d) and (e), the New Owners take on all rights under, and agree to be bound by, the charter party obligations which they undertake to perform in favour of the Charterers.

The changeover of contracting party takes place at the “Effective Time” agreed and entered in Box 8. This can be a specific time and date or it might be linked to an event such as “dropping last outward pilot” or on arrival at a specified port or place.

The New Owners will not expect to be held liable for matters arising prior to the changeover. Subclause (f) therefore provides that the Original Owners and Charterers remain liable to each other after the Effective Time for all liabilities and obligations occurring prior to the novation. An indemnity secures the New Owners’ position against any such claims.

Clause 2 (Amendments to the Time Charter Party)

As from the Effective Time, all references to the ship in the Time Charter Party refer to the New Owners’ vessel details stated in Box 10.

Clause 3 (Charter Hire)

Payment of hire is linked to the provisions of the underlying Time Charter Party. The Charterers pay hire, net of any off-hire deductions, to the Original Owners up to the Effective Time and thereafter to the New Owners. On or before the Effective Time, the Charterers must pay hire covering the period up to the next instalment date under the charter party. If the ship is off-hire at the Effective Time, the Charterers’ obligation for making the payment will depend on the terms of the underlying charter party. In the circumstances of the NYPE Time Charter Party for example, hire will have ceased and not be payable by the Charterers until the ship is again available to them. However, the position may be different under other contracts. Charterers might be required to make an advance payment regardless of whether the ship is off-hire at the Effective Time with any deductions to be made from the next instalment. Parties are therefore recommended to confirm the position on a case by case basis.

In view of the variety of possible circumstances, such as a variable Effective Time or because of the corporate structure, adjustment of overpaid hire has not been addressed. Arrangements will depend on individual needs and should be resolved on a case by case basis.

Clause 4 (Warranties)

The Original Owners and the Charterers warrant, under subclause (a), that there have been no contractual changes to the underlying Time Charter Party and, in accordance with subclause (b), confirm that there has been no breach or other event that will entitle or result in the termination of the charter party. Subclause (c) sets out the Original Owners’ warranty that, as at the Effective Time, their interests have not been assigned to any other party and nor will they attempt to do so in future. (If rights have been assigned then, in order to comply with this provision, it is important that they are re-assigned back to the Original Owners. Specialist advice may be required.)

Clause 5 (Effective Time Survey)

Optional arrangements are offered for a survey. This is a useful evidential tool to reduce the scope for later disputes about a ship’s condition at the changeover point. In order to avoid potential conflict with the terms of the underlying Time Charter Party, the provision applies only where expressly agreed between the parties.

The clause:

• Recognises the need for flexibility as to the timing of a survey where a ship is at sea or has cargo on board at the point of novation;
• Entitles all three parties to appoint their own surveyor with procedures for a dissenting report or non-participation by one of the parties;
• Provides that the scope of the survey is to ascertain the condition of the ship; and
• Allocates the costs of any time lost between the Original and New Charterers.  

The clause applies only where agreed and inserted in Box 15.

Clause 6 (Mutual Renewal of Guarantees)

It is a condition precedent to the novation that the Charterers and the New Owners provide each other with appropriate new guarantees in substantially the same form and on the same basis as those provided by the Charterers and the Original Owners. The new guarantees take effect from the changeover. A new guarantor will have no liability for events prior to the novation.
There is no express requirement for the release of the original guarantors. This is because guarantees normally run to the expiry of the subject charter party. Guarantors’ liabilities for the original parties’ performance are, therefore, subject to any accrued or pre-existing liabilities, likely to cease when, on novation, the original time charter party comes to an end and is replaced by the new time charter party.

Accordingly, releasing original guarantors might be inconsistent with the terms of the guarantors’ liability for continuing or outstanding claims under the pre-novation time charter. An unconditional requirement to release the original guarantors could therefore prejudice the interests of the continuing counter party (charterers) who might lose the ability to recover a pre-novation claim.
It should be noted that while often taking an interest in an ownership novation, banks are nevertheless unlikely to become a party to the agreement. If required, any issues will normally be dealt with through a side letter between owners and their financiers.

Clause 7 (Assurances)

This sets out the parties’ obligations to take all necessary action, cooperate with each other and pay their own costs in respect of all matters necessary to give effect to the novation. The parties are also required to confirm that they have the necessary powers and authority to enter into and perform the agreement.

Clause 8 (Costs and Expenses)

Each party is responsible for meeting and paying its own costs and expenses in relation to the negotiation and execution of the agreement.

Clause 9 (Third Party Rights)

This provision makes it clear that no third party has any rights under the contract.

Clause 10 (Notices)

This is a standard provision for contact details.

Clause 11 (Dispute Resolution Clause)

The dispute resolution clause offers four options for arbitration: London (which applies by default in the absence of a stated alternative in Box 15); New York; Singapore; or an open choice for parties to agree the governing contractual law and seat of arbitration. Mediation procedures are set out for London, Singapore and the open forum. However, mediation occupies a different position in the USA, and, if required, it is left to the parties to agree their own procedures.

Disputes under a novation agreement might involve all three contracting parties. Additional wording has therefore been included to provide a mechanism for starting multi-party disputes. The procedures apply where all three parties are involved in a dispute from the outset but are not designed to accommodate a third party joining an extant arbitration at a later stage. If the situation should arise, it can be dealt with on a case by case basis with the third party possibly starting a separate arbitration against either or both of the other parties. The references might then, by agreement, be consolidated, heard concurrently or restarted as a multi-party arbitration.

The modifications mean that the clause is not the standard version and “BIMCO” does not therefore appear in the heading.