Background

Owners commonly require time charterers to provide a written guarantee underwriting their obligations to pay the owners for all sums due under the agreement. Such guarantees are typically issued by a parent company. A guarantee should provide owners with a greater degree of security; but if it is poorly drafted it may not be worth the paper it’s written on.

To help avoid the pitfalls of a poorly worded guarantee, BIMCO has developed a standard document that provides a clearly worded and comprehensive guarantee of the charterer’s obligations to pay all sums due under the charter party. The BIMCO Charter Party Guarantee extends beyond payments due to the owners by the charterers by also incorporating a guarantee for charterers’ liabilities for items such as unpaid bunkers, port charges and stevedoring costs that the owners may find themselves liable for if the charterers default on payment.

While it is not possible to draft a comprehensive guarantee that will function in all jurisdictions (not least due to the many different preconditions for guarantees, such as registration, filing and approval), the BIMCO Guarantee is a flexible instrument which, although based on English law, can be adapted to work in other jurisdictions.

The BIMCO Guarantee was drafted by a team of industry representatives with expertise in and experience of this type of guarantee. BIMCO is grateful for the hard work and commitment by the members of the Charter Party Guarantee Working Group:

• Mr Mick Walsh, The Hadley Shipping Co. Ltd, London (Owner)
• Mr Donald Chard, Chamber of Shipping, London (Owner)
• Mr Alan Mackinnon, Thomas Miller, London (Club)
• Mr Chris Hilton, Eversheds LLP (Lawyer)

Explanatory Notes

• Clause 1 (Definitions)
• Clause 2 (Guarantee)
• Clause 3 (Continuing Nature of Guarantee)
• Clause 4 (No Deduction or withholding)
• Clause 5 (Owners’ rights, powers and remedies)
• Clause 6 (Demands for Payment)
• Clause 7 (Costs, charges and expenses)
• Clause 8 (Modification)
• Clause 9 (Assignment and Successors)
• Clause 10 (Representatives and Warranties)
• Clause 11 (Governing Law and Jurisdiction)
• Recommended Additional Clauses to be added to Charter Party

The following explanatory notes provide some background to the thinking behind the BIMCO Charter Party Guarantee.

The box layout at the head of the agreement contains the key details of the Guarantee such as the identity of the guarantor, the owners and the charterers, as well as the name of the vessel, maximum liability and governing law and jurisdiction.

Clause 1 (Definitions)

This Clause sets forth a number of definitions used throughout the Guarantee. Most notably the “Guaranteed Amount(s)” definition contains two specific payment obligations, namely, the first is any sums due from the charterers to the owners under or in connection with the charter, including recoverable costs; and the second is any payment obligations which have been shifted to the owners due to the charterers’ default in payment regarding their operational costs.

It was felt that the guarantee should be broader in scope than just within the charterers’ monetary obligations under the time charter. It is preferable also to cover the charterers’ other debts as well, for instance, the costs of bunkers, port charges, stevedoring costs or the like – and these are addressed in part (b) of the definition.

Clause 2 (Guarantee)

Sub-clause (a) is intended to provide the consideration required under English law to ensure the validity and enforceability of a contract. The text also highlights that the guarantor is to be primary obligor for all of the charterers’ payment obligations under the time charter – which means that the owners can go directly to the guarantor for sums unpaid by the charterers, rather than first having to try to obtain the money through the charterers, who may have gone out of business. However, it would be unreasonable for the owners to be able to draw directly on the guarantee even in the event of a contractual dispute; therefore the charterers’ right to refer a dispute to arbitration in accordance with the charter party is preserved.

To ensure that a the provision cannot be used as a delaying tactic by a potentially recalcitrant charterer, a narrow window of 10 banking days has been set within which the charterer must provide evidence of the commencement of arbitration proceedings in order for the guarantor to withhold payments; otherwise the owners will be entitled to draw on the guarantee.

Sub-clause (c) highlights that the guaranteed amount is to be paid immediately once the said amount has been determined by an award or judgment.

Sub-clause (d) states that the effectiveness of the guarantor’s undertaking is independent of the charterers’ obligations, which means that even if the charterers’ obligations become unenforceable under the charter party, the guarantor’s obligations remain intact.

Sub-clause (e) specifies that the parties are provided with an option to cap the guarantor’s maximum liability under this guarantee. This feature flags the fact that under a long term charter party multiple calls on the guarantee may be made. It is important to note that unless an amount is stated in Box 8, the guarantor will be exposed to unlimited liability.

Clause 3 (Continuing Nature of Guarantee)

Sub-clause (a) clarifies that the provisions and effectiveness of the guarantee remain unchanged regardless of any amendments to the charter party or any additional time given to the charterers to meet their obligations.

Sub-clause (b) states that the guarantor’s liability under the guarantee remains in effect even if the charterers go out of business.

Sub-clause (c) deals with how long the guarantee is intended to remain in force. As arbitration and litigation could extend far beyond the time charter period, the Guarantee provides for an extended period of validity of 12 months after redelivery of the vessel (unless the parties agree an alternative period). If arbitration or other proceedings have been commenced in accordance with Sub-clause 2(b) then the Guarantee will remain in full effect until 45 days after a final award or judgment has been made (bearing in mind that the guarantor is obliged to make payment in accordance with Sub-clause 2(b) within 30 days of an award or judgment).

Sub-clause (d) provides for multiple demands to reflect that during a long time charter an owner might have to call upon the Guarantee on several occasions.

Clause 4 (No Deduction or withholding)

As the title of the Clause suggests, the guarantor is not allowed to make any set-off, counterclaim, deduction or withholding for any sums payable.

Clause 5 (Owners’ rights, powers and remedies)

This clause sets out a series of rights, powers and remedies that the owners may freely exercise as they deem appropriate. It clearly states that the owners are under no obligation to demand anything of the charterers, or commence proceedings or make claims before exercising such right, powers and remedies.

Clause 6 (Demands for Payment)

This clause deals with some key features regarding the form in which demands should be made and also what constitutes an effective notice.

Clause 7 (Costs, charges and expenses)

The guarantor is obliged to reimburse the owners on demand for all monetary losses that the owners may have sustained during their suing or recovering activities under the guarantee.

Clause 8 (Modification)

This clause highlights that no modification to the Guarantee will be effective unless it has been mutually agreed and subsequently signed in a written instrument by the party against whom the amendment is made.

Clause 9 (Assignment and Successors)

Pursuant to this clause, the owners are entitled to transfer their rights under the guarantee as they deem fit, whereas the guarantor must obtain a prior written consent from the owners to assign or transfer their rights or obligations under the guarantee.

Clause 10 (Representatives and Warranties)

Some nations impose harsh requirements to ensure the validity and enforceability of guarantees, such as registration, filing requirements or similar. As such, this Clause spells that the guarantor warrants to the owners that it possesses all the corporate powers, and has taken all necessary corporate, administrative or other steps to enable the guarantee to be executed, delivered and performed.

Clause 11 (Governing Law and Jurisdiction)

Although the guarantee is most likely to be governed and interpreted under English law, it is designed to be adaptable to local jurisdictions. The reason is that in the case of a parent company guarantee the guarantor should be subject to the same jurisdiction clause and not a separate cause of action outside the underlying charter party.

As the nature of this guarantee is a contract rather than a deed, the signature requirements of the authorized representative from both parties shall suffice.

Recommended Additional Clauses to be added to Charter Party

The primary driving force for this recommended clause is to resolve the past consideration which is due to the charter party being concluded prior to the guarantee. By incorporation of a non-waiver, the charterers undertake to arrange a guarantee prior to the delivery of the vessel.

Given the fact that there could be a long gap between the conclusion of the charter party and delivery of the vessel where the owners could be exposed if the charterers defaulted or went bankrupt in the intervening period, this recommended has been designed to require the guarantee to be provided by the charterers within 5 working days but latest prior to the delivery of the vessel, otherwise the owners have their rights to cancel the charter party.