Understanding Clause 16 of Gencon 2022: Suspension and Termination
The Baltic and International Maritime Council (BIMCO) recently published its own standard charter party form for voyage charters, GENCON 22.
While it was originally targeted to be introduced in 2020, due to the Covid-19 global pandemic, launching of the main contract form for the voyage charters postponed to 2022.
GENCON 22 is set to provide the industry a form of contract with wider terms (longest compared to its predecessors) and prevent the parties from using rider clauses to the main contract.
As the ship owners undertake cargo carriage against freight, the sustainability of shipping relies heavily on timely payments of freight. Disputes arising from ship owners’ rights under charter parties may result in delays and impact the supply chain. Lien clauses in voyage charter parties are often used to resolve such disputes, but enforcing a lien on cargo may lead to expensive legal proceedings for ship owners. Moreover, in countries where legal procedures are challenging to apply or unclear, a lien is not a feasible solution for ship owners seeking payment.
Clause 16 of Gencon 22 offers new solutions for ship owners to consider. It allows ship owners to suspend the performance of any and all of their obligations under the charter party or even terminate the contract.
Clause 16 has three sub-clauses, and with its own significance. InterWits has analyzed each sub-clause in detail and broken down their implications into nine points for a better understanding of how they may impact the parties involved.
1. Relationship between lien right under the Clause 15 and Clause 16
The wording of Clause 16 does not create a prejudice to the lien clause (Clause 15), meaning that the carrier could suspend the performance of the charter party and they still could exercise lien on the cargo if the charterer does not rectify the failure of non-payment of freight or any other dues incurred by the ship owner.
2. The Scope of the rights or claims that Clause 16 covers
Clause 16 encompasses rights and claims that ship owners’ may have such as freight, deadfreight, demurrage and any other compensation in accordance with the requirements of the charter party. This means that if charterers do not fulfil their obligations, shipowner could stop performing their duties under the contract. This sub-clause gives ship owners the leverage to hold charterers accountable for many different cases. It also covers the unliquidated damages under the name of detention. This is especially significant for ship owners.
3. Precondition to execute Clause 16
The key point to mention is that the right or claim must be payable for the Owners to exercise their rights under the Clause 16.
4. Notice of suspension and termination
Ship owners are required to issue and send a notice to the Charterers, bringing to the Charterers’ attention that the Charterers are demanded to either rectify their failure to pay in full or to provide security for sums in terms acceptable to ship owners within ninety-six (96) hours of their receiving the notice. Under such notice ship owners must clearly declare that they suspended the performance of the charterparty.
5. Termination of the charter party
In the event that the charterers do not comply with the notice served by the ship owners, the latter could use their right to terminate the charter party.
6. Timeframe for Termination of the Charter Party
It is worth noting that ship owners are entitled to terminate the charter party at any time after the expiration of the 96-hour period. They could immediately terminate after the given period or later provided that charterers fail to pay or lodge security for the rights or claims of ship owners.
7. Deviation and Discharging the Cargo at Another Place Other Than the Discharge Port
Ship owners have one more right to use together with the termination or as an alternative to the termination of the charterparty, which is discharging the cargo at any port or place other than the discharge port. It is important to note that discharging the cargo somewhere else shall not be considered a breach or deviation under any relevant bills of lading.
8. Ship Owners’ Liability to Third Parties and Charterers’ Position
Another important point is that ship owners are entitled to demand charterers to indemnify them for all damages, losses, expenses, or liabilities that they may incur, including any liabilities to third parties resulting from the exercise of such rights.
9. Charterers’ Duty to Mitigate the Delays to the Vessel
The duty of charterers to mitigate delays to the vessel is an important consideration, as ship owners may face claims and arrest or detention risk from third-party cargo owners when exercising their rights under Clause 16. Therefore, charterers are under the obligation of promptly providing appropriate security or substitute security to avoid any delay to the vessel in the event of its actual or threatened arrest or detention. Compensation for time lost to ship owners shall be paid by charterers at the demurrage rate.
Conclusion and Advice of InterWits
The provisions of Clause 16 in Gencon 22 are potentially among the most contentious provisions. On one hand, this Clause could provide comfort to ship owners in cases of non-payment of their claims, as they may suspend the performance of the charter party. In shipping, it is not unusual that a ship owner suspends the performance of the charter party due to outstanding payments to them but in such cases there are question about whether ship owner may claim detention and other damages owing to suspension. Clause 16 answers this question, provides clarity and guidance for the parties to a voyage charter party on what happens in the event of suspension before entering into the contract.
Clause 16 clearly extends the powers of ship owners to affect third-party bill of lading holders, which perhaps is one of the most controversial parts of the Clause 16. Third-party cargo owners must exercise caution when receiving bills of lading, particulary if there is an incorporation from the bill of lading to a charter party based on Gencon 22 form. They must ask a copy of the charter party before or at the time they receive the bill of lading.
Additionally, compelling charterers to indemnify ship owners due to ship owners’ liabilities to third parties as a result of damages, losses, expenses, or liabilities that they may incur due to ship owners exercising their rights under the charter party is of great importance. Clause 16 imposes this obligation not only with respect to the rights under it but also for all other rights of ship owners under the charter party in general.
Clause 16 of Gencon 22 provides ship owners with the right to suspend the performance of their obligations under the charter party or terminate the contract in the event of non-payment or failure by the charterer to provide security for outstanding sums. This clause encompasses a broad range of rights and claims, such as freight, deadfreight, demurrage, detention, and other compensation in accordance with the requirements of the charter party. Ship owners must issue a notice of suspension or termination to the charterer, and if the charterer does not comply, the ship owner may terminate the contract or discharge the cargo at a port other than the discharge port. The charterer must promptly provide appropriate security or substitute security to avoid any delay to the vessel in the event of actual or threatened arrest or detention. The charterer must also compensate the ship owner for time lost at the demurrage rate. This clause could provide comfort to ship owners in cases of non-payment of their claims.
More information and a copy of the Gencon 22 form can be reached here*.