Having recently advised on a number of disputes arising under the BIMCO SHIPMAN 2009 contract (referred to herein as “SHIPMAN”), some common misunderstandings have arisen regarding how the contract operates, including the parties’ respective duties and obligations. William Pyle and Andrew Shannon offer answers to some Frequently Answered Questions.
SHIPMAN is the industry standard contract for ship management. Managers are appointed by Owners as agents to carry out ship management services as defined in the contract. This will usually include technical management and may also include crew and commercial management.
Disputes between Owners and Managers commonly relate to whether Managers have performed the management services to the required standard, and/or issues of budgeting and expenditure.
is also not unusual for Managers to find themselves caught in the middle of disputes between shipowners and third-party contractors/suppliers (including shipyards), and Managers can also become embroiled in disputes pertaining to the vessel’s ownership, or charter arrangements.
This article addresses common disputes that arise under the SHIPMAN contract, in the form of answers to frequently asked questions (FAQs).
What standard of performance is required of Managers under the SHIPMAN?
The standard required of Managers is to use ‘best endeavours’ to provide the management services in accordance with ‘sound ship management practice’ and to ‘protect and promote the interests of the Owners’.
The term ‘best endeavours’ is not clearly defined under English law. However, the available case authorities demonstrate that it is an extremely high standard being the next best thing to an absolute obligation or a guarantee. Hence, in practice, Managers would be required to show that they took all necessary steps that a prudent manager would take to perform the management services.
What level of authority do Managers have as agents?
Managers have broad authority under the terms of the SHIPMAN, as agents for and on behalf of the Owners, to take such actions as they consider necessary in their “absolute discretion” to perform the management services.
There are, however, several restraints on the Managers’ discretion. As mentioned above, Managers must act in accordance with ‘sound ship management practice’ and ‘protect and promote the interests of the Owners’. This means that Managers must promote Owners’ interests above their own in all matters relating to the provision of the management services.
Managers’ actions must also conform with the other provisions of the SHIPMAN contract, including in relation to the requirements of technical management (and crew/commercial management if incorporated), and the relevant provisions pertaining to budgeting and expenditure.
Can Managers limit their liability?
Managers have no liability to Owners unless Managers (or their employees, agents and/or subcontractors) are shown to have been negligent, grossly negligent or in wilful default in the performance of the management services.
Under Clause 17(b)(i), Managers’ liability is limited to ten (10) times the annual management fee. However, this limitation can be broken if the loss is shown to have been caused by a personal act or omission by Managers committed deliberately or recklessly.
See further below regarding Managers’ potential liability for acts or omissions of crew.
Can Managers be held liable for an act or omission of the crew (for example resulting in a collision, or grounding)?
Clause 17(b)(ii) provides that Managers are not liable for any acts or omissions of the crew, even if such acts or omissions are negligent, grossly negligent, or wilful. However, this exception does not apply if such acts or omissions are shown to have resulted from a failure by the Managers to perform the required crew management services under Clause 5(a) (if applicable).
If the Managers are providing crew management services, they are required to provide suitably qualified crew complying with the requirements of STCW 95. This includes but is not limited to, selecting, engaging and providing for the administration and training of the crew.
Hence, if an incident (such as a collision or grounding) occurred as a result of the appointment of unqualified, or otherwise unsuitable or poorly trained crew, Managers could face liability. It is, therefore, crucial for Managers to carefully check and document the validity and authenticity of the crew’s qualifications, and their continued training, experience and performance reviews.
As part of the technical management of the vessel, the Managers are also required to ensure compliance with the ISM code, and hence any breach of this could also expose Managers to potential liability.
What can Managers do to avoid, or resolve, disputes where they are ‘stuck in the middle’ between the Owner and a third-party supplier?
These types of disputes are not uncommon. However, they can be difficult to resolve while maintaining good relations with both Owners and the relevant supplier.
There is no ‘one size fits all’ solution. The key is often to delineate Managers’ role as an agent at an early stage. This should be made clear to all third-party suppliers at the time of contracting and, insofar as is possible, all invoices and purchase orders should be for Owners’ account.
If a dispute arises, Managers should tread carefully so as not to adopt a position contrary to that of their principal (i.e. the Owner). To do so may constitute a breach of the SHIPMAN contract, and potentially expose the Managers to independent liability.
What can Owners/Managers do to minimise the likelihood of disputes concerning budgets and expenditure?
Clause 13 of the SHIPMAN deals with budgeting and the management of funds. This is frequently amended, and supplementary provisions are often incorporated. We recommend that Owners/Managers carefully consider all such provisions.
The default scheme under the SHIPMAN requires the parties to attempt to agree an annual budget each year, and the managers are then to present an estimate of the working capital requirements for the vessel each month and request such funds from Owners in advance. However, disputes can arise where there is unexpected or unbudgeted expenditure.
Managers will naturally want to ensure that they have the liberty to incur such sums as necessary to perform the management services, without needing to obtain prior approval for each and every small item of expenditure. They will also want to ensure that they are not required, in any circumstances, to use or commit their own funds to finance services.
Owners on the other hand will want to ensure that they are obtaining spare parts and supplies at reasonable rates, and that they are regularly updated on all expenditure. Hence Owners may wish to include provisions requiring Managers to obtain prior approval before incurring any single item of unbudgeted expenditure over a certain amount (say, USD 5k or USD 10k). In addition, we have seen terms incorporated requiring Managers to purchase parts through contracting associations to ensure parts are obtained at a fair price.
In some cases, (particularly where there are concerns regarding Owners’ financial circumstances), we have been asked to draft terms requiring Owners to maintain a ‘float’ of cash at all times in a separate account maintained by the Managers. Alternatively, these funds could be held in an escrow account. These funds can be used by Managers to pay any sums that fall due under the SHIPMAN, and if Owners fail to maintain the float this constitutes a termination event. This is an example of the type of bespoke provisions that can be incorporated, if agreed between the parties.
Please do not hesitate to contact us if we can assist in advising on, or drafting, any such clauses.
How can the SHIPMAN be terminated?
Essentially this can be done in two ways:-
Firstly, by agreement, or by exercising the right to terminate on notice without fault. The SHIPMAN is an evergreen contract that runs until terminated by agreement, or by one party giving notice of termination. Provided the minimum contract period has elapsed (as agreed between the parties and specified in Box 18), either party may terminate by giving two months’ notice.
Secondly, by terminating for cause. Clause 22 sets out the circumstances in which termination rights arise. This includes a general right to terminate under clause 22 (a) in the event that either party fails to meet their obligations. Before terminating under this provision, the non-defaulting party is required to give notice to the party in default requiring them to remedy the default within a reasonable time period. There are various other termination provisions, including if the parties fail to agree an annual budget, if Owners cease to be the registered owners of the vessel, and if either party is deemed insolvent.
We recommend seeking legal advice before exercising any option to terminate under Clause 22. This is because getting this wrong could result in Managers/Owners themselves being in breach of the contract and being exposed to liability.
What is the law and jurisdiction provision?
The default provision is for disputes to be resolved in accordance with English law, with arbitration in London held in accordance with the Arbitration Act 1996 and the London Maritime Arbitrators Association (LMAA) Terms. However, there is the option to specify another choice of law, or jurisdiction, by filling in Box 21.