a clause was aimed at deterrence rather than compensation.
Deterrence was, inmost cases, seen as penal and, therefore,
unenforceable. The English courts now recognise that a party can
sometimes have a legitimate interest in enforcing performance that
goes beyond simply being compensated for its losses.
Getting paid
Under a typical TCP, a charterer will pay a daily hire to the owner for
use of the vessel, usually divided into a capital element (including
an amount to cover the owner’s capital costs and equity return),
which is ordinarily fixed over the termof the charter; and an
operating element (covering operating costs for which charterer is
responsible), whichmay simply allow for inflation (or an automatic
escalator), or may be passed through to charterer on an open-book
basis. The TCPmay also incorporate a cost element to account for
any modification (at cost to the charterer) to the vessel during the
termof the charter. In relation to hire, it is in the owner’s best interest
to reduce the circumstances in which the vessel may be placed
off-hire (i.e. where charterer’s payment obligations are suspended),
or where the charterer is entitled to pay hire at a reduced rate
proportionate to a reduced level of performance. It will be key for
the owner that at least the capital element of the hire remains due,
as this represents the owner’s committed financial obligations (often
for third party financing). The circumstances in which the vessel
can be placed off-hire, or where hire reduces, will be a negotiated
element taking into account the vessel’s performance. It will be
important for owners to ensure that there is a realistic reduction in
hire – not a penalty – if performance falls below guaranteed levels.
Force majeure
Another significant provision in the contracts will be forcemajeure
relief. The type of forcemajeure events, and whether an inclusive
or exclusive list is agreed, may largely depend on the force
majeure events already negotiated under the upstream contracts.
The relief granted to the charterer if a forcemajeure event occurs
to any part of the value chain outside of the vessel must be
carefully negotiated as any relief from the payment of hire during
forcemajeure events will detrimentally impact the owner.
One of the most contentious areas for force majeure relief
will be governmental interference in the project. Owners of
FLNG/FSRU vessels will often be operating their vessels in
politically unstable environments, where there is a real risk of
operating permits being revoked or the vessel itself being
expropriated. Insurance against such risks can be prohibitively
expensive, and owners will, therefore, seek to cover themselves
in the contract through continued hire payments and
termination fees, secured with a bank letter of credit.
The issues considered in this article represent some of the
issues that parties may face when negotiating contractual
arrangements for an FLNG project. Given the nature of such
projects, there will no doubt be a myriad of project specific
concerns and complications, but this article gives a flavour of the
key areas for negotiation and the parties’ approach to them.
References
1. [2015] EWHC 2658 (Comm).
2. [2015] UKSC 67.
