Bareboat Charters – What you need to know
May 20, 2021
Well, it’s that time of year again—fishing season. After months off in a wintery reprieve, it’s time to get back to work and go fishing—and not a moment too soon. Many vessel owners might have had an eye for expansion this season. Perhaps they are looking to build new boat or one of their buddies is looking to sell his boat for a song. Either way, the owner’s fleet is set for expansion. Yet finding enough capital to build or buy a vessel is not easy at all. In fact, it is one of the most ubiquitous problems in the maritime industry today (no access to cheap capital), which is why a bareboat charter is something worth considering.
Bareboat Charter Basics
The underlying intent of a bareboat charter is to maximize the earning capabilities of the vessel so that both parties (the Owner and the Charterer) can make money. In its simplest form, a bareboat charter arises when the Owner leases his or her vessel out to the Charterer for a fixed period of time. Once the Charterer takes position of the vessel, the Charterer becomes entirely responsible for the vessel. This means the Charterer is accountable for the vessel’s crew, fuel, insurance, and any maintenance and repairs the vessel needs. In exchange for the use of the vessel, the Owner will receive a daily, weekly, or monthly stipend (better known as “charter hire”). Once the charter party has expired, the Charterer will redeliver the vessel to the Owner in the same condition as the vessel was originally in upon delivery (ordinary wear and tear excepted). Importantly, in some instances, the charter party will allow for a transfer of ownership in the vessel once the contract has ended, which, by way of analogy, is similar to “rent-to-own” agreement. Indeed, for an Owner, a bareboat charter party can be an effective tool to put an unemployed vessel to work. For a Charterer, a bareboat charter is a great way for a captain or crewmember to buy a boat without jumping through a bank’s traditional financial gauntlet. Either way, a bareboat charter is a win-win. Easy-peezy, right? Well… sort of.
Terms and Conditions
The terms of a bareboat charter party will depend on a number of variables. In most instances, these variables include the purpose of the charter, the bargaining strength of the parties, the length of the charter period, the type of the vessel, and the trade involved. That being said, there are certain terms and conditions that are fundamental to any bareboat charter. For example, all bareboat charters will have specific details about where the vessel can go (“trading warranties”); the type of insurance the Charterer must carry while operating the vessel (“insurance warranties”); and other clauses applicable to the safe operations of the vessel such as crewing standards, permitted cargoes, and indemnity agreements.
In contrast, the vessel’s Owner is most often concerned about non-payment of hire, failure to maintain and/or repair the vessel, and failure to arrange/maintain insurance on the vessel. For Charterers, they are primarily concerned about chartering an unseaworthy vessel. Regardless of the terms and conditions of the bareboat charter, these contracts will provide Owners and Charterers a clear, contractual roadmap that is designed to land at each party’s respective financial destination. No contract, however, is without its own unique issues and bareboat charters are no different. Arguably, the most contested issue between the Owner and the Charterer in a bareboat charter involves the allocation of liability.
Liability – From the Charterers Perspective
Bareboat charters are an attractive alternative to a traditional financial arrangement, but they do come with a price—increased liability. For example, the Charterer, as the de facto owner of the vessel, is now responsible for paying hire to the Owner; responsible for any loss or damage to the vessel; responsible for any ordinary diligence in the care of the vessel; and responsible for any third party liabilities as if they were the Owner. Put differently, a Charterer becomes responsible for collisions, personal injuries (Jones Act claims), pollution damage (OPA 90), and wages to the crew (Maintenance and Cure). Indeed, in contrast to an Owner’s legal exposure, a bareboat Charterer takes on a significant amount of legal liability.
Liability – From the Owners Perspective
Vessel Owners have a favorable opinion of bareboat charters because their liability is significantly reduced. After all, if everything is working correctly, the Charterer should be responsible for nearly all the costs associated with the vessel and the Owner should just be collecting charter hire. Contractually speaking, however, the allocation of liability is never that clear, and a substantial portion of bareboat charters are litigated over whether or not a valid bareboat charter party even existed.
In order to establish a valid bareboat charter, Owners must completely surrender “operational control” of the vessel to the Charterer for the duration of the charter period. Operational control is a legal term of art that means that the Owners must go so far as to relinquish “possession, command and navigation” of the vessel as to be “tantamount to, although just short of, an outright transfer of ownership.” Guzman v. Pichirilo, 1962 AMC 1142 (1962). Legally, this requires three elements: (1) full possession and control of the vessel must be delivered to the Charterer for a specified period of time; (2) the vessel is then directed by its Master, manned by his crew, makes his voyages, and carriers the cargo as he chooses; and (3) the services performed on board the vessel are primarily for the benefit of the Charterer. Put differently, in order to establish a valid bareboat charter agreement, courts will required evidence that the Owner has completely and exclusively relinquished possession, command, and navigation of the vessel to the Charterer.
Avoiding liability is not as easy as one might think—even with a sophisticated contract. Indeed, in an effort to avoid liability, Owners of fishing vessels sometimes bareboat charter their vessels to their Masters. From there, the Masters proceed to hire their own crews. Yet when things go south, i.e., someone gets hurt or the vessel is damaged, the injured crew members will challenge the validity of the bareboat charter party. This should come as no surprise because, after all, friends rarely sue each other. And, more often than not, the Master of the vessel does not have as deep of pockets as the former vessel owner.
For example, in an effort to double their catch or to simply increase revenue, shipowners will informally charter one of their vessels to a friend who, in turn, subsequently hires their own crew (usually a friend) to work the boat. Following an injury, however, the injured crew member soon realizes that his longtime friend/captain has no financial means of providing the necessary maintenance and cure obligations. As you would expect, the injured crew (and his new attorney) then turn to the shipowner for restitution, and by alleging they were employees of the shipowner, not the charterer, they can effectively tap into the shipowner’s insurance policy. Indeed, these loose crew arrangements are ripe for maritime litigation because the shipowner, not the charterer, will typically have the necessary insurance to pay for a claim, and, as a general rule, injured crew (and their lawyers) tend to follow the money.
The landmark case illustrating the above scenario is Deal v. A.P. Bell Fish Co., 1985 AMC 446 (5th Cir. 1982). The case involved the disappearance of Mr. Richard S. Deal, a deckhand on the F/V MISS IRENE who mysteriously disappeared during a wheelhouse watch while fishing for red Snapper sixty miles off the coast of Louisiana in the Gulf of Mexico. It was believed Mr. Deal fell overboard during his watch while the other two crew members took a short nap.
A short time after the disappearance, Mr. Deal’s wife and minor child sought six-figure recovery from A.P. Bell Fish Company (“AP Bell”); alleging Jones Act and unseaworthiness violations. Initially, however, the District Court dismissed Mrs. Deal’s Jones Act and unseaworthiness claims. The Court reasoned that Captain Creamer (the skipper of the MISS IRENE) had a bareboat charter agreement with AP Bell and therefore he (as the Charterer), not AP Bell (as the Owner), was responsible for Mr. Deal’s death (if at all). Put another way, the District Court reasoned that Captain Creamer’s bareboat charter party with AP Bell made him solely responsible for any injuries that occurred on the MISS IRENE—including the death of Mr. Deal.
To support its decision, the District Court relied heavily on the oral bareboat charter agreement between Captain Creamer and AP Bell. Pursuant to that agreement, the District Court opined that: (1) Captain Creamer had the liberty to hire all crew members and navigate the ship wherever he wished; (2) MISS IRENE’s fuel, ice, and grocery costs were to be taken out of the Captain Creamer’s and his crew’s share of the earnings; and (3) Captain Creamer had agreed to give AP Bell one-third of the vessel’s catch. All in, the District Court felt these three elements were enough prove that Captain Creamer had operational control over the vessel, thus establishing a bareboat charter agreement between Captain Creamer and AP Bell and relieving AP Bell of all legal liability.
The 5th Cir. Court of Appeals, however, disagreed and reversed the District Court’s ruling. In reaching its decision, the 5th Circuit scrutinized the bareboat charter agreement between Captain Creamer and AP Bell and took issue with several key facts. First, the 5th Circuit was not impressed with Captain Creamer’s ability to hire and fire crew members. The 5th Circuit felt that a skippers ability to hire and fire crew members was customary in such instances—regardless of who owned the boat. Second, the 5th Circuit was not impressed with the fact that Captain Creamer was allegedly going to give AP Bell a percentage of his catch. The 5th Circuit felt this agreement was merely illusory since it was oral and had no set duration. Third, the fact that all of MISS IRENE’s repairs were being charged to AP Bell, not Captain Creamer, suggested that AP Bell had more operational control of the vessel than had previously been argued. With that, the 5th Circuit felt there was not enough evidence to establish that Captain Creamer (as the Charterer) had sufficient command, possession, and control of the MISS IRENE. As a result, the 5th Circuit reversed the District Court’s ruling thus holding AP Bell responsible for the death of Mr. Deal. Yet, if the Owner retains operation of the vessel, there will be no shelter from liability.
Bareboat charter agreements can be a great financial alternative, especially for those with a lack of capital. However, the liabilities associated with these arrangements are no joke and Owners need to be careful when deciding to bareboat charter out their vessels too long time captains or crew members—especially without a written contract. As the Deal v. A.P. Bell Fish Co. case illustrates, vessel owners who decide to charter their vessels out can be liable to 3rd parties even though the owners had no formal contract with that party.
That being said, having a written bareboat charter in place can easily prevent any miscommunication down the road. In such circumstances, parties conversant with the terms of a standard bareboat charter party are unlikely to be caught off guard by some onerous clause or unforeseeable 3rd party liability claim. As a result, each party and can concentrate on the essential goals of the contract—to go fishing and make some money.
About the author
Isaak’s current list of clients includes shipowners, charterers, shipyards, seafood companies, importers, exporters, freight forwarders, carriers, offshore oil and gas companies, mining companies, construction companies, and other entities and persons engaged in the maritime and transportation industry.