Explanatory notes

Background

Clauses to protect parties against commercial dealings with persons or undertakings prohibited from engaging in trade, commerce or financial transactions have previously been developed for Charter Parties and Sale & Purchase Agreements.

Similar contractual safeguards are required for use in connection with ship management contracts. BIMCO has, therefore, now issued a parallel provision - Designated Entities Clause for SHIPMAN 2009.

Summary of main features

The Clause has been drafted for use with SHIPMAN 2009. It applies to identified persons or entities (and includes designated vessels) whose activities are restricted or prohibited by United Nations Resolutions, European Union laws and regulations issued by the United States of America.

Breach of international sanctions is likely to have far-reaching consequences for an innocent party. Owners and managers are therefore each required to provide continuing warranties that they are not subject to any sanctions, prohibitions or restrictions. Owners further warrant that the vessel is not a designated vessel and will not be used in any trade in breach of sanctions.

Similarly, managers provide an additional warranty that they will not sub-contract any of their duties or obligations to any prohibited party. This has particular relevance where crewing activities are sub-contracted to a third party. In such event managers, as owners’ contracting counterparty, should put in place rigorous systems for ensuring the bona fide of personnel supplied and also for checking the status of other sub-contractors such as commercial managers.

Lists of designated persons and entities are liable to be updated and amended at frequent intervals; details are publically available and, as appropriate, can be monitored. In the event that a party is, or becomes, identified as a designated person or entity, or a vessel is designated, the Clause provides flexibility for the innocent party to act as necessary in the circumstances. It is assumed that, in most cases, guidance will be requested from regulatory authorities. However, where such advice is not, or cannot be, obtained, the innocent party may terminate the agreement immediately.

Despite international agreement on designated entities, some states apply their own anti-blocking or similar legislation to counter the effects of a boycott or other targeted action affecting their trading interests. The Clause therefore provides that parties shall not be required to break their own laws. This is a potentially difficult area and legal advice is likely to be required where there is tension between competing legislative obligations.

An indemnity is included to enable an innocent party to seek to recover losses from a party in breach. Two points should be noted. The first is that in contrast with the underlying contractual provisions in SHIPMAN where managers’ liability for negligence and commercial errors is in most circumstances limited to ten times the annual management fee, obligations for compliance with internationally imposed restrictions fall within a different and more serious category. Accordingly, where managers are in breach of any of their obligations under the Clause, or fail to ensure their sub-contractors’ compliance, they should not benefit from the limited liability in SHIPMAN. Full liability is therefore imposed where either one of the parties, owners or managers, is in breach of the Clause.

However, the second point is that even if a liability is established, it is unlikely to be enforceable where the party at fault is a designated entity. This is because such a party will be prohibited from making, and the innocent party unable to receive, any payments.

Detailed provisions

Sub-clause (a) describes the scope, basis and application of the Clause covering restrictions and prohibitions imposed against specified persons, bodies and vessels (“designated entities”) by the United Nations, European Union and the United States of America;

Sub-clause (b) sets out the respective and continuing party warranties that neither is in breach of sub-clause (a) together with owners’ warranty that the vessel is not a designated vessel and managers’ warranty that they will not sub-contract in breach of applicable sanctions;

Sub-clause (c) lays down the approach to be followed where one of the parties is found to be in breach of the warranties given. In such event, the innocent party should seek guidance from the appropriate regulatory authorities or, if that is not feasible or forthcoming, terminate the agreement;

Sub-clause (d) addresses conflicts of law where a party’s compliance with regulatory provisions is a breach of or an offence under the first party’s national law; and

Sub-clause (e) is a standard indemnity provision although its effectiveness is likely to be limited where a defaulting party is a designated entity.

Originally published in BIMCO Special Circular No. 5, 21 July 2015 - BIMCO Designated Entities Clause for SHIPMAN 2009