The Novation Agreement for the Substitution of Time Charterers is an agreement between the parties to novate the time charter party from the original charterers to the new charterers on terms set out in the agreement. The latest edition of this contract is the Novation Agreement for the Substitution of Time Charterers, issued in 2016.
Copyright in the Novation Agreement for the Substitution of Time Charterers is held by BIMCO.
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Novation can be expected to include provisions reflecting case-specific party needs and requirements. The new standard agreement addresses core underlying contractual issues. It cannot cover the many and variable situations that might be encountered or required by parties to meet their individual needs.
These notes are intended to provide an insight into the reasoning behind the key provisions of the Novation Agreement for the Substitution of Time Charterers. However, users are recommended to seek advice in respect of issues that are not covered, are specific to their particular contractual arrangements or require specialist legal guidance.
The contract is divided into two sections. The covering box layout is for the insertion of variable information relating to the novation followed by the applicable terms and conditions.
Details of the Owners, Original Charterers and New Charterers are to be entered in Box 2, Box 3 and Box 4 respectively, Vessel details in Box 5 and the date of the underlying Time Charter Party in Box 6. Further information required includes the Effective Time of novation, price of bunkers, details and price of the Original Charterers’ equipment and party guarantors.
This states the parties’ agreement to novate the Time Charter Party from the Original Charterers to the New Charterers on terms set out in the agreement. In order to ensure consistency, it is expressly provided that terms used in the Novation Agreement shall have the same meaning as terms in the underlying Time Charter Party.
The changeover of contracting party takes place at the “Effective Time” agreed and entered in Box 7. This can be a specific time and date or it might be linked to an event such as “dropping last outward pilot” or on arrival at a specified port or place.
The New Charterers will not expect to be held liable for matters arising prior to the changeover. Subclause (f) therefore provides that the Original Charterers and Owners remain liable to each other after the Effective Time for all liabilities and obligations occurring prior to the novation. An indemnity secures the New Charterers’ position against any such claims.
Finally, the Original Charterers and the Owners warrant that they have the right to possess and/or use the equipment stated in Box 9.
The price of bunkers should be agreed and inserted in Box 8. However, if left blank, the default position is the amount that would have been payable by the Owners to the Original Charterers on redelivery of the ship if the charter party had not been novated.
In terms of process, on taking over bunkers the New Charterers should pay the Owners the sum due and the Owners reimburse the Original Charterers in the same amount. However, parties may prefer to circumvent two sets of payments and instead agree a direct transfer from the New Charterers to the Original Charterers.
Under subclause (a), the Original Charterers must procure that their rights to possess (the term is used to avoid disputes about title) or use their on board equipment, as identified in Box 9, will pass to the New Charterers and the Owners at the price agreed in Box 10.
The alternative, in subclause (b), requires the Original Charterers to pay for the removal of their equipment and re-instatement of the ship to the Owners’ satisfaction. This is the default position if the parties do not identify their chosen option.
The clause applies only where agreed and inserted in Box 15.
There is no express requirement for the release of the original guarantors. This is because guarantees normally run to the expiry of the subject charter party. Guarantors’ liabilities for the original parties’ performance are, therefore, subject to any accrued or pre-existing liabilities, likely to cease when, on novation, the original time charter party comes to an end and is replaced by the new time charter party.
Accordingly, releasing original guarantors might be inconsistent with the terms of the guarantors’ liability for continuing or outstanding claims under the pre-novation time charter. An unconditional requirement to release the original guarantors could therefore prejudice the interests of the continuing counter party (owners) who might lose the ability to recover a pre-novation claim.
Disputes under a novation agreement might involve all three contracting parties. Additional wording has therefore been included to provide a mechanism for starting multi-party disputes. The procedures apply where all three parties are involved in a dispute from the outset but are not designed to accommodate a third party joining an extant arbitration at a later stage. If the situation should arise, it can be dealt with on a case by case basis with the third party possibly starting a separate arbitration against either or both of the other parties. The references might then, by agreement, be consolidated, heard concurrently or restarted as a multi-party arbitration.
The modifications mean that the clause is not the standard version and “BIMCO” does not therefore appear in the heading.
Anna Wollin (BIMCO), Chris Kidd (Ince and Co) and Donald Chard (Arbitrator and BIMCO consultant) provide an overview of the Standard Novation Agreements.
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