Falkonera Shipping Company v Arcadia Energy Pte Ltd, Re "Falkonera"

Factual and Procedural Background

The Appellants, Owners of a Very Large Crude Carrier ("VLCC") named the Falkonera, chartered the vessel to Charterers on or about 18 November 2010 under BPVOY4 terms with amendments. The charter allowed Charterers the option to transfer cargo to or from other vessels, including VLCCs, subject to compliance with the ICS/OCIMF Ship to Ship Transfer Guide (Petroleum) ("the Guide") and Owners' approval of the receiving vessels, which approval was not to be unreasonably withheld.

The dispute arose when Charterers sought Owners' approval to transfer cargo from the Falkonera to other VLCCs of similar size, specifically the Front Queen and Front Ace, for use as floating storage vessels. Owners withheld approval, citing safety concerns based on the absence of specific guidance in the Guide for VLCC to VLCC transfers and difficulties with mooring arrangements due to the vessels' similar sizes.

Owners had a prior negative experience with a similar VLCC to VLCC STS transfer in 2007, which influenced their policy of declining such transfers. Charterers engaged SafeSTS Ltd, a specialist company, to address Owners' concerns and proposed detailed mooring plans and risk assessments. Despite these efforts, Owners maintained their refusal to approve the VLCC to VLCC transfers and approved alternative vessels for discharge. Charterers alleged that Owners' refusal caused delay and increased costs.

The central procedural issue was whether Owners had unreasonably withheld approval for the proposed receiving vessels, and the judge below held that Owners had acted unreasonably in withholding approval. Owners appealed that decision.

Legal Issues Presented

1. Whether Owners acted reasonably or unreasonably in withholding approval for the VLCC to VLCC ship-to-ship transfer operation.
2. The scope and nature of Owners' right to approve receiving vessels under the charter party terms, particularly whether Owners could refuse approval based solely on the non-standard nature of VLCC to VLCC transfers.
3. Whether Owners' concerns regarding mooring arrangements, absence of head and stern lines, and the "vertical aspect" of mooring lines constituted reasonable grounds for withholding approval.
4. The extent to which the ICS/OCIMF Ship to Ship Transfer Guide (Petroleum) governs the approval process and the safety of VLCC to VLCC transfers.

Arguments of the Parties

Owners' Arguments

• VLCC to VLCC transfers are non-standard and involve additional complexity and risk requiring operation-specific risk assessments.
• Owners' refusal was based on safety concerns arising from the similar size of the vessels, which made conventional mooring arrangements (head and stern lines) impossible and resulted in mooring lines having a poor vertical aspect.
• Owners relied on a prior difficult experience with a VLCC to VLCC transfer that caused damage, justifying a cautious approach and a settled policy against such transfers.
• The Guide did not contain specific recommendations for VLCC to VLCC transfers at the time, providing limited assurance of safety for the proposed operation.
• Owners contended that approval related to the suitability of the receiving vessel itself, distinct from the transfer operation, and they were entitled to withhold approval if the vessel's characteristics made the operation unsafe or unreasonably risky.
• Owners argued that they were not obliged to approve the vessel without a full risk assessment and detailed planning, which had not been completed.

Charterers' Arguments

• Charterers contended that VLCC to VLCC transfers, though less common, were not prohibited or inherently unsafe and had been conducted without incident.
• They presented expert evidence and detailed mooring plans prepared by SafeSTS Ltd, demonstrating that the proposed operation could be conducted safely in accordance with the Guide's recommendations.
• Owners' refusal was based on an erroneous interpretation that the Guide prohibited VLCC to VLCC transfers and on unfounded concerns about mooring arrangements.
• Charterers argued that Owners' right to withhold approval was limited to unreasonable refusals and that Owners' blanket refusal constituted an unreasonable exercise of that right.
• Charterers maintained that the approval concerned the vessel's inherent suitability rather than the operation's planning, which required cooperation after approval.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court analysed the contractual provisions governing the approval of receiving vessels and the conduct of STS operations. Clause 8.1 granted Charterers the option to transfer cargo to any vessel, including VLCCs, subject to Owners' approval of the receiving vessel, which could not be unreasonably withheld. The STS lightering clause separated the approval of the vessel from the conduct of the transfer operation, which must comply with the Guide.

The court emphasised that Owners' approval related to the vessel's inherent suitability, not to detailed approval of the transfer operation or its planning. The court rejected Owners' argument that the non-standard nature of VLCC to VLCC transfers justified a blanket refusal, noting that such a refusal would render the contractual right illusory.

The court found that Owners' concerns about the absence of conventional head and stern lines were unfounded. Expert evidence established that breast lines and spring lines, supplemented by "effective" head and stern lines, provided a safe mooring arrangement for vessels of similar size. The so-called "vertical aspect" of mooring lines was a general feature of STS operations and not specific to VLCC to VLCC transfers, and did not justify withholding approval.

The court also found that Owners' past incident was attributable to specific vessel characteristics and inadequate fendering, which were not present in the proposed vessels, and thus did not justify refusal.

The court noted that the Guide, while lacking specific provisions for VLCC to VLCC transfers at the time, did not prohibit them and that the 2013 edition later addressed such transfers with guidance on mitigation measures, underscoring the court's conclusion that the prior Guide did not forbid such operations.

Owners' refusal was characterised as a settled policy or fixed position against VLCC to VLCC transfers rather than a reasoned assessment of the particular vessels proposed. The court held that such a refusal was unreasonable because the vessels nominated had "flawless" Q88 forms, had been vetted by oil majors, and there was no evidence that their characteristics rendered the operation unsafe.

The court rejected Owners' contention that approval should be withheld pending full risk assessments and operation planning, holding that the approval concerned the vessel's suitability and that detailed planning was a collaborative process to follow approval.

Overall, the court found the judge below had correctly applied the reasonableness standard and had not erred in concluding that Owners had unreasonably withheld approval.

Holding and Implications

The appeal is dismissed.

The court upheld the decision that Owners unreasonably withheld approval of the proposed VLCC receiving vessels for the ship-to-ship transfer. The direct consequence is that Owners are bound to approve such vessels unless there are reasonable safety grounds to refuse. The decision clarifies that Owners' right to withhold approval is limited by an objective standard of reasonableness and cannot be exercised based on a blanket or policy refusal without specific grounds related to the vessel's suitability. No new precedent beyond the application of established contractual and reasonableness principles was set.