Ship Management : Tuesday 3rd October

10.10 - 10.40 Chris Hilton - Eversheds

Management Contracts in relation to Crew

Background

The crew management industry has developed rapidly over the last decade or so. In the mid 1980s, when BIMCO set out to produce the first standard ship management contract, the provision of the crew was no different than the provision of technical or commercial management — it was just one of the services that a manager provided.

It wasn’t long after the first Shipman contract was produced, however, that it became apparent that a separate crew management contract was going to be justified, and the first Crewman contract was therefore released in 1994.

Both Shipman and Crewman have been revised so that we now have three contracts — Shipman 98, Crewman A and Crewman B. Since these have become industry standards, I shall come back to look at those in a little more detail later on. I will not be reviewing these contracts clause by clause — neither time nor your patience would permit this, but I will be concentrating on the main differences between them to underline which one should be used in which circumstances.

To understand the significance of the contracts, however, we need to spend a little time looking at the legal concept of principal and agency. I hope you will forgive me for touching on what to many of you may seem obvious, but when deciding how to structure a crew management contract, it is critical to bear these concepts well in mind.

This is not the time for a lengthy analysis of the law of agency, but the important fundamental point is that where an agent is known to be acting as an agent, if he makes a contract, he makes it on behalf of the principal, and it is the principal who is liable under it, not the agent.

Why act as an agent?

Against that background, it is pretty obvious that one of the big advantages in acting as an agent is to restrict liability. If the crew manager acts as an agent for the owner, therefore, when he hires the crew he does so on the owners’ behalf. The crew’s contract is with the owner, not the agent.

First of all this means that the crewman’s rights are against the owner (although to maintain working relationships, doubtless the good crew manager will handle the crew’s concerns rather than simply to refer them to the owner). Secondly, however, this means that the agent will not be the employer of the crew. The consequence of this is even more important. The issue arises because of an employer’s liability for the conduct of his employee where the employee is, for instance, negligent whilst working in the course of his employment. In the context of a crew running a ship, the consequences can of course he dramatic. If a helmsman negligently causes a collision, the employer of the helmsman could be liable for the damage to the other ship.

So the primary advantage of being an agent is to restrict liability to third parties. That is not to say, however, that the agent is free of responsibility - of course he still has to perform his contract with his principal which, in the case of crew management, would normally be to select, and probably train, a suitable crew. If he didn’t do so, he would be liable under the contract to the owner, but that would be the case even if he were acting as principal.

Why be a principal?

So you might well ask, why would a crew manager ever want to act as a principal? It was that assumption that led to BIMCO drafting the first Shipman Contract on the basis that all ship manager’s services (including crewing) would be performed as an agent. In practical terms, however, some crew managers had developed a relationship with "their" crews whereby they were considered as the crew’s employers, and the managers wanted to keep it that way. They had also developed a different charging structure which was more consistent with their acting as the principal.

To explain, where a company is acting as an agent, it is under a duty of good faith to its principal, which, in plain terms, means that the agent cannot use his position to make any secret profits. An obvious example of this would be commissions that the agent received, for instance, on airline tickets when sending the crew out to the ship.

That is not to say that crew managers who act as a principal are thereby setting out to rip off their owner — just that they can choose to have a different charging structure than a normal agent would use.

The penalty, however, which must be remembered is that the manager will have to ensure that his liabilities as employer of the crew are properly insured, and, in the case of a specialist insurer like ITIC, to notify the underwriters that they are contracting on this basis.

Shipman & Crewman Contracts

The Shipman Contract in both its original and new form is an agency contract. I suspect that most of you will be familiar with the format of this agreement, which contains a series of options as to the nature of the management services that are to be performed, including crew management, and the specific services to be provided by the crew manager are set out in Clause 3.1. They are very similar to, but not quite as exhaustive as, the equivalent provisions in the two Crewman Contracts. Shipman can be used to cover crewing where the crew manager is acting as an agent, but it is really designed for the situation where the manager is performing other functions as well. If it is crew management alone, on an agency basis, Crewman A should be used.

Crewman A

The full title of this contract is Crewman A — Cost Plus Fee. The reason for this is that it has the same basic charging structure as Shipman, under which the crew manager is entitled to a fee for his work, over and above expenses that he incurs in operating the contract.

The manager acts as the owners’ agent (as with Shipman) and therefore for instance, you will find in both Shipman and Crewman A an obligation on the part of the manager to account to the owners for all discounts and commission.

The crew manager’s liability is limited (under Clause 12.2) to 10 times the equivalent annual management fee, as with Shipman.

Crewman B

The full title of this contract is Crewman B — Lump Sum. This is the same construction as the first Crewman Contract, and is based on the assumption that the crew manager will act as principal, supplying the crew to the owners and being paid on a lump sum basis. In other words, the owner simply pays a monthly lump sum which includes not only the manager’s fee, but the crew’s wages, transportation, working clothes and even food.

This contract reflects the practice of part of the crew management industry as it has developed, particularly, as I understand it, in Cyprus.

Under this contract, the crew manager’s liability is limited to 6 times the monthly lump sum (bearing in mind that the monthly lump sum includes a lot of expenses as well as the manager’s fee).

Crew Manager’s Responsibilities

These are very similar under all three documents and appear in Clause 3. The manager has to perform in accordance with sound ship management or crew management practice, an expression which does not seem to have caused any difficulty over the years since the contracts were produced. Indeed it was considered in the English case of the "FLAMAR PRIDE" in 1990 (involving Denholm Maclay) when the court had no difficulty in interpreting it.

Applying that standard, the crew manager is obliged to provide suitably qualified crew in accordance with STCW 95, and then each clause goes on to list particular functions.

The three contracts are very similar but not identical — a function partly of the fact that Shipman 98 was produced earlier than the other two, and, on reflection, the Crewman drafting committee decided that they could clarify one or two aspects of the wording used.

I would like to draw your attention to one difference in particular and this is that both Crewman A and Crewman B contain a provision that reads:-

"Company" is defined as meaning the owner or other organisation who has assumed responsibility for operation of the vessel and has agreed to take over the duties and responsibilities imposed by the ISM Code.

Shipman 98 is intended to cover crewing operations when they are being provided in conjunction with other management services, so the expectation is that where Shipman is used, the managers will also be providing technical management. That being the case, Shipman 98 provides (at Clause 4.2) that the technical managers will be the Company for the purposes of the ISM Code. In other words, the managers will organise the crew both from a crew management point of view and also by virtue of being the Company for the purposes of the ISM Code.

Where the crew management and technical management have been provided by different companies, however, it is imperative that the reporting lines are clear and therefore Crewman A and Crewman B specify that the crew must understand whose orders they are to follow for the purposes of compliance with the ISM Code.

The only difference between Crewman A and Crewman B in this respect is that the lump sum contract includes an obligation on the part of the crew manager to supply provisions for the crew — which is picked up in Clause 6 which sets out what is covered by the crew management lump sum, the arrangement being that the crew managers and owners respectively at the commencement and termination of the agreement take over and pay for all unbroached provisions on board the vessel. This is part of the "lump sum" service.

Crew Insurance

Again the arrangements are different in each of the contracts, consistent with the specific purpose of each contract. Shipman 98 has a more general insurance clause, although its effect is the same as Clause 4 of Crewman A. In each case, the owners are to provide crew insurances.

In Crewman B, however, it is the crew managers who carry this obligation.

Limitation of Liability

The responsibility provisions of the three contracts are the same and, although they have been clarified in the redraft, the effect is the same. The manager is excluded from any liability whatsoever except where he has been negligent, in which case his liability is capped to 10 times the annual management fee (in Shipman and Crewman A) or 6 times the monthly lump sum (in Crewman B). The manager loses the right to rely on that cap, however, if the loss has resulted from his personal act or omission committed with intent, or recklessly and with knowledge that the loss would probably result (the same test as the 1976 Limitation Convention — and it should be very rare indeed for this to apply).

The reason why the Shipman and Crewman contracts are structured with limits of liability by reference to the amount of the management fee is to create a regime where on the one hand the manager knows the level of his exposure (in the absence of "personal act or omission committed with the intent to cause same or recklessly and with knowledge and that such loss, damage, delay or expense would probably result"), and can therefore insure against this exposure, whilst on the other hand having a level of limit that is fair, in the sense that it relates to the value of the services provided by the manager.

All three contracts also specifically exclude the manager from liability for the actions of the crew except to the extent that the manager has failed to select a competent crew. In Shipman and Crewman A, this provision is largely self explanatory, since, because the manager is acting as the owner’s agent, it is the owner, not the manager, who is responsible for the crew’s actions (assuming they have been properly selected).

The provision is very important, however, for the manager under Crewman B because the crew remain his employees. The contract won’t stop anyone other than the owner from suing the manager if he has suffered from the negligence of the crew, although the contract also contains an indemnity from the owner to the manager which gives him some protection. Having said this, the indemnity is only as good as the financial credit worthiness of the owner, and the crew manager is only likely to be sued in the first place if the owner and his ship have disappeared.

When deciding whether to act as principal or agent, however, it is also important to bear in mind the general limitation conventions. Although in most countries it is possible for a ship manager to limit liability statutorily, where the ship manager is only providing limited services, namely crew management, it is debatable. The 1976 Limitation Convention specifically applies to managers and operators but to the extent that a manager must also be involved in the operation of the ship it is doubtful whether this could be said to extend to a crew manager or agent, and in the USA the courts have held that a manager can only limit where he has full control of the ship.

Consequently, it is possible that in the situation where the crew manager employs the crew and the helmsman negligently causes a collision, the owner may be able to limit liability statutorily, but the crew manager may not. I am aware of only three cases where a crew manager has been sued (and I understand one of them was not pursued), but I suspect that is largely because generally speaking crew managers will not have sufficient funds to make them a worthwhile target. If that is the basis on which the crew manager wishes to sleep easily at night, however, he should nevertheless be aware of the risks that he is running.

Summary

Before deciding which contract to use, it is important to consider carefully the basis on which a crew manager is going to operate. Instinctively, and speaking as a cautious lawyer, I would always advise a crew manager to act as an agent unless there are compelling commercial reasons otherwise.

A manager who is performing a range of management duties can use Shipman 98 on its own, but if he is carrying out a full crew management service or if he wants a separate crew management contract, he could use a combination of Shipman 98 (with crew management deleted) and Crewman A.

Although in theory it would be possible to use a combination of Shipman 98 and Crewman B, I would have thought this less likely, not least because of the confusion of legal relationships that it generates and therefore the need to have more complex insurance arrangements in place.

If the manager is only carrying out crew management, he should use Crewman A or Crewman B as appropriate.