The new Barecon 2017 – an overview, with a project finance focus

| Insight

There are already quite a few publications on this 2017 sequel of the Barecon 2001. Barecon has also been the backbone of the project finance / sale leaseback transactions, hence, we focus here on how this version might affect such structures.

That said, the set-up of the projects to come from Norway might take a different form, due to the EU-driven changes in tax regulations of Norway. Nonetheless, we deemed it prudent to bring to our clients’ attention some comments regarding Barecon 2017 in relation to the project finance structures.

Overview of changes

In brief, the following are the main noteworthy changes in this new Barecon:

  • Enhanced Owner’s liability in the Delivery obligations regarding Vessel’s condition,however, these are in any case carved out in theproject charters.
  • New box and provision on ”Latent Defects” that are discovered by the Charterer within 12 months from delivery (or other period agreed) for the repair costs of which (but not the time of repair) the Owners will be liable to the Charterers. Certainly a carve-out for the plain vanilla sale-leasebacks.
  • New box and provision for insured total loss value, which can be now used for the minimuminsured values traditionally addressed in theadditional clauses.
  • Familiarisation clause, for both parties on delivery and redelivery, respectively. This resembles the Norwegian Saleform 2012 (NSF), and is practical for the time of redelivery, accommodating sale of the Vessel to a third party at the end of the charter period.
  • Another NSF-inspired addition is the underwater divers’ inspection, afforded to both parties on delivery and redelivery, respectively. For same reasons as above, this is a welcome addition.
  • A third NSF-inspired addition is the bunkers and luboils new clause, which mirrors thepayment mechanism of the NSF. This will needadjustment to relate only to redelivery, as nopayment is made on delivery in the projects.• Another welcome addition is found in the Redelivery clause, which is now furtherelaborated, and includes that the Vessel shouldbe redelivered free of any conditions or recommendations.
  • An improved Insurances clause, that will address points of insurance proceeds’ distributions, traditionally addressed in the additional clauses.
  • In the new form, the alternative to all regulatory compliance burdening solely the Charterers, i.e. the sharing of modification/new equipment between Owners an Charterers, is further regulated. If costs required for the continued operation of the Vessel exceed an agreed amount, a formula is introduced to allocate each party’s contribution obligation. This might not be befitting the project structures, but does reflect the increase of the costs associated with an equally increasing regulatory framework of the last years.
  • The Hire clause is both weakened on one point, and strengthened on another.
    – Strengthened in, amongst other, including a tax gross-up clause;
    – Weakened in having removed the phrase that, with regards to payment of the Hire, ”time shall be of the essence”, which (deletion) has a potential adverse effect on the common law rights that would otherwise render payment as a condition (a clause that goes to the root of the contract).
  • A welcome addition of a Total Loss clause, though some adjustments are required to address for what minimum period the Hire shall continue to fall due.
  • New Anti-Corruption clause, which is drafted as affording both parties the right to terminate if the other is in breach, if such breach has a knockon effect on the innocent party.
  • New Sanctions clause, applying to both parties, and affording both parties the right to terminate if the other is in breach.
  • The revised Part III for Newbuildings affords the Charterer a wider degree of control on the construction and variations (at its own cost), and has a more pragmatic regulation of how the cancellation of the shipbuilding contract should entitle either the Owners or the Charterers to cancellation of the Charter.
  • The new Part IV now addresses the Purchase Option(s), which, with relevant adjustments,could substitute the provisions traditionallyaddressed in the additional clauses.

Conclusion

Barecon 2017 is improved, and it adds some value to the project finance structures that would otherwise be based on the Barecon 2001 with additional clauses (riders). Amendments in the Barecon 2017 are still required of course, while some of the clauses that would be addressed in the riders to the old Barecon are now easier to address in the form, with slight adjustments to the provisions of the Barecon 2017. However, Barecon 2017, although improved, is designed for true charters, thus striking a different balance between owners and charterers, than is required to suit project financing, and therefore the requisite changes to the recently introduced provisions of the new form might appear more pronounced.

Thus, albeit an inescapable change of the old Barecon, it is not an unwelcome one for project finance. It certainly requires adjustments to suit project finance structures, while we are already readying our clients’ additional-clauses’ templates to this effect.

Equally, when a term sheet for a project finance is negotiated, and reference is made to the new Barecon, even if referred to as ”amended Barecon 2017”, caution should be applied in addressing in the term sheet the provisions that appear in standard Barecon 2017, and which are unsuitable for project financing, and need carving-out. A review of existing term sheet of our clients’ templates is underway.