Shortcomings of subletting

The Supreme Court has handed down a significant judgement clarifying vicarious performance under a charterparty and the scope of responsibility of charterer’s agents, following the case of NYK Bulkship (Atlantic) NV v. Cargill International SA (Global Santosh) 2016 UKSC 20.

In the case of NYK v. Cargill, the Global Santosh was time chartered on terms that the vessel would be off-hire during any period of arrest or detention not occasioned by any personal act or omission or default of the charterer or their agents. The cargo receiver arrested the vessel following a dispute with a sub-sub-charterer. The dispute had no connection to the owner. Nonetheless, the Supreme Court held that the vessel was off-hire during the relevant time because the arrest was not occasioned by the time charterer’s agents within the meaning of the above proviso.

Specifically, the Global Santosh was time chartered from the head owner, NYK, for a one time charter trip for the shipment of cement from Sweden to West Africa. Cargill subsequently voyage chartered the vessel to Sigma, who sub-sub-chartered to Transclear. Under a separate sale contract, Transclear agreed to sell six shipments of cement to IBG and C&FFO terms, meaning that, as between Transclear and IBG, IBG were responsible for unloading.

Clause 49 of the time charter between NYK and Cargill explained: “Should the vessel be captured or seized or detained or arrested by any authority or by any legal process during the currency of this charterparty, the payment of hire shall be suspended until the time of her release, unless such capture or seizure or detention or arrest is occasioned by any personal act or omission or default of the charterers or their agents. Any extra expenses incurred by and/or during the above capture or seizure or detention or arrest shall be for owners’ account.”

Meanwhile, under Clause 8, NYK undertook that the master would be “under the orders and directions of Cargill as regards employment and agency”, and Cargill undertook to “perform all cargo handling at their expense”.

At the discharge port, the vessel was held at anchor for two months due to congestion, partly caused by IBG’s broken unloader. By not discharging, IBG were in breach of the sale contract with Transclear. Transclear obtained an arrest order to secure their claim for demurrage. What should have been arrested was the cargo but, by mistake, the order provided for the arrest of the vessel. Eventually, Transclear and IBG resolved their differences and the vessel was released after 29 days.

Cargill withheld hire from NYK for the period of arrest on the grounds that the vessel was off-hire. NYK disagreed and relied on the proviso in Clause 49.

Scope of agency

The majority arbitrators found for Cargill, and held that the vessel was off-hire during the relevant period. In their view, neither Transclear nor IBG were acting as Cargill’s agents in respect of the arrest and detention of the vessel.

On appeal, the Commercial Court held that Cargill was responsible for any act or omission or default in the course of the performance by the delegate of the delegated task. The court agreed with the arbitrators that Transclear was not discharging any obligation on behalf of Cargill but withheld that IBG was doing so. Its failure to unload and to pay the resultant demurrage were omissions in the course of its vicarious performance of Cargill’s obligation to discharge the cargo. The matter was remitted to the arbitrators to decide whether the failure to pay demurrage was the cause of the arrest.

The Court of Appeal upheld this construction of the proviso, but for different reasons. It disagreed with the Commercial Court that there was a requirement that the act or omission causing the delay must occur in the course of performance of the delegated task. Instead, the Court of Appeal took a wider view of the scope of “agency”. Citing the distinction highlighted in the Doric Pride 2003 All ER (Comm) 188 between matters within owners’ and charterers’ spheres of responsibility, it held that the delay caused to the vessel in this case fell within Cargill’s sphere of responsibility because NYK was not involved in the dispute between Transclear and IBG, which did not arise out of anything that the ship was alleged to have done or failed to do, but related only to IBG’s alleged failure to pay demurrage under a contract with which NYK was not concerned. The Court of Appeal agreed with the Commercial Court that the issue of causation should be remitted to the arbitrators.

Spheres of responsibility

The Supreme Court, by a majority of four to one, rejected the Court of Appeal’s reliance on the parties’ “spheres of responsibility”. To adopt the view taken by the Court of Appeal would unjustifiably extend Cargill’s delegation to everything that arises from its trading arrangements, so that “anything that the sub-charterers may choose to do which results in the arrest of the vessel, becomes the responsibility of the time charterer if the occasion for doing it would not have arisen but for their having come in at the tail end of a chain of contracts which the time charterer initiated”.

Rather, in the majority Supreme Court’s view, there must be some connection between the occasion for the arrest and the function which Transclear or IBG were performing as “agent” of Cargill. The correct question was whether IBG, by omitting to discharge on time, were vicariously exercising rights or vicariously infringing obligations under the time charter between NYK and Cargill.

The material obligation in question was that of Cargill to perform cargo handling at its expense. This did not oblige it to procure the vessel to be discharged at any particular time. It was correct that any actual unloading carried out by IBG would have been a vicarious performance of Cargill’s cargo handling obligation. What led to the arrest, however, was the absence of cargo handling operations before the date agreed in the sale contract. During that time, the vessel was at anchor and IBG was doing nothing on behalf of Cargill. The court said: “Their inactivity could be relevant to the question of responsibility posed by Clause 49 only if it amounted to the vicarious breach of some obligation of Cargill under the time charter, which it did not.” The scope of IBG’s agency did not extend to the material inactivity.

The Supreme Court, therefore, effectively restored the decision of the majority arbitrators, that the vessel was off-hire during the arrest since the arrest was not cause by the act, omission or default of Cargill or its agents.

Lord Clarke, disagreeing, took a wider view of the material time charter clauses. He considered that Cargill was responsible for discharge, which it delegated to IBG and Transclear. Since the arrest was occasioned by matters relating to discharge, there was a sufficient connection such as to make Cargill responsible.

All in the wording

The Supreme Court decision suggests that the “sphere of responsibility” test looks set to become less pervasive. It remains important, however, for owners and charterers entering into charterparties to think carefully about how they word their off-hire clauses to make it clear where they intend the risk to lie.

In reviewing past authorities on the definition of “agents” in shipping contracts, the Supreme Court has taken the opportunity to clarify the position. The judgement specifically confirms that a sub-charter is an agreement under which benefits and burdens are enjoyed and imposed vicariously. The term “agents” is not to be construed in the strict legal sense, but as a reference to parties down the chain enjoying rights derived from the time charterers.

Daniel Jones is a partner at Ince & Co, specialising in shipbuilding, charterparty, bills of lading and trading disputes. He can be contacted at +49 (0) 40 38 0860 or Daniel.jones@incelaw.com. Iain Preston is an associate at Ince & Co. He is involved in commercial disputes where the firm represents shipping-related personal. Iain can be contacted at iain.preston@incelaw.com.