Interpreting an off-hire clause

The recent decision in the Global Santosh, which many in the shipping industry will already be familiar with, is an important one which highlights the need for charterparties to clearly stipulate how the risk of an arrest and events of delay are allocated between owners and charterers. It also raises an interesting question as to the role of agents and which party bears responsibility for their acts.

NYK BULKSHIP (ATLANTIC) N.V (NYK) time-chartered the Global Santosh to Cargill. She was then subsequently sub-chartered and sub-sub-chartered. The sub-sub charterer Transclear entered into a contract of sale as seller for a cargo of cement. The discharge of the cargo was delayed due, partly as a result of the breakdown of the buyer’s (IBG) off-loader. IBG was liable to pay demurrage under the contract of sale. Transclear arrested the cargo, and also accidentally the vessel, for security for its demurrage claim. As a result of the arrest of the vessel, there was a delay in the discharge of the cargo.

Cargill as time charterers withheld hire from NYK for the period of arrest, in accordance with the following off-hire clause in the charterparty:

“Should the vessel be captured or seizure (sic) or detained or arrested by any authority or by any legal process during the currency of this Charter Party, 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…” (our emphasis)

NYK took the view that the proviso emphasised in bold applied and so hire was payable for the duration of the arrest order. The case went first to London arbitration (where Cargill succeeded), to the High Court, the Court of Appeal (in both of which NYK succeeded) and subsequently to the Supreme Court.

The decision and the position of “agents”

The Court of Appeal stated that the vessel was on hire during the period of arrest as “the acts, omissions or defaults in question, culminating in the detention or arrest of the vessel involved Cargill’s delegates and fell on its side of the line”. This was controversial as under this analysis, charterers’ liability would have no boundary. It raised the question of how far charterers would be responsible for the acts of any party it has directly/ indirectly delegated to that fell on “its side of the line”.

The Supreme Court recognised the difficulty with the Court of Appeal’s analysis and ultimately preferred the reasoning of the original London arbitrators. They found that the proviso in the off-hire clause had not been triggered because the arrest was not “occasioned” by parties acting as charterers’ agents. This was because there was an insufficient “nexus”, or a disconnect, between the occasion for the arrest and the charterers’ functions being performed by parties acting as charterers’ agent:

“…not everything that a subcontractor does can be regarded as the exercise of a right or the performance of an obligation under the time charter. There must be some nexus between the occasion for the arrest and the function which Transclear or IBG are performing as “agent” of Cargill.”

The vessel was therefore held to be off-hire throughout the period of arrest.

It is now clear that a rogue agent acting on its own accord can never be charterers’ responsibility, regardless of which party’s “side of the line” they fell into. The test is now whether the agent is performing the obligations given to him and also whether there is a sufficient nexus of the performance of those obligations to the occasion for the arrest. 

Brian Perrott is a partner at Holman Fenwick Willan, specialising in international trade regulation, dispute resolution and commodities. He can be contacted on +44 (0)20 7264 8184 or brian.perrott@hfw.com. Prashant Kukadia is an associate in the commodities team at Holman Fenwick Willan. He can be contacted on +44 (0)20 7264 8070 or prashant.kukadia@hfw.com.