Is there a general rule recognised in English law that helps determine the allocation of risk for delays and other losses between shipowners and charterers under charterparties? The English Supreme Court has very recently considered this issue, in a significant decision in NYK Bulkship (Atlantic) NV v Cargill International SA ("The Global Santosh").
Similar to most other contracts concluded in international trade, charterparties contain clauses that seek to allocate commercial risk between the parties. The particular difficulty that arises in a shipping context is the wide variety of potential expenses and risks that must be apportioned between shipowner and charterer and the complexity of the charterparty "chains" along which such risks are passed.
In a previous case, the "Doric Pride", the Court of Appeal had suggested there may be a "basic distinction" between things like the management of the vessel and its crew which lay within the owner's sphere of responsibility, and the vessel's trading arrangements which lay within the charterer's sphere of responsibility. In the "Global Santosh" the Supreme Court had to consider whether this "sphere of responsibility" approach was an appropriate way to resolve such disputes.
The vessel in question was time-chartered to the head charterers, who in turn voyage chartered it to a third party, who consequently sub-voyage chartered it for the carriage of a cargo of bulk cement from Sweden to Nigeria.
The vessel arrived at the discharge port, Port Harcourt, but was delayed for two months in getting onto the berth due to congestion arising from the breakdown of the buyers' discharging equipment. By the time the vessel was permitted to berth, further delay arose as the result of a local court order for arrest of the cargo, obtained by the sellers (the sub-voyage charterers) against the buyers, to secure a sizeable demurrage claim. The order for arrest also mistakenly named the vessel and as a result yet more delays were experienced.
As is not uncommon, the charterparty said that payment of hire should be suspended where the vessel was captured, seized, detained or arrested by any authority or legal process. However, the relevant clause contained a proviso that the vessel would not be off-hire where such delay was caused by "any personal act or omission or default of the charterers or their agents". The key question at the centre of the dispute was whether the arrest could be regarded as having been caused by the time charterer's "agents" within the meaning of the clause.
Drawing the "line"
The Court of Appeal took an approach based upon the "Doric Pride" and said the delay could be attributed to the charterer's agents. In particular it held that the classic division of risk under a time charterparty envisaged that the risk of delay would be for charterers alone: the owners were responsible for the vessel and its crew, the charterer for the consequences of its trading use of the vessel. Due to the charterer's ability to sublet the vessel under the terms of the head charter, the penalties arising from its trading of the vessel were on its "side of the line."
Blurring the "line"
In its recent decision the Supreme Court has now reversed the decision of the Court of Appeal and has taken a very different approach in interpreting the charterparty. The Supreme Court concluded that the charterers were not responsible for "agents" under the clause simply because the party at fault fell on one or other side of the "line". Instead, there needed to be a sufficient connection between the acts leading to the arrest and the performance of functions under the time charter. On the facts, the terms of the sale contract between the sub-voyage charterer and its customer and the dispute that led to the detention of the vessel had nothing to do with the head charterer's performance of its obligations under the time charter. For this reason the detention could not therefore be considered the responsibility of "agents" under the clause and as a result the vessel remained off-hire.
The decision of the Supreme Court has blurred, if not completely erased, the broad "line" of responsibility between owners and charterers identified by the Court of Appeal. The decision will be welcomed by charterers who had previously faced the uncertain prospect of having to pay hire if a vessel was arrested by anyone on what the Court of Appeal had referred to as "their side of the line". However, owners will naturally be disappointed that they may not receive hire if their vessel is arrested for reasons which have nothing at all to do with them.
Although the decision complicates the interpretation of the clause in this particular case, it highlights the everpresent need for clear drafting of charterparty clauses. If the parties decide to apportion risk for the delay caused by arrest by adopting a broad-brush approach, they will then need to use clear language in the charterparty to achieve this.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.