The following article was published in Fairplay on 28 June 2016 and is reprinted here by kind permission.

Rulings by the UK’s highest court, the Supreme Court, are relatively rare and very significant. The recent decision in the Global Santosh (NYK Bulkship (Atlantic) NV v Cargill International SA.) is therefore an important one for the global shipping industry, in which many contracts are governed by English law.

The decision, in favour of Cargill, dealt with a dispute which dated back to 2008 and involved a mistaken arrest of a vessel in Nigeria and a delay in discharging a cement cargo by third parties. The dispute focused on the allocation of risk between owners and charterers of the vessel and how this was addressed in the charterparty.

As a result of this decision, with which many in the shipping industry will already be familiar, it is recommended that charterparties stipulate clearly how the risk of an arrest and events of delay are allocated between owners and charterers.

Background and implications

The case centred on an off-hire clause. NYK time-chartered the vessel to Cargill. She was then sub-chartered and sub-sub-chartered and carried a cargo of cement to Port Harcourt in Nigeria.

Following a lengthy delay in discharging, and both vessel’s and cargo’s arrest, Cargill as time charterers withheld hire from NYK for the period of time the arrest order was in place. This was on the basis of their interpretation of the off-hire clause in the charterparty which “suspended” the payment of hire if the vessel was “detained or arrested”.

However, NYK took the view that the proviso in the off-hire clause (“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…”) applied and that hire continued to be payable for the duration of the arrest order. The case went from London arbitration right through to the Supreme Court on appeal.

The Supreme Court recognised the difficulty of the issue, but 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 Cargill’s agents. This was because there was an insufficient “nexus” or a disconnect between the occasion for the arrest and the functions or rights or obligations to be performed by parties acting as Cargill’s agent. The vessel was therefore off-hire throughout the period of the arrest.

The chartering community will welcome the decision, as it reduces a significant business risk for them. However, owners will be disappointed with it, as they may not receive hire if their vessel is arrested for reasons over which they have little or no control.

The legal view

The Supreme Court’s decision provides welcome clarity. Previous decisions had meant that any party to whom charterers directly or indirectly delegated an obligation (including sub-charterers, sub-sub-charterers and receivers), could potentially be classified as charterers’ agents at all times.

The Supreme Court approached the dispute from a different angle, focusing more on what occasioned the arrest and its connection to the functions performed under the charterparty (i.e. the nexus test). The nexus test rests on the definitions of “occasion” for the arrest (in this case for unpaid demurrage/absence of discharge) and the performance of “functions” by third parties on behalf of charterers. The broader the definitions, the broader the application of the nexus test and so the broader the application of the off-hire proviso. In this case the definitions (and therefore the proviso) were rightly held to be narrow, as a broad interpretation was held to be “impossible to justify”.

Parties should therefore ensure that the off-hire clause in their charterparty properly captures the level and breadth of risk contemplated.