Explanatory notes

Background

The absence of standard arrest clauses in the market has resulted in owners and operators being presented with individually drafted provisions. However, the provisions are often one-sided with charterers having the right to terminate the charter party if the vessel is not released within two or three days of an arrest. In the light of the OW Bunker collapse and sharp increase in the number of ship arrests around the world, it was decided to develop comprehensive standard BIMCO clauses to provide a contractual allocation of owners’ and charterers’ risks and responsibilities in the event of arrest.

Two new clauses have been developed respectively for time and voyage charter parties. Risk allocation is based on the “sphere of responsibilities” approach taken by the Court of Appeal of England and Wales in The Global Santosh ¹ . Under this approach, a distinction is drawn between issues such as the management of the vessel and its crew, which fall within the owners’ sphere of responsibility, and employment for use of the vessel which falls within the charterers’ sphere of responsibility.

The drafting subcommittee took a conscious decision not to follow the UK Supreme Court judgment in The Global Santosh where it was held that there must be some connection between the cause of the arrest and the function that the agents perform under the charter party in their capacity as agents.

The “sphere of responsibilities” test has been chosen because it provides a less complex and therefore more practical way of allocating responsibility and was felt to be more in line with market expectations. As with the knock for knock principle, which has been described as “a crude but workable allocation of risk and responsibility”² , the “sphere of responsibilities” test will not always be entirely fair but is intended to minimise disputes and reduce the number of claims.

It should be noted that under trip time charters, parties may wish to consider incorporating subclauses (c)(iii) (with appropriate amendments) and (c)(iv) of the Arrest Clause for Voyage Charter Parties into the time charter clause for consistency with any underlying voyage charter party.

¹ NYK Bulkship (Atlantic) NV v. Cargill International SA (The Global Santosh) [2014] EWCA Civ 403.
² Smit International (Deutschland) GmbH v Josef Mobius GmbH [2001] CLC 1545.

Commentary

Subclause (a) sets out the scope of the clause by defining “Arrest”. It is not limited to contractual claims but covers all incidents of detention, seizure or restraint of a vessel as long as they have been given effect by a Court or government authority. In practice this means that the clause will have wide application covering, for example, detention by port state control, matters connected with sanctions, restraint or war risks and execution of a judgment. However, the clause will not apply to illegitimate detentions or seizures by, for example, pirates.

As it is essential for charterers’ commercial operations to be aware of the arrest and status of the ship, owners are required to keep charterers informed of developments.

Subclause (b) provides that charterers take the risk when the arrest falls within their sphere of responsibility as determined by the test (referred to above) laid down by the Court of Appeal. The test determines the status of the subcontractor without any requirement for a connection between the act leading to the arrest and the performance of the functions under the time charter party. This means that acts on the charterers’ side by a sub-charterer, receiver, or other person or entity involved in the chain of contracts connected with the charter party which result in the arrest of the vessel, become the responsibility of the time charterer. It is expressly provided that the vessel remains on hire during arrest.

The second sentence of subclause (b) requires charterers to take steps to obtain the release of the vessel, such as putting up security. In order to address a situation where charterers’ security for the claim is not accepted, owners may, in their option, step in and provide security against receipt of counter-security from the charterers.

Subclause (c) sets out the position when the arrest falls within the owners’ sphere of responsibility including, for example, matters relating to the management of the vessel and its crew. It also provides a catch-all provision for all other arrests that do not fall within or result from the act of a third party not identified in subclause (b). Situations will occur where the arrest will be neither the owners’ nor the charterers’ fault including, for example, wrongful arrest or because of a fault attributable to owners’ previous counterparty such as time charterers’ default on bunker payments. Such events fall within this subclause and are the responsibility of the owners. As with subclause (b), the owners are required to try to obtain the release of the vessel by, for example, putting up security. If, however, the ship is not able to provide the services for which it has been chartered, it will be off-hire for the time that is lost.

Subclause (d) provides in the first paragraph that the party taking the risk of arrest under subclause (b) or (c), must indemnify the other party’s direct losses. This means that if the arrest has been caused by an entity on the charterers’ side, the charterers must indemnify the owners for all their direct losses. In contrast, if the arrest has been caused by an entity on the owners’ side or a third party other than those listed in subclause (b), the owners must indemnify the charterers for their direct losses.

Under English law, direct losses are losses that arise naturally from a breach, i.e. according to the usual course of things or may reasonably be supposed to have been in the contemplation of both parties, when they made the contract, as being the probable result of a breach.³

The second paragraph excludes liability for indirect or consequential losses suffered in connection with the arrest. English law defines indirect or consequential losses as losses that are not the direct and natural result of the breach and can only be foreseen on the basis of specific information. If the specific information or special circumstances under which the contract was made have been communicated to and are known to the counterparty at the time the contract was entered into, then the resulting losses may be recoverable. This is because in such cases the losses can be supposed to have been in the contemplation of the parties as the probable result of the breach of the contract. If, however, the special circumstances were wholly unknown to the party in breach, it could only be supposed to have had in its contemplation liability for the losses that would arise generally, not affected by any special circumstances.

However, and in line with the majority of BIMCO contracts and clauses, the Arrest Clauses exclude indirect or consequential losses as such losses will generally be unidentified risks that are too remote and unpredictable for a party to accept. Moreover, the acceptance of such losses might prejudice owners’ insurance cover.

³  Hadley v Baxendale (1854) 9 Ex. 341.