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 voyage 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 voyage charterer.

The charterers are required 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.

The final sentence clarifies that time actually lost as a result of the arrest will count as laytime or demurrage, as the case may be.

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.

Subclause (c)(i) provides that where the owners take the risk of arrest, they are required to try to obtain the release of the vessel by, for example, putting up security.

Subclause (c)(ii) states that time will not count as laytime or demurrage, as the case may be, for time actually lost.  This means that if, for example, cargo operations are interrupted because of an arrest, time will not count during such interruption.

Subclause (c)(iii) addresses the situation where charterers might be required to undertake loading while a ship is under arrest but delay in securing release could lead to the loss of perishable cargo. Wording has therefore been included to give the charterers the right to delay loading until the vessel is released. This means that, depending on circumstances, charterers can either wait to start loading or can suspend operations if loading is already underway. If the charterers choose to exercise their option to delay loading, half laytime or demurrage, as the case may be, will count. However, it should be noted that this counting of time may be a negotiation point when fixing. If nevertheless, the charterers decide to go ahead with loading, time actually used will count as laytime or demurrage. The opening words “provided that the Vessel is ready to load” have been included to make it clear that this option is available only when the ship is load ready. It follows that the charterers do not need a right to delay cargo operations if the vessel is not ready to load.

In most instances, charterers will want to load to avoid losing time. It can therefore be expected that charterers will invoke the right to delay loading only on rare occasions.

The wording of subclause (c)(ii) will cover an arrest occurring during discharging operations.

Subclause (c)(iv) provides the charterers with a right to terminate the charter party if there is no cargo on board and the arrest lasts for more than 14 days. The stated number of days should be seen as a default figure that may be negotiated by parties to fit their particular transaction and trading requirements.

Relationship with cancellation provision in the voyage charter party
Voyage charter parties invariably include a cancellation provision allowing the charterers to cancel the contract if the vessel has not arrived at the loading port by a specified date and time. The question is how the right to terminate under the Arrest Clause relates to the cancellation provision in the voyage charter party. The Arrest Clause takes into account the sequence of events where a vessel has arrived, tendered a valid NOR and is subsequently arrested. This will trigger the charterers’ right to delay loading under subclause (c)(iii), and the right to terminate after 14 days under subclause (c)(iv) if no cargo has been loaded and security has still not been provided.

If the vessel is arrested before a NOR has been tendered, it is questionable whether it is still possible to tender a valid NOR because the ship is arguably no longer ready to load. The requirements for tendering a valid NOR cannot be fulfilled and laytime will not, therefore, start to run. In this situation, subclause (c)(iii) will not be applicable but the charterers may be able to invoke the charter party cancellation provision. There is a further scenario where the vessel has arrived, tendered a valid NOR but is subsequently arrested and not released before the cancellation date in the voyage charter party. This raises the question whether the charterers can cancel immediately after the cancellation date has passed or whether they must wait for 14 days as set out in the Arrest Clause. It is therefore necessary to determine which of the two cancellation provisions will prevail. Given that the Arrest Clause has been specifically negotiated and incorporated as a rider clause into the charter party its provisions, and in particular subclause (c)(iv), are likely to prevail allowing the charterers to terminate the charter party if the vessel has not been released from the arrest after 14 days, provided that no cargo has been loaded or security put up. If the requirements for subclause (c)(iv) are not fulfilled, i.e. if cargo has been loaded or security provided, or if the cancellation provision of the charter party is held to prevail, then the charterers may cancel as soon as the cancellation date has passed.

However, in most cases a vessel’s P&I Club will provide security in the form of a P&I Club Letter of Undertaking which will enable the vessel to be released to continue its current employment without any disruption.

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, only those losses that would arise generally could be supposed to have been contemplated and not those arising from 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.