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Supreme Court clarifies scope of agency under charterparty

News / / Supreme Court clarifies scope of agency under charterparty

NYK Bulkship (Atlantic) NV v. Cargill International SA (Global Santosh) [2016] UKSC 20

The Supreme Court has recently handed down a significant judgment clarifying vicarious performance under a charterparty and the scope of responsibility of charterers’ agents.

The Global Santosh was time chartered on terms that the vessel would be off-hire during any period of arrest or detention not “occasioned by any personal act or omission or default of the Charterers or their agents”. The cargo receivers arrested the vessel following a dispute with a sub-sub-charterer. The dispute had no connection to the Owners. Nonetheless, the Supreme Court held that the vessel was off-hire during the relevant time because the arrest was not occasioned by the time charterers’ “agents” within the meaning of the above proviso. 

The background facts

Cargill time chartered the vessel from the head owners, NYK, for one time charter trip for the shipment of cement from Sweden to West Africa. Cargill subsequently voyage chartered the vessel to Sigma, who sub-sub-chartered to Transclear. Under a separate sale contract, Transclear agreed to sell six shipments of cement to IBG on C&FFO terms, meaning that, as between Transclear and IBG, IBG were responsible for unloading. 

Clause 49 of the time charter between NYK and Cargill provided as follows:

“Should the vessel be captured or seizured [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. Any extra expenses incurred by and/or during the above capture or seizure or detention or arrest shall be for Owners’ account.”

Under Clause 8, NYK undertook that the master would be “under the orders and directions of [Cargill] as regards employment and agency”, and Cargill undertook to “perform all cargo handling at their expense”.

At the discharge port, the vessel was held at anchor for two months due to congestion, partly caused by IBG’s broken unloader. By not discharging, IBG were in breach of the sale contract with Transclear. Transclear obtained an arrest order to secure their claim for demurrage. What should have been arrested was the cargo but, by mistake, the order provided for the arrest of the vessel. Eventually, Transclear and IBG resolved their differences and the vessel was released after 29 days.

Cargill withheld hire from NYK for the period of arrest on the grounds that the vessel was off-hire. NYK disagreed and relied on the proviso in clause 49: “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”.

Tribunal and lower court decisions

The majority arbitrators found for Cargill and held that the vessel was off-hire during the relevant period. In their view, neither Transclear nor IBG were acting as Cargill’s agents in respect of the arrest and detention of the vessel.

On appeal, the Commercial Court held that Cargill were responsible for any “act or omission or default in the course of the performance by the delegate of the delegated task”. The Court agreed with the arbitrators that Transclear were not discharging any obligation on behalf of Cargill but held that IBG were doing so. Their failure to unload and to pay the resultant demurrage were omissions in the course of their vicarious performance of Cargill’s obligation to discharge the cargo. The matter was remitted to the arbitrators to decide whether the failure to pay demurrage was the cause of the arrest.

The Court of Appeal upheld this construction of the proviso, but for different reasons. It disagreed with the Commercial Court that there was a requirement that the act or omission causing the delay must occur in the course of performance of the delegated task. Instead, the Court of Appeal took a wider view of the scope of “agency”. Citing the distinction highlighted in the Doric Pride [2006] All ER (Comm) 188 between matters within owners’ and charterers’ spheres of responsibility, it held that the delay caused to the vessel in this case fell within Cargill’s sphere of responsibility because NYK were not involved in the dispute between Transclear and IBG, which did not arise out of anything that the ship was alleged to have done or failed to do, but related only to IBG’s alleged failure to pay demurrage under a contract with which NYK were not concerned. The Court of Appeal agreed with the Commercial Court that the issue of causation should be remitted to the arbitrators.

The Supreme Court decision

The Supreme Court, by a majority of four to one, rejected the Court of Appeal’s reliance on the parties’ “spheres of responsibility”. To adopt the view taken by the Court of Appeal would unjustifiably extend Cargill’s delegation to everything that arises from its trading arrangements, so that “anything that the sub-charterers may choose to do which results in the arrest of the vessel, becomes the responsibility of the time charterer if the occasion for doing it would not have arisen but for their having come in at the tail end of a chain of contracts which the time charterer initiated”.

Rather, in the majority Supreme Court’s view, there must be some connection between the occasion for the arrest and the function which Transclear or IBG were performing as “agent” of Cargill. The correct question was whether IBG, by omitting to discharge on time, were vicariously exercising rights or vicariously infringing obligations under the time charter between NYK and Cargill.

The material obligation in question was that of Cargill to perform cargo handling at their expense. This did not oblige them to procure the vessel to be discharged at any particular time. It was correct that any actual unloading carried out by IBG would have been a vicarious performance of Cargill’s cargo handling obligation. However, what led to the arrest was the absence of cargo handling operations before the date agreed in the sale contract. During that time, the vessel was at anchor and IBG were doing nothing on behalf of Cargill: “Their inactivity could be relevant to the question of responsibility posed by clause 49 only if it amounted to the vicarious breach of some obligation of Cargill under the time charter, which it did not." The scope of IBG’s agency did not extend to the material inactivity. 

The Supreme Court effectively, therefore, restored the decision of the majority arbitrators: the vessel was off-hire during the arrest since the arrest was not caused by the act, omission or default of Cargill or their agents.

Lord Clarke, dissenting, took a wider view of the material time charter clauses. He considered that Cargill were responsible for discharge, which they delegated to IBG and Transclear. Since the arrest was occasioned by matters relating to discharge, there was a sufficient connection such as to make Cargill responsible.

Comment

The Supreme Court decision suggests that the “sphere of responsibility” test looks set to become less pervasive. It remains important, however, for owners and charterers entering into charterparties to think carefully how they word their off-hire clauses to make it clear where they intend the risk to lie.

In reviewing past authorities on the definition of “agents” in shipping contracts, the Supreme Court has taken the opportunity to clarify the position. The judgment specifically confirms that a sub-charter is an agreement under which benefits and burdens are enjoyed and imposed vicariously. The term “agents” is not to be construed in the strict legal sense, but as a reference to parties down the chain enjoying rights derived from the time charterers. 

If you have any queries about this article please contact Carl walker.

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