Escalating tensions in the Gulf: Part III - seizure and detention, legal issues under time charters - what you need to know...

This third briefing in the series looks at some of the legal issues arising under time charters in cases of a seizure or detention by state powers.

For commentary on the practical issues arising and possible steps to reduce risks, see Part II.   

Introduction

A detention or seizure by a state authority can, amongst other things, lead to fines and delays of uncertain duration resulting in significant charterparty claims. 

The detainment of the CV STEALTH by local authorities in Venezuela from July 2015 until March 2017 resulted in unpaid hire claims totalling USD4.37 million. The seizure and forced sale of the GREEK FIGHTER by UAE authorities in 2002, resulted in a claim by Owners against their charterers for USD3.7 million due to the loss of the vessel and a further claim of USD2.5 million for unpaid hire. The STENA IMPERO seized in July by Iranian authorities remained under detention for approximately 10 weeks until her release in September.

In light of the serious implications, it is very important for the parties to understand the legal issues that might arise following a detention or seizure so that they are forearmed and consider the allocation of responsibility under the relevant charterparty from the outset. Note that certain doctrines of English law, not spelled out in the charterparty, may also be relevant. Some of the legal issues for consideration are discussed below.

1.   How will a seizure or detention affect the payment of hire?

This will depend upon the charterparty wording. Points to look out for include:

Silent clauses - a clause that does not state that a ship is to be off-hire due to a seizure or detention will generally result in the ship remaining on-hire until her release, or until such time as the contract may become frustrated.  

The Charterer has a basic obligation to pay hire and will only be relieved if they bring themselves squarely within the relevant off-hire wording.  Doubt will be resolved in favour of the Owner. This well-known position has been reemphasised in the recent piracy case of Eleni Shipping v Transgrain Shipping [2019], involving a hire claim of USD4.5m after 7 months of detention by pirates in the Arabian Sea. 

“any other cause” wording - clauses, such as clause 15 of the NYPE 1946 form,  that do not expressly refer to seizure or detention as off-hire events may include wording that potentially widens the list of named off-hire events by the use of the words “any other cause”.  These words are generally accepted as placing a ship off-hire only if the cause of the detention / seizure relates to exceptions referred to earlier in the clause, specifically those concerning the condition of the ship.  Complications will arise if, for example, the ship’s detention by a state authority is justified on spurious grounds of safety or unseaworthiness (i.e. relating to the condition of the ship), or simply based on a “suspicion” of ship related deficiencies, which turn out to be false. 

Acts or omissions by the Charterer resulting in a detention / seizure – off-hire clauses often include an “exception to the exception” so that a ship will not be off-hire if the off-hire event, such as an arrest or detention, has been brought about due to the act or omission by the Charterer. It is also a generally accepted principle of English law that a party cannot benefit from its own wrong, meaning that a ship would not normally be placed off-hire if the event resulting in delays has been caused by the Charterer. 

Detentions as a result of third party acts -   charterparties may include wording that places a vessel off-hire following a seizure or detention unless “occasioned by any personal act or omission of the Charterer or their agents…” [emphasis added].  This wording was at one time thought to draw a line between events falling on the Charterer’s side of the line, in which case the Vessel would remain on hire, and the Owner’s side of the line, so that the exception would not apply. This approach was rejected by the Supreme Court in the GLOBAL SANTOSH [2016] and the analysis is now more complex. A ship will be off-hire under the wording unless the acts resulting in the seizure or detention are done by a third party in the course of performing the Charterer’s obligations. If the Charterer has no control over third parties that become involved with the Vessel, then the mere fact a Charterer’s own sub-Charterer may be involved in the cause of the detention or seizure may not be enough to keep the ship on-hire.  

Detentions or seizure due to fortuitous events without fault of either party - as mentioned, a ship will remain on-hire unless an off-hire event specified in the charterparty applies. For example, the unamended wording at Clause 15 of the NYPE 1946 form is unlikely to place a ship off-hire in the event of a detention brought about in the tit-for-tat retaliation of two states at loggerheads. In those circumstances, the addition of the words “whatsoever” after “any other cause” may be sufficient to place a vessel off-hire. 

 Extended periods of off-hire resulting in cancellation – it is important to note that charterparties may include an automatic right to terminate the charter exercisable by the Charterer following a period of off-hire specified in the Charterparty. Wording may also extend the Charterparty period due to the off-hire. 

2. What about goods exposing a vessel to detention or seizure?

The nature, origin or destination of the goods carried may result in a ship being detained, seized or forfeited. There are various charterparty clauses that might apply, including:

• Those requiring that goods or cargoes cannot be loaded that expose the vessel to capture or seizure by rulers or government.
• Those requiring that the vessel is only employed to carry “lawful merchandise.” Goods will not be lawful merchandise if their loading amounts to a breach of local law, or if they cannot lawfully be discharged.
• Those preventing the carriage of “dangerous” cargoes may also be relevant. This is a broad category and does not just apply to physically dangerous cargoes, such as those that might cause a fire or are corrosive. It will probably also include cargoes that threaten to trigger detention or seizure of the ship.

A breach is likely to give rise to a claim in damages against the Charterer. The origin or destination of a cargo is a particular concern in this age of sanctions. Operators involved in STS operations ought to ensure they have maximum transparency on the origin or ultimate destination of cargo for fear of unwittingly breaching sanctions.

3. What about indemnities?

When triggered an indemnity operates within certain boundaries to hold the recipient of the indemnity harmless against the consequences of certain events.

Two categories of charterparty indemnities are recognised; those that are implied and those that are express. Either category may be relevant in the case of a state-backed detention, dependent on the relevant charter wording.

• Implied indemnities against loss, damage or liability incurred are generally recognised as a consequence of following the Charterer’s voyage orders. They are limited to the extent that the Charterer is not bound to indemnify the Owner for risks that the Owner is regarded as having agreed to bear, either expressly or impliedly. For example, if a ship is ordered to proceed to a port named in the charterparty and is detained or experiences delays that are well-known to occur at that port at the time the charter was entered into, then it is more likely that the indemnity will not apply (see for example The KITSA [2005], a case that dealt with hull-fouling). The well-known case of The ISLAND ARCHON [1994] is the oft cited authority for an implied indemnity, which applied in that case as a result of spurious cargo claims in Iraq, regarded as flowing from the Charterer’s orders. Implied indemnities are not automatic and depend on the facts of the case as well as the terms of the charter. 
• Express indemnities are included in some standard time charterparties, such as clause 9 of the Baltime form and clause 13(a) of the Shelltime 4 form. These indemnities effectively provide for the Owner to be indemnified for the consequences of compliance with the Charterer’s voyage orders and are similar in scope to the implied indemnity. A number of cases have stressed the need for an unbroken chain of causation between the Charterer’s orders and the loss, damage or liability. However, The KOS [2012], a Supreme Court case, established that it is not necessary to show that the Charterer’s order is the sole-effective cause of the loss, damage or liability. Rather, it is sufficient to show that it is an “effective” cause.  

4. What about cargo claims arising from delays or deterioration of the cargo? 

Obligations under the Bill of Lading - the “carrier” under the bill of lading is generally obliged to properly care and keep the cargo by virtue of Article III (2) the Hague / Hague Visby Rules, should they apply, either by contractual incorporation or mandatory application.  This means that a failure to properly care for the cargo during delays is likely to result in claims by the cargo owners.

•  Non-contractual obligations - if there is no contractual relationship between the shipowner and the owner of the cargo, then the cargo owner may be entitled to hold the Owner responsible as “bailees” in possession of the cargo, imposing a responsibility on the shipowner to properly care for the cargo.
• Defences available to a Carrier - excuses for cargo claims arising from a detention might include Article IV (g) of the Hague / Hague Visby Rules, exempting liability for loss or damage arising from “arrest or restraint of princes, rulers or people, or seizure under legal process”. Article IV (2) (q) relieves the carrier or the ship where there has been no actual fault or neglect of the carrier, its agents or servants.
• Compensation for an Owner - arguments may arise as to whether the Owner is entitled to be compensated by the cargo owner for taking steps to care for the cargo or have incurred costs following long periods of detention. This assumes there is no actionable breach on the part of the Owner.
•  Does the ICA apply? - should cargo claims arise, then it may be relevant to consider if the Inter-Club Agreement (ICA) has been incorporated into the relevant charterparty, providing for apportionment of cargo claims in certain circumstances. Clause 8 (d) includes a mop-up provision, providing that “all other cargo claims whatsoever (including claims for delay to the cargo)” are shared 50/50 between the parties. 

5.   Don't forget to mitigate

So your ship has been detained or seized and the charterparty squarely places responsibility for the consequences on one party. Can you sit back and simply bring your claim to recover your losses? Under English law, it would be foolish to do so due to the concept of mitigation. In essence, this prevents a claimant from recovering losses that could have been avoided by taking reasonable steps.

In the case of The GREEK FIGHTER [2005] the defendant Charterer argued that the Owner had, by their inactivity at procuring the release of the ship, allowed itself to be dragged down as innocent victims of an abuse of power by UAE authorities. The Vessel was confiscated and sold following allegations of contraband Iraqi oil being on board. The submission that the Owner had brought about its own loss by their unreasonable conduct was held not to displace the finding that the Charterer’s loading of unlawful cargo was the predominant cause of the loss. The case serves as a reminder that even if a party considers it is not at fault, and another party is, they may still be criticised and their claim potentially jeopardised if appropriate steps are not taken.

6.   Is your agreement frustrated due to the detention or seizure?

The doctrine of frustration may result in a charterparty automatically ending as a matter of law (and without election of either party) as a result of an event outside the control of either party. This is so in circumstances that performance is impossible or its commercial objective unattainable. 

A key requirement is that the potentially frustrating event (i.e. a long period of detention) is not dealt with in the express terms of the contract, since the legal consequences of the event are to be determined by applying the contractual provisions and not the general law.

In general terms, frustration of a contract in all but extreme cases is not easily established, even if it might appear obvious that performance is being prevented outside of either party’s control. For example, in The SEA ANGEL [2007] the vessel was detained for 108 days more than the 20 day charter period but there was still no frustration available on the facts of that case.   

Complications may arise in cases of contracts of affreightment – for example, what is the impact of a frustrating event during one voyage on the remaining shipments?

7.   Force majeure - does your contract relieve you from responsibility?

Force majeure is an express provision in a contract that may relieve the parties from performing their obligations when certain expressly specified circumstances beyond their control arise. A common example is a clause relieving the parties from responsibility in case of an “arrest or restraint of princes, rulers or people” (See for example clause 27(a) of the SHELLTIME 4 form). That clause was relied upon by the Charterer in the CV STEALTH Venezuelan detention case mentioned above in order to dispute liability for the delays. A force majeure clause may not be relied upon by a party bringing about the circumstances of the force majeure event.

8.    Unsafe port - does the seizure or detention make the port unsafe?

It is common for charterparties to include within the defined trading limits, safe port warranties so that the ship is only to be employed in trades between “safe ports and safe places.”

The classic definition of a safe port is one that can be reached, used and returned from by a particular ship, absent some abnormal occurrence and without being exposed to a danger which cannot be avoided by good seamanship and navigation (See The EASTERN CITY [1958]). ‘Danger’ can extend to political unsafety and the risk of confiscation of the ship. However, that danger must be a characteristic of the port. It must also render it “prospectively unsafe” at the time of the voyage orders. If the port is safe at the time of the voyage orders but then becomes unsafe, for example due to a change in political regime or outbreak of war after the date of the nomination, then there will not be a breach (see the EVIA (No.2)[1982]).

The fact of a delay due to local authority intervention at a port is unlikely to make a port unsafe unless there is an “inordinate delay” (see The SUSSEX OAK (1949)). Accordingly, a port with an overly zealous PSC resulting in short detentions / fines would probably not be enough.

Conclusion

The risk of seizure or detention by a state power is a feature of international shipping. A number of clauses in a charterparty are likley to be relevant, whilst the cause of the intervention will be highly relevant to the allocation of responsibility. There are English law concepts such as implied indemnities, frustration and mitigation that are not dealt with in the wording of the charterparty which will need to also be borne in mind.

Prevention is always the best medicine. However, this will not always be possible and regardless of fault it is important for a ship operator to have in place a contingency plan in case of an unexpected seizure or detention in order to find a quick cure. For some ideas in that regard see Part II in this series of briefing.  

Should you have any specific issues to discuss regarding the above, or further points of concern, please do not hesitate to contact Rory Grout ([email protected]) at Stephenson Harwood LLP or your usual contacts. 

None of the above is to be construed or relied upon as the giving of legal advice and all legal and / or practical steps and considerations mentioned should be checked with your legal advisors.  

9 October 2019