Avoid the new BIMCO Arrest Clause

In June 2019 BIMCO released new arrest clauses. These seek to regulate the position as between Owners and Charterers when a chartered vessel is arrested by a third party. The clause has been issued in two versions, designed to apply to voyage and time charters respectively.

 

The clause profoundly and dangerously changes the carefully balanced allocation of risk as between Owners and Charterers for the consequences of arrest previously set out in the English Supreme Court’s majority judgment in The Global Santosh.[1] It does so to the detriment of Charterers. It imposes much greater obligations on Charterers than exist at English common law. The clause thereby also potentially imperils a Charterer’s liability cover.

 

Charterers should therefore strongly resist any attempt by Owners to incorporate these clauses when fixing. Charterers should also be careful to guard against the BIMCO arrest clause being “smuggled” into fixtures as part of general wording incorporating other BIMCO clauses when fixing. A sample replacement clause can be found at the end of this bulletin.

 

From a Charterer’s perspective, the principal objections to the new BIMCO arrest clauses are as follows:

 

  • The definition of “arrest” is very extensive. BIMCO’s explanatory note emphasises that the arrests to which the clause responds are not limited to contractual claims, but include all incidents of detention, seizure or restraint of a vessel as long as they have been given effect by a court or government authority.  By way of example, Charterers may be exposed to the consequences of an arrest or detention by port agents whose DA has not been paid.
  • More importantly, sub-clause (b) expands the scope of a Charterer’s common law responsibility for 3rd party arrest significantly. It re-establishes in a time charter, and imports (for the first time) into a voyage charter, the discredited “sphere of responsibility” test previously endorsed by the English Court of Appeal in The Global Santosh (but later overturned by the Supreme Court).
  • This was a standard of liability which the majority of the Supreme Court rejected as “impossible to justify” because it effectively made a Charterer responsible for all acts of 3rd party agents, servants or delegates, irrespective of whether these 3rd parties were in fact acting in accordance with the Charterer’s instructions at the time of the acts leading to the arrest.
  • The clause obliges both voyage-charterers and time-charterers to now assume the risk of third party arrest when the arrest falls within their, contractually-assumed, “sphere of responsibility”.
  • Significantly, it appears from the wording that this responsibility arises without any requirement for there to be an effective causal connection between the act leading to the third party’s arrest and the performance of the Charterer’s functions under a charter party.  For instance, an arrest prompted by a dispute with a bank under the underlying sale contract.
  • Contrary to previous authority, there is a significant risk that agreeing these clauses will therefore contractually expose a Charterer to legal responsibility vis-à-vis the Owners for all acts committed by a sub-charterer, receiver, bank, or other person or entity involved in the chain of contracts connected with the charter party which result in the arrest of the chartered vessel.
  • Equally concerning is that a Charterer will also then be required to take steps to obtain the release of the vessel, such as putting up security. This too goes far beyond the obligations imposed on a charterer at common law.
  • Sub-clause (d) makes a Charterer responsible to indemnify Owners for “losses directly arising out of the Arrest that are reasonably foreseeable.” This therefore potentially exposes Charterers to additional claims by Owners if, say, a profitable follow-on fixture is lost because there is a delay by the Charterer in putting up security to release the Vessel from arrest. Such claims could well be substantial.
  • The clauses also establish that any time actually lost as a result of an arrest by a third party falling within “the charterers’ sphere of responsibility” will count as laytime or demurrage, or as time on hire, as the case may be. This delay is naturally not covered by Charterer’s liability insurers.
  • It is entirely unclear how clause is supposed to interact with other clauses regulating the responsibility as between Owners and Charterers for third party claims – such as the NYPE Inter-Club Agreement.

 

The BIMCO arrest clauses are therefore a retrograde step, which significantly expand the scope for disputes, delays and related off-hire and demurrage claims. Whilst it may be thought to be commercially fair for Charterers to be responsible for third party arrests where these arise when the arresting party is performing a function which is properly the Charterer’s responsibility under the charter, the effect of the new BIMCO arrest clauses is to expand considerably the circumstances in which Charterers will be responsible for a third party arrest. It is tantamount to the imposition of strict responsibility.

This may in turn prejudice a Charterer’s liability cover, which may not respond in circumstances where a liability has been assumed contractually which is greater than that imposed on a Charterer at common law. Charterers are also reminded that in any event, the provision of security is strictly discretionary under the terms of their liability cover. If the BIMCO arrest clause is agreed on fixing, there can therefore be no guarantee either (i) that security will be provided on Charterer’s behalf by the Charterers Club in the event the vessel is later arrested and the clause is triggered, or (ii) that any resulting liability will fall within the scope of Charterer’s liability cover.

Charterers are therefore instead strongly advised to continue using one of the standard form rider clauses dealing with third party arrest. A recommended alternative wording to the BIMCO arrest clause is set out below:

 

“Should the vessel be captured or seized or detained or arrested by any authority or by any legal process during the currency of this Charter Party, [the payment of hire or the running of laytime or time on demurrage] (as the case may be) 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 of their servants, agents, or delegates, (but only when any such personal act or omission or default of the latter occurs as part of the performance by such servant, agent or delegate of a task delegated to them by Charterers). Notwithstanding any other provision of this Charterparty, the BIMCO arrest clause 2019, or any amendment or substitution thereof, shall never apply to this Charterparty and any purported general incorporation of the aforesaid clause shall be null and void.”

 

We thank David Semark of Quadrant Chambers, London, for his assistance with the preparation of this bulletin.

 

Should clients have any queries in relation to this bulletin then they should contact their usual contact in the Claims department in London, Dubai or Shanghai.

 

[1] [2016] 1 Lloyd’s Rep. 629.

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