Executive Summary
Vessel chartering in Nigeria carries significant hidden risks because a ship can be arrested in rem for debts or claims completely unknown to the charterer. These risks escalate when vessels are hired through agents who lack ownership, authority, or financial depth—leaving charterers exposed when encumbrances, litigation, or regulatory breaches surface mid-operation.
This article sets out a concise, practical roadmap for preventing vessel arrests and operational disruption. It highlights the essential due diligence steps—owner verification, registry and court searches, CAC checks, and P&I confirmation—and the contractual protections charterers must insist on, including tripartite CPAs, owner warranties, LOUs, agency disclosure, co-assured insurance status, escrow-based payments, and enforceable indemnities.
With disciplined due diligence and well-structured charter-party agreements, charterers can significantly reduce legal, financial, and reputational exposure in Nigeria’s maritime environment.
1. The Hidden Depths of Vessel Risk
Under Nigerian law, a vessel is treated as a separate legal entity that can be sued in rem, independently of its owner. Sections 2 and 5 of the Admiralty Jurisdiction Act (AJA) 1991 empower claimants to pursue the ship itself for maritime debts, even if the underlying debt arises from the owner’s financing arrangements. The Supreme Court in Owners of the M.V. Arabella v. NAIC affirmed that such claims attach to the vessel and survive changes in ownership or charter. Section 5(4) of the AJA further allows claims to extend to sister vessels owned by the same person or entity. The admiralty principle that a vessel is a juristic entity capable of being arrested in rem was also reaffirmed in The M.V. Lupex v. N.O.C.C., where the Supreme Court emphasized that maritime liens attach to the vessel itself and follow the ship irrespective of changes in possession or contractual arrangements.
In one case, a vessel that appeared “clean” on registry records was arrested after its owning company had granted an all-assets debenture to a financial institution, which by implication covered the vessel. The lender enforced its security interest under Sections 197 and 198 of the Companies and Allied Matters Act 2020 (CAMA) and Section 5(4) of AJA, leading to the vessel’s arrest at the instance of the creditor.
2. The Agent Problem: When You Hire Through Intermediaries
The common practice in Nigeria’s oil and gas industry is to hire vessels via licensed agents or logistics intermediaries rather than the registered owners. This commercial reality introduces layered risks:
• The Charter-Party Agreement (CPA) is often executed between the oil company (the Charterer/Hirer) and the agent.
• The vessel owner is neither a signatory nor a guarantor of the charter arrangement, yet the vessel is deployed.
• Warranties, indemnities, and termination rights under the CPA bind only the agent—often a thinly capitalized entity.
• The vessel owner enjoys the benefit of hire payments without assuming corresponding legal obligations.
When things go wrong—for example, when a creditor moves to arrest the ship—the charterer will discover it has no contractual leverage against the vessel owner. For arrest purposes, the law generally recognizes the vessel’s beneficial owner, rather than a mere agent or operator, although in cases of a demise charter, the charterer may also be treated as having sufficient control for in-rem (against the ship/vessel) enforcement.
3. The Ideal Safeguard: Tripartite Charter-Party Agreements
The most robust protection remains a tripartite CPA where the vessel owner, vessel agent, and charterer are all parties.
Under this structure:
i. The Vessel Owner warrants title, compliance, and absence of encumbrances.
ii. The vessel agent manages operations and logistics.
iii. The charterer gains direct contractual recourse against both.
Tripartite CPAs embody international best practice, which sets out standard procedures for vessel inspection, delivery, and acceptance, thereby providing a clear framework for allocating legal responsibility if the vessel is arrested or found defective.
However, vessel owners sometimes refuse to be a party to the CPA. When does that happen? The charterer is not without options.
4. Dealing with a Vessel Owner Who Opts Out of the CPA: Practical Alternatives
When a vessel owner insists on staying off the CPA, a combination of legal and commercial safeguards can achieve near-equivalent protection:
(a) Vessel Owner’s Letter of Undertaking (LOU).
The Charterer may require the Vessel Owner to issue an LOU, also called a side letter, to the charterer, confirming vessel ownership, authorizing the agent, and warranting that the vessel is free of encumbrances or pending claims. Under Order 8, Rule 2(2) of the Admiralty Jurisdiction Procedure Rules 2023, such security may take the form of a Protection & Indemnity (P&I) Club LOU from a member of the International Group of P&I Clubs, a bank guarantee from a Nigerian bank, or a bond from a reputable Nigerian insurance company. While widely accepted in maritime practice and enforceable as a contractual undertaking, LOUs remain contractual instruments, not proprietary rights over the vessel, so charterers and hirers should carefully review their terms before relying on them.
(b) Agency Disclosure and Indemnity Clause
The CPA should clearly state that the agent acts “as agent for a disclosed principal (the vessel owner)” and indemnify the charterer against loss from any misrepresentation. As a general rule, a contract made by an agent acting within the scope of his authority for his disclosed principal, in law, is the contract of the principal, and the principal, not the agent, is the person to sue or be sued upon the contract.
(c) Owner’s Power of Attorney or Authority Letter
A vessel owner may authorize an agent to negotiate and execute a Charter Party Agreement (CPA) via a Power of Attorney (POA), which should be notarized and deposited with the charterer before hire. Without proper authority, the CPA may not bind the owner. Nigerian law, including Section 16 of the AJA, recognizes agent authority and liability, highlighting the importance of verifying the scope of the POA.
(d) Insurance and Co-Assured Status
The charterer should insist on being noted as co-assured or loss payee under the vessel’s Protection & Indemnity (P&I) cover to ensure direct protection and access to insurance proceeds in the event of liabilities, accidents, or cargo loss arising during the charter. Thus, charterers should ensure they are designated as additional insureds under Rule 18 of the International Group of P&I Clubs Rules 2024 whenever they assume potential operational liabilities, to secure direct coverage under the vessel’s P&I policy. This ensures direct recovery rights if the vessel is detained or damaged.
(e) Escrow or Conditional Payment
Hire payments should be routed through an escrow account and released only upon documentary confirmation that the vessel holds a valid registry certificate, class certificate, P&I policy, or such other conditions or requirements as the parties may agree, ensuring the charterer’s risk is mitigated while guaranteeing the owner receives payment once compliance is verified. Such escrow arrangements are recognized under Nigerian contract law as conditional payment instruments.
(f) Performance Bonds or Bank Guarantees
The charterer should require the agent to post a performance bond or bank guarantee covering defaults or arrests traceable to the owner.
Each of these mechanisms—alone or in combination—bridges the liability gap in vessel hire arrangements or transactions between the charterer and the vessel’s agent when the owner declines direct participation.
5. Due Diligence Must Extend Beyond Vessel Records: Court and Registry Checks
Even with perfect paperwork, hidden litigation risks remain. While Section 251(1)(g) of the Constitution and Section 1 of the Admiralty Jurisdiction Act grant exclusive admiralty jurisdiction to the Federal High Court, suits are sometimes filed in State High Courts, generating disruptive injunctions before being struck out. In Bronwen Energy Trading Ltd v. Oan Overseas Agency Nigeria Ltd, the Court of Appeal warned that even interim orders from courts lacking proper admiralty jurisdiction may create operational disruption before they are set aside, reinforcing the need for proactive registry checks across jurisdictions.
The recent arrest of a crude-oil vessel by the Federal High Court in Port Harcourt under an ex parte motion (FHC/PH/CS/287/2024) (reported in Independent, Jan 12, 2025) underscores that checking official vessel ownership and encumbrance records alone is insufficient. Charterers and hirers must extend due diligence to court registries, including Federal and State High Courts with admiralty jurisdiction, corporate filings, and foreign-flag registries, to uncover pending claims or security filings that could trigger vessel arrests, blocked cargo, or operational delays, safeguarding both financial and reputational interests.
6. Translating Findings into Contractual Protection
Every due diligence result should feed into the CPA through clauses that allocate risk transparently: Key provisions include:
Owner Warranties: The vessel and ownership are free from arrests, liens, or encumbrances.
Disclosure Obligations: Immediate notice of new litigation, claims, or charges.
Indemnities: The owner and agent indemnify the charterer for losses from undisclosed liabilities, including legal costs and cargo-related damages.
Termination Rights: Triggered by vessel arrest, change of ownership, or regulatory breaches.
Audit & Monitoring: Periodic verification of compliance during the hire.
Jurisdiction Clause: Electing the Federal High Court (Admiralty Division) to preempt forum shopping and ensure enforceability.
Together, comprehensive due diligence and carefully drafted CPA clauses provide charterers and hirers with practical safeguards, minimizing operational disruption, financial loss, and reputational risk.
6. Closing Reflection
Every vessel charter is both a commercial voyage and a legal odyssey. The ocean may be unpredictable, but your compliance process must remain steady, deliberate, and unwavering. From years of working with vessel owners, charterers, P&I Clubs, and marine logistics operators, we have seen that most vessel-related disputes stem from simple but costly oversights—unclear authority, hidden beneficial ownership, unregistered corporate charges, and a dangerous reliance on agents with no financial depth.
A charterer who undertakes multilayered due diligence—offshore and onshore registry checks, court searches, CAC investigations, P&I verification, and strong contractual backstopping—rarely faces vessel arrest or cargo detention. Those who neglect these steps often learn, too late, that the calm before the storm was merely an illusion drawn on paper.
Written by Emeka Ogenyi (Lead Partner – ThinkField Law), Email: meogenyi@gmail.com, https://www.linkedin.com/in/
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About ThinkField Law
At ThinkField Law, we help clients in Nigeria’s energy and maritime sectors by providing due diligence, risk allocation, and dispute resolution services. We guide clients in developing, drafting, and reviewing charterparty agreements (CPAs) and related contracts, ensuring clear allocation of liability, effective risk mitigation, and full regulatory compliance. We also assist clients in navigating complex vessel hire and cargo operations, managing disputes, and enforcing their rights efficiently.
As a boutique, full-service law firm, we provide strategic legal counsel across corporate and commercial law, dispute resolution, regulatory compliance, energy, real estate, and emerging sectors such as fintech and intellectual property. We serve as trusted advisors to business leaders, investors, and innovators, delivering discreet, high-level solutions grounded in deep sector expertise and uncompromising legal excellence.
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USA – 801 The Heights Drive, Fort Worth, Texas 76112, +234 701 401 9208 | Info.thinkfieldlaw@gmail.com, https://www.linkedin.com/in/
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Disclaimer:
This article is for general informational purposes only and should not be construed as legal advice. Entities are advised to seek specific legal counsel before acting on any information contained herein.
