The rapid spread of COVID-19, a novel coronavirus originating from the Chinese city of Wuhan, is causing significant disruption to international trade and the shipping industry. This article considers the main legal issues affecting shipowners, charterers, traders and shipyards.
Force majeure
Nicholas Lum
Under English law (and in many other common law jurisdictions), there is no general right for parties to rely on force majeure. A party will therefore only be able to rely on force majeure if there are contractual provisions allowing it to do so and it can show that the clause is triggered.
Most sale of goods contracts, charterparties, bills of lading and shipbuilding contracts will typically contain a force majeure clause modifying the parties’ contractual obligations or excusing performance entirely in the event of force majeure. For example, in the shipbuilding context, a force majeure clause may entitle a shipyard to an extension of time for the delivery date in the event of force majeure.
Whether a party can trigger a force majeure clause will ultimately depend on the wording of the particular provision in question. At the same time, such a party will need to be able to show that:
- There has been a force majeure event (falling within the meaning of the clause);
- The inability to perform, loss or delay is due to or caused by the force majeure event;
- That any notice requirements have been satisfied.
Disputes can frequently arise when parties declare force majeure so each of these issues must be carefully considered.
Iain Clayton
A well-drafted, detailed force majeure clause may declare events such as epidemics, pandemics quarantine, entry and exit restrictions, restraint of princes, rulers or people, requirements of government authorities and certain disruption to inland and shore side transport as force majeure events. The burden will be on the party seeking to rely on the clause that the relevant force majeure event has occurred or exists. Whilst “epidemic” is the most obvious force majeure event to rely on in the present circumstances, it may also be possible to rely on other force majeure events such as “quarantine”, “entry and exit restrictions”, “restraint of princes, rulers or people” or “requirements of government authorities”, if employees, supplies or sub-contractors have been held-up by the measure imposed to stop and prevent the spread of COVID-19.
Generally, the existence of a force majeure event will not in itself be sufficient to trigger the clause. The inability to perform, loss or delay must be “due to” or “caused by” the force majeure event. This element has the greatest potential for dispute. Parties should therefore carefully analyse all the relevant facts and gather and preserve sufficient evidence to prove the chain of events leading to the inability to perform, loss or delay.
The China Council for the Promotion of International Trade (CCPIT), accredited with China’s Ministry of Commerce, has been issuing force majeure certificates (upon request) to Chinese businesses if their business with overseas counterparties has been affected by the COVID-19 outbreak. Such certificates may helpfully support a party’s position, although we would warn against undue reliance on the certificates. Full and complete evidence should be gathered and preserved so that causation can be properly established.
We have also seen reports of China National Offshore Oil Corp (CNOOC) declaring force majeure on various LNG cargoes supplied by oil majors Shell and Total due to COVID-19. The reasons / bases for the declarations are unknown but we understand that other buyers of LNG cargoes are facing difficulties operating their refineries as staff are unable to return to work. If CNOOC (or any other LNG importer) is seeking to rely on similar issues to declare force majeure, it would be well advised to act now to gather and preserve the relevant evidence which may include evidence relating to travel restrictions, quarantine orders, local operating or production restrictions, refinery operation guidelines and manuals, employment contracts, availability of alternative labour and travel arrangements.
The force majeure clause may also require a party to exert “reasonable efforts” to avoid or mitigation the effects of a force majeure event. In Seadrill Ghana Operations v Tullow Ghana Ltd [2018] EWHC 1640 (Comm), the High Court commented that all matters of relevance can be taken into account in assessing whether it is reasonable to expect a party to take certain steps to avoid a force majeure event. Parties are advised to be mindful of this requirement.
Force majeure clauses may also contain strict notice requirements. This may be directed not only at the party seeking to rely on a force majeure clause but any opposing party as well. A failure to comply with the notice provisions may result in a party being barred from relying on or challenging a declaration of force majeure.
Frustration
If the contract does not contain a force majeure clause, the doctrine of frustration may come into play. Frustration occurs where there is an event which makes the contract either impossible to perform or its performance radically different, through no fault of either party. In such circumstances, the contract is automatically terminated. Generally, frustration will be less straightforward to establish than force majeure. Frustration will usually require very serious and significant events that undermine the entire purpose of the contract. If entering into a new contract, it is suggested that care be taken to ensure that an appropriately worded force majeure clause is included to avoid such difficulties.
(Un)safe ports
Time charters usually contain a warranty which requires the charterers to nominate a safe port for the vessel. “Safety” typically concerns the physical characteristics of the port or the prevailing weather conditions but dangers to the crew in the form of political risks or diseases may also render a port unsafe. If a port is unsafe, owners may justifiably refuse to call at that port.
Strong evidence would be needed to demonstrate the substance of the risk and the unsafety of the port. If appropriate protective measures are in place, a port may still be considered safe, despite the presence of COVID-19 there. At present, it is unlikely that COVID-19 has rendered any port unsafe as the risk of infection appears to be manageable, provided that certain measures are taken. Owners may therefore face difficulties refusing to call at Chinese ports on the sole basis of unsafety. That said, the situation is moving quickly and this issue will need to be considered carefully, especially with respect to Wuhan and other nearby ports along the Yangtze River.
If a port becomes unsafe after nomination, charterers are under an obligation to nominate an alternative port. Similarly, if the vessel is at a port which becomes unsafe while the vessel is there but the danger may be avoided by leaving, the charterers may be obliged to order the vessel to depart.
Deviation and quarantine of ships
If a member of a ship’s crew is unwell or is suspected of having been infected by COVID-19, this could lead to deviation and/or quarantine.
Under a time charter, owners are at liberty to deviate for the purpose of saving life, excusing owners from their obligations to proceed with utmost dispatch and to comply with charterers’ employment orders. The vessel may also be off-hire for the entire period of the deviation which would include the putting back of the voyage. The position under a voyage charter is likely to be similar as most voyage charters allow the vessel to deviate for the purpose of saving life but no additional freight will be payable. It should be stressed, however, that the “saving life” element must be firmly established to justify the deviation. This would likely mean that the crew member must be seriously unwell and requires immediate onshore treatment.
Time and voyage charters and bills of lading commonly incorporate the Hague-Visby Rules and/or US COGSA. These both exempt owners from loss or damage caused by quarantine restrictions. Other types of restrictions may fall within the exemption for restraint of princes, rulers or people. A time charter may also contain an express exception for restraint of princes, rulers or people which charterers (as opposed to owners) may rely on. Since quarantine may itself not be an off-hire event (assuming no deviation), in certain circumstances, charterers may seek to rely on this exception to excuse themselves from paying hire.
BIMCO Infectious or Contagious Disease Clause for charterparties
Some charters may also include the BIMCO Infectious or Contagious Disease Clause. The clause was released in 2015 in response to the Ebola virus outbreak in West Africa. It comes in both time and voyage charter versions.
The clause helpfully clarifies the parties’ respective rights and obligations when a vessel encounters the outbreak or aftermath of a disease. It is therefore important to check whether the charter contains such a clause. Note, however, that the provisions of the clause will only apply if the clause is triggered and that it is only intended to be triggered in the most serious of cases and a high threshold has been set – it will only take effect upon the onset of real and significant danger to the vessel and its crew and cannot be triggered unless this threshold is met.
If entering into a new fixture, it is again suggested that the parties consider including the BIMCO Infectious or Contagious Disease Clause (in addition to an appropriately worded force majeure clause) as it clarifies some important matters and gives the parties additional options.
Minor events / issues
Less serious events / issues and the delays they cause are perhaps the most difficult to deal with. For example, a vessel may face delays due to immigration or health checks because it employs a Chinese crew but no quarantine restriction is imposed. Such an incident is unlikely to trigger any of the above provisions or principles but could nonetheless lead to disputes between the parties. Resolving such matters will invariably involve a detailed analysis of the relevant contract and facts.
Conclusion
The full impact of COVID-19 remains to be seen. At this stage, disputes are likely to focus on whether parties are entitled to excuse themselves from performance of their contractual obligations by force majeure, frustration or otherwise. As the situation develops, it is likely that the attention will turn to whether parties can hold others responsible for the losses and/or delays suffered. It is therefore important that parties consider their position now and think ahead so that these risks can be properly managed.
Please feel free to contact Nicholas Lum (Nicholas.Lum@clydeco.com) or Iain Clayton (Iain.Clayton@clydeco.com) should you have any questions arising from this article.
For more information and insights, please visit the Clyde & Co Coronavirus Information Hub
Authors:
Nicholas Lum, Partner, Shanghai
E: nicholas.lum@clydeco.com
Iain Clayton, Senior Associate, Hong Kong
E: iain.clayton@clydeco.com
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