With force majeure already being declared, shipping needs to face up to implications of the virus’ outbreak
With China in virtual lockdown and the rest of the world on high alert for identifying and reacting quickly to signs of novel coronavirus, shipping faces disruption on an unprecedented scale.
First reported in late December 2019, the virus originated from the inland city of Wuhan, the capital of the Hubei province, China, but quickly spread nationally and then internationally, prompting the World Health Organisation to declare the outbreak as a Public Health Emergency of International Concern (PHEIC) on January 30.
Ince’s Wai Yue Loh, Kimarie Cheang and Cindy Wang expect a “significant degree” of business interruption from the coronavirus and report that they are already starting to see declarations of force majeure from Chinese entities involved in international shipping and trade.
Hill Dickinson’s Beth Bradley and John Agapitos have warned the shipping industry to prepare to face the same issues that arose in previous severe disease outbreaks, such as with other coronaviruses or Ebola, should the issue escalate. While Reed Smith’s shipping lawyers say that it is reasonable to anticipate delays as a consequence of the coronavirus outbreak which may impact charterparties, bills of lading, shipbuilding contracts, and ship sale and purchase agreements, among other documents.
A number of important contractual issues need to be considered by ship operators, charterers and brokers. For example, how safe is the planned load or discharge port? Hill Dickinson points out that under a charterparty, charterers are obliged to nominate a safe port and that risks to the crew may render a port unsafe even where there is no risk of real damage to the ship. “Consequently, a contagious disease may legally make a port unsafe,” says Hill Dickinson. However, the lawyer adds that at present the virus is not at a stage where it may render a port unsafe, and that the severity of the outbreak would need to escalate significantly before owners could reasonably refuse to call at scheduled or nominated ports on the basis of the ports being unsafe.
Ince acknowledges that the ‘safe port’ position will have to be assessed on a case-by-case basis, adding that while the WHO has declared the outbreak as a PHEIC, it has at the same time recommended that no travel or trade restriction be imposed.
“Determining the ‘unsafety’ of an affected port may prove difficult and will depend on the facts, bearing in mind the evolving situation. If an owner refuses to follow a charterer’s order without sufficient grounds, the charterer may in principle be entitled to claim damages and potentially even to terminate the contract if the owner’s conduct can be said to be repudiatory or renunciatory,” said Ince.
Clyde adds that 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.”
A second consideration relates to the quarantine and how that will impact on off-hire, laytime and demurrage. A recent case of the new coronavirus identified in Singapore involved a person who had served on board a cargo vessel. The vessel was isolated at anchorage and went through a process of disinfection. “If a member of the crew is unwell or is suspected of carrying the virus, this could lead to deviation and/or quarantine,” notes Clyde.
For vessels on time charter, the owner will be responsible for quarantining any crew member that becomes infected. Where the illness results from following a charterer’s order then the owner may be able to claim any costs of repatriation, medical expenses and related costs from the charterer, but this will depend on the terms of the charter and the allocation of risk that they provide for. The position under a voyage charter is anticipated to be similar to that in relation to deviation for the purpose of saving life.
However, Ince points out a wrinkle in the situation where a ship arrives in port and the symptoms of the virus are discovered on board at that time or before arrival at the port and/or quarantine restrictions are in place affecting whether the ship will be able to obtain free pratique. “This may affect whether valid notice of readiness (NOR) can be tendered if it prevents loading or discharging as the case may be,” said Ince. “Laytime will not start to run until such time as a valid NOR can be tendered and an owner will bear the risk of such delay. The quarantine of crew will also usually be an exception to laytime running.”
Both time and voyage charters generally incorporate the Hague-Visby Rules and/or US COGSA, which exempt owners from loss or damage caused by quarantine restrictions.
A third consideration is what the declaration of force majeure means in practical terms. Ince believes that given the recent declaration by the WHO, force majeure provisions are likely to be “increasingly relied upon and invoked by an affected party”. Indeed, the China Council for the Promotion of International Trade (CCPIT) has announced that it will offer “force majeure certificates” to businesses in China affected by the outbreak.
However, whether a party can successfully invoke force majeure and/or rely on the CCPIT certificates, will depend on the governing law of the contract and the terms of the relevant clause, according to Ince.
“As a matter of English law, force majeure is a creature of contract,” it says. “Generally, a party who seeks to rely on a force majeure clause bears the burden of demonstrating the following:
- It could not perform its obligations due to the relevant event.
- The inability to perform was beyond its control.
- There were no reasonable steps the party could have taken to avoid the event or its consequences.”
Hill Dickinson believes that it unlikely that any given situation will fall within the scope of a force majeure clause unless the wording of the clause is quite broadly drafted.
“However, if the outbreak escalates in the future and/or travel bans are imposed, questions of whether it amounts to a force majeure event may come to the fore.”
If the contract or charter does not contain a force majeure clause, the doctrine of frustration may come into play. Clyde says: “Frustration occurs where there is an event which makes the contract or charter either impossible to perform or its performance radically different, through no fault of either party. In those circumstances, the contract or charter is automatically terminated.”
That said, frustration is less straightforward to establish and will require very serious and significant events to be triggered, for example, a lengthy, indefinite delay.
In summary, Ince’s Loh, Cheang and Wang “strongly recommend” that existing contracts be reviewed to identify any potential risks and exposures arising from the developing situation and that any new contracts entered into should incorporate express and clearly drafted provisions to allocate potential risks as appropriate between the parties concerned.
Inclusion of and/or reference to the BIMCO Infectious or Contagious Disease Clause in charterparties could help to clarify the parties’ respective rights and obligations when a vessel encounters the outbreak or aftermath of a disease, adds Clyde’s Lum and Clayton. However, that clause is only intended to be triggered in the most serious of cases and will only take effect upon the onset of extreme illness.