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25 Jun 2019

Escalating tensions in the Gulf – Implications for shipping

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This bulletin looks at some of the issues arising for shipowners and charterers operating in the Gulf of Oman area in light of recent developments.

Industry reaction  

A fifth of the world’s oil passes through the Straits of Hormuz (16.8 million barrels per day according to Lloyd’s List Intelligence), which is between the Persian Gulf and the Gulf of Oman, providing the only sea passage from the Persian Gulf to the open ocean and is therefore a strategically important bottle neck. 

It is therefore not surprising that the shipping and oil & gas industries are closely following recent events and fear possible future attacks. Some of the immediate aftereffects of the latest attacks include:

  • the Lloyd’s Joint War Committee, representing interests who write marine hull war business in the London market, updated its Listed Areas (i.e. high risk areas) to include the Persian or Arabian Gulf and adjacent waters, including the Gulf of Oman west of Longitude 58°E and the UAE (the “Listed Areas”);
  • War Risks insurance premiums for ships trading to those areas have increased significantly;
  • concerns about the safety of ships, her crew and cargo, have led to the increased deployment of onboard guards;
  • an increase in the cost of crude oil;
  • freight rates for tanker tonnage to the Middle East have also increased.

Considerations for Owners and Charterers

Below we consider some of the legal and practical issues arising.

a. Relevant to Owners and Charterers

  • Refusing orders to go to the Listed Areas, or alternative routing:  Subject to specific legal advice on each case, this is a high risk strategy and requires very careful thought. Shipowners are under a basic obligation imposed by the contract of carriage (i.e. bill of lading), to carry cargo by the normal and customary route to the discharge port. The Master is also under an obligation to follow Charterers’ orders as to the ship’s employment, generally as a term of a time charterparty, although this duty is not absolute. Any deviation potentially exposes Owners to a claim in damages and may also invalidate their P&I cover. An unreasonable refusal to follow Charterers’ voyage orders may also amount to a repudiatory breach of contract. To escape liability, an Owner /  Master will need to establish that they acted reasonably in the interests of safety and be prepared to justify their conduct. However, this may not be straightforward - a mere apprehension of risk is not enough and an Owner /  Master that has cold feet based on recent events and does not wish to go to the Gulf of Oman is unlikely to be in a position, per se, to simply refuse to perform the voyage or change route, absent specific charterparty wording.

    Owners considering a deviation from the customary route or refusing to perform the voyage for fear of facing a similar attack,  run a serious risk of being in breach of contract and would be well advised beforehand to take legal advice and speak to their P&I Club, as well as carefully reviewing the charterparty terms for relevant clauses.

  • Relevant charterparty clauses:  War Risks clauses for use in charterparties have been developed over a number of years in order to try and reduce the uncertainty for when an Owner or Master has the liberty to deviate or even cancel a charterparty upon the happening of certain specified War Risks perils. These are commonly defined to include acts of war, acts of terrorists, piracy, sabotage and blockades, amongst others.

    In the case of both the CONWARTIME 1993 and VOYWAR 1993 clauses, the presence of a War Risk lies in the “reasonable judgment of the Master and / Or Owners” so that a vessel is not required to proceed through any waterway or canal where, in the same reasonable judgment, it appears that the vessel, her crew or cargo “may be, or are “likely to be exposed to War Risks”. The words “may be” or “likely to be” bring into play a difficult assessment of whether or not during the intended voyage the named perils are sufficiently certain to arise, so as to trigger a right to exercise the liberties the clauses potentially allow (i.e. cancellation or deviation). Other forms of War Risks clauses, through the use of different wording, may require a higher or lower degree of probability that the named peril will arise during the voyage, or allow a wider or narrower discretion by an Owner or Master. War Risks clauses may also make provision for the allocation and responsibility for payment of any additional costs, upon the exercise of a liberty, such as choosing to discharge at an alternative port, or even allocate responsibility for payment of additional War Risks insurance premiums.

    Although not relevant on present facts, some charterparties may provide for automatic termination following an outbreak of war between specified countries.

  • War Risks, waivers and the status quo: questions may arise as to whether, should a known War Risk peril exist at the time of entering into a fixture, an Owner may be taken to have accepted the risk of that peril so that they subsequently lose the right to exercise a liberty under a War Risks clause based on the continued existence of the same peril. This may result in an Owner losing the ability to rely upon the War Risks clause to exercise a liberty unless the situation regarding the relevant peril (i.e. terrorism) had significantly worsened since the date of the fixture. This requires a careful analysis of the facts.

  • Responsibility for payment of increased War Risks insurance premiums: An Owner being asked to trade in a Listed Area will normally need to pay additional War Risk premium and potentially a Crew War Bonus. Which party, the Charterers or Owners, are obliged to pay for these will depend upon the wording of the relevant charter. For those fixtures not yet agreed, it will be a matter for negotiation. Under the CONWARTIME 1993, for example, War Risks insurance in respect of the Vessel and premiums / calls are for an Owner’s account. 

  • Impact of significantly increased War Risks premiums on the charterparty: The fact that a fixture may have become unprofitable due to a significant increase in costs, in this case a significant increase in War Risks insurance premiums, will not ordinarily give rise to a right to an Owner (or a Charterer, if the insurance is their responsibility) to cancel a fixture. The English law doctrine of “frustration” allows, in some very limited instances, for a change of circumstances to give rise to a right for the parties to be relieved from performance (unless those circumstances have been brought about by one of the parties that is seeking not to perform). However, a change in the economic burdens associated with performance will not ordinarily relieve a party from its obligation to perform, even if costs have dramatically increased. 

  • Ensuring access to the best available and most up to date information: it is in the interests of both parties to stay up to date and closely monitor the latest developments and events in the Middle East, ensuring that the risks of further attacks are assessed and understood within the contractual framework agreed.

b. Relevant to Owners

  • Effect on existing loans: Owners would be well advised to check their loan documentation to ensure these are not impacted by a voyage to a Listed Area. Typically, loan documentation will impose requirements for a borrower to ensure that they have in place additional War Risks insurance, covering areas of designated high risk and / or require that they do not go into such an area without first consulting and obtaining the necessary approval from their insurers. A failure to do so may be an Event of Default under the loan agreement.

  • Practical steps for Owners to try to minimise risks of an attack: Owners travelling to the Listed Areas would be well advised to undertake a thorough ship security assessment, in accordance with the ISPS Code, to ensure that it has an up to date ship security plan, in coordination with specialist security agencies. This may involve the deployment of additional guards, the cost and responsibility of which (including embarkation and disembarkation) will need to be carefully thought about and considered in relation to the charterparty terms and allocation of responsibilities. Note that some sources caution against the use of armed guards that may run the risk of a misunderstanding with state controlled patrol boats. Further steps aimed at reducing the risks of an attack might include transiting high risk areas at full speed (although the impact on costs and responsibility for additional fuel costs will again need to be considered) and during day light hours. Lookouts maintaining extra vigilance is obviously recommended, especially for operators of tankers or gas carriers.

  • Trading areas: During fixture negotiations, Owners should have careful regard to the trading areas named in a time charterparty to ensure that these reflect an Owner’s perception of risks and insurance cover available.

c. Relevant to Charterers

  • Implied indemnities: time charterers will generally be obliged to indemnify Owners for the consequences of their voyage orders. If these orders involve travelling to an area where the ship is sabotaged, then a Charterer may potentially be held liable for any consequences arising.

In the event of an incident, detentions or delays might also arise, giving rise to further issues of demurrage and off-hire disputes.

Issues under sales contracts

Issues will also arise from a sales contract perspective. For example, a CIF/CFR seller will wish to consider whether it can pass on to buyers any additional War Risks premiums arising under the charterparty. Also, a CIF buyer will need to consider whether the cargo policy purchased by the seller covers them in the event of an incident. These and no doubt other issues require careful thought in light of recent events.

We are continuing to monitor developments as they unfold and shall provide a further update in due course.

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Simon Moore

Simon Moore
Partner

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Rory Grout

Rory Grout
Associate

T:  +44 20 7809 2668 M:  +44 20 7809 2668 Email Rory | Vcard Office:  London