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31 Jan 2020

Novel Coronavirus, shipping and international trade

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While little is known about the novel coronavirus, what is clear is that the global shipping industry will inevitably be affected as the virus spreads globally at alarming speed.   It has been reported that cruise holidays have been affected and that cases of suspected novel coronavirus have been reported in commercial crew.  The World Health Organisation has now declared the outbreak a Public Health Emergency of International Concern.

We are already instructed in a matter where the suspension of a sales contract has resulted in the premature termination of shipping contracts.  We are dealing with disputes over drafting of loan documentation to reflect the current situation, and we are seeing notices of force majeure that have been precipitated by the outbreak.

The shipping and international trade industries should ready themselves for potential disputes arising from the impact of the virus.  These will not be limited to delays or breaches caused by quarantines and port closures, but will also have an impact on sale contracts, trade finance arrangements, shipbuilding, offshore construction projects, ship financing and leasing, and insurance.

Force majeure

Unlike civil law systems, under the common law there is no general definition of “force majeure”.  It is a concept purely of contract.  Therefore, force majeure has only the meaning given to it by the contract which governs the relationship between the parties.  If the specific event, or one very like it, is not mentioned, it cannot be a force majeure event.  It is very important therefore when considering whether to declare force majeure or what to do with a force majeure notice relating to novel coronavirus that the specific requirements of the contract are adhered to.  There is no “one size fits all”.

In addition, it is important to consider the effects of the specific force majeure clause.  Some clauses operate to suspend performance until the end of the force majeure event (e.g. GATFA standard “prevention of shipment” clause), others operate to extend time for performance (payment or delivery) and others will operate to bring the contract to an end.  Exercising the wrong option will itself be a breach of contract.

Further, parties to contracts should be aware that a force majeure in one contract, such as an agreement for the sale of goods, will not necessarily be a force majeure in another connected or related contract – such as a shipping or finance contract.  This has the potential to cause an uneven allocation of loss in a chain of international trade contracts.

In considering whether or not novel coronavirus constitutes a force majeure event careful consideration will need to be given to the cause of the delay or interruption in performance.  For instance, the clause may not include “epidemics” (and of course there is a question whether the current situation will amount to an epidemic in law).  However, the prevention of performance may arise because a governmental body has prevented performance (i.e. a declaration of port closure by a central government).  However, actions by private corporations, such as banks, even if taken for the safety of employees, may not be sufficient to amount to a force majeure.  All of this will turn on the wording of the relevant force majeure or exceptions clause.

Although many contracts for the carriage of goods do not contain specific force majeure clauses, it is important to remember that there are exceptions to liability set out in the Hague and Hague-Visby Rules which may apply.

Chartering

In the context of chartering, whether time or voyage charters, there are a number of ways in which novel coronavirus may affect contractual obligations:

Seaworthiness

A vessel may become unfit to receive and carry the cargo it is chartered for after calling at an infected area.   In MatianaCiampa v British India Steam Navigation Company, Limited [1915] 2 K.B. 774 (“The Matiana”), a vessel carrying lemons underwent compulsory sulphur fumigation at a French port after calling at a plague port, which caused the lemons to rot.  The vessel was held unseaworthy.  Similarly, if a vessel is delayed due to quarantine regulations which in turn cause damage to  cargo, the vessel may be considered unseaworthy.

Safe port warranties

Charterparties often contain warranties, express or implied, given by charterers to order vessels to ports that are safe.  A port will not be safe unless in the relevant period of time, the particular ship can reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship.  If a particular port is not safe, then owners may be able to refuse to comply with the charterers’ order.  This can be a complex issue because whether a port is safe is a question of fact and is likely to depend on medical evidence such as the likelihood of the crew being exposed to the coronavirus and the fatality rate.

Off-hire

Depending on the wording of the time charter, delays or deviations caused by quarantine may place the vessel off-hire.  For instance, clause 15 of the NYPE 1946 form provides that no hire is payable for the time lost caused by “deficiency of men […] or by any other cause, preventing the full working of the vessel”.   External interference (as opposed to the inherent physical inefficiency of the vessel) that prevents the full working of a vessel, e.g. fumigation required by a port health authority, may suffice.  It may therefore be possible to argue that quarantine required as a result of a large number of infected crew members is a “deficiency of men” and thus an off-hire event.  Owners may nonetheless argue that the delay is a natural and inevitable result of complying with charterers’ order and the vessel should remain on-hire.

Laytime

In the context of voyage charter, some charters contain express quarantine clauses.  For example, the Asbatankvoy Charter expressly excludes charterers from liability caused by delay resulting from quarantine declared after charterers have given owners orders, meaning that that owners will not be entitled to demurrage in respect of such delay.

In other charters, the issue of “free pratique” may arise if the wording requires the vessel to be in “free pratique” before laytime can commence.  Owners will then not be able to tender a notice of readiness until free pratique is obtained.  As a result, owners will be bound to bear the costs of obtaining for the vessel a free pratique if the vessel has called at an infected area, or if certain crew members are suspected of infection, so that the notice of readiness can validly be tendered.

Crew

We have noted from news reports that some ships’ crew have been identified as infected with novel coronavirus.  This will inevitably cause delays.  In addition, shipowners may not wish to carry out crew changeovers in affected areas.

It is the responsibility of the employer to take full precautions to protect their crew (a duty of care), by overseeing hygiene, reporting any symptoms and limiting crew’s exposure to the virus.

Generally speaking, P&I cover will indemnify owners for losses arising from crew death or illness, crew repatriation and substitution, quarantine fines and cargo losses.  However, it will not usually cover commercial losses arising from deviation or lost time or lost hire.

Carriage of goods

In the event that a vessel or cargo is quarantined, articles IV rule 2(g) and (h) of the Hague or Hague Visby Rules may apply.  These provisions operate to exempt carriers from any loss or damage arising or resulting from “restraint of princes” and quarantine restrictions, although the former may be wide enough to cover the latter.

If it becomes necessary to deviate, say, to avoid confiscation or to repatriate crew members that have fallen ill, owners may also seek to rely on article IV rule 4 of the Hague or Hague Visby Rules which provides that “any deviation in saving or attempting to save life or property at sea or any reasonable deviation shall not be deemed to be an infringement or breach of these rules or of the contract of carriage, and the carrier shall not be liable for any loss or damage resulting therefrom”.  The deviation should not be greater than reasonably necessary in the circumstances and is at the owners’ own expense.

Ship finance

Lenders and borrowers alike may be concerned about the effect of the novel coronavirus on the earning capacity of vessels.  If vessels are servicing long-term sales contracts which are affected by a force majeure, the financial impact could be significant.

Where a lending or leasing arrangement involves a bareboat charter with a “hell or high water” payment clause, the borrower/charterer will be required to pay hire whether or not the ship is earning.  This may place the borrower/charterer in financial difficulties.  While the effect may not be immediate, if the outbreak continues for a significant period of time, the borrower may attempt to redeliver the vessel under the bareboat charter, or may become insolvent.  This could leave the financial institution in a situation where it becomes an operational shipowner and is thereby exposed to the general commercial shipping market, including potential liabilities and complexities mentioned above.

In relation to current projects that are being negotiated, there will be an opportunity to include bespoke drafting to clarify uncertainties that have presented themselves because of the outbreak.  In particular there is a large degree of uncertainty at present surrounding the operation of businesses in the People’s Republic of China (“P.R.C”) – for example it is not possible to predict when banks and financial institutions will be operational.  Matters such as payment terms and the definition of what comprises a “banking day” under the contract may need to be considered.

Shipbuilding and offshore construction

Most shipbuilding/offshore construction contracts contain provisions regarding force majeure.  We understand that some shipyards in the P.R.C are already issuing force majeure notices to buyers.  Careful examination of the force majeure clause is necessary to ensure that such notices are properly tendered, and can in fact validly be given in the circumstances.

We are already dealing with issues arising from the issue of force majeure notices in respect of the supply items with long lead times intended to have been produced in the P.R.C.  Some issues to consider are whether or not the situation properly fits within the scope of the force majeure provisions, and whether or not the resultant disruption of supply is sufficient to affect the critical path of the building or construction project.  The purpose of these notices is to allow any delay to the project to be considered a “permissible delay” and thereby extend the delivery date.

Clause 34(a)(i) of NEWBUILDCON states that ”government interference” and ”epidemics” constitute force majeure events.  Should the authorities intervene in the progress of a ship building project in an attempt to limit the spread of the novel coronavirus, or should the work force be depleted due to infection, further knock on effects could result including the possibility that the buyer could obtain the right to terminate the contract in accordance with clause 39(a)(iii)(1).

International sale of goods and trade finance

Buyers, sellers and their financing banks may be exposed to additional risks arising from or in relation to the novel coronavirus.

As mentioned above, there may be legitimate force majeure considerations.  However, it is also possible that force majeure has been invoked invalidly under the relevant sales contract.

In addition, there may be other indirect effects on the international trade industry:

  • Carriers may be prevented from entering certain ports as they may be closed or free pratique may not be granted;
  • If sale contracts are unable to be performed, security provided to financiers may be jeopardised;
  • Letters of credit may have been issued but the underlying transaction may be delayed beyond the validity of the documentary credit.  This may give rise to a situation where bills of lading or other documents may need to be amended to meet the requirements of the documentary credit.  Trade finance banks will need to be additionally vigilant in this regard;
  • Prices of commodities exported into or out of affected areas may fluctuate wildly. These variations may prompt parties to re-evaluate their existing contractual arrangements, and consider whether they wish to continue to be bound to their obligations.

Insurance

As noted above, P&I cover will cover a number of losses relevant to the novel coronavirus outbreak.  The cover may extend to delay related to cargo loss which is associated with the exercise of a force majeure clause.  In a situation involving quarantine or port closure issues, there is potential for charterparty disputes to arise – in such circumstances the legal costs of defending such claims may be covered by Defence insurance.

As to other forms of insurance, many policies contain exclusions for global pandemics.  This is principally because insurers are unable to calculate the risks and costs of such an event.

Standard business interruption insurance cover is usually only triggered by physical damage to property or equipment.  The fact that a virus has emerged does not necessarily mean that there will be physical damage.  Some businesses may have purchased contingent business interruption cover.  This will engage only if the specific circumstances described in the policy are met.  As with force majeure, careful attention to the precise wording of the policy will be required.

Further information

As the situation with the novel coronavirus is a developing one, readers are encouraged to seek the latest information from the WHO (www.who.int) and the US Center for Disease Control (www.cdc.gov).

Conclusion

There are many unknowns at present: how quickly will the novel coronavirus will spread; to which areas will it spread; how deadly is the virus;  what will be the reactions of governments, shippers, charterers, traders, banks and port authorities.  The anxiety surrounding the spread of the virus and the uncertainty of how authorities will respond will no doubt lead to a number of stakeholders taking action to protect their position or to gain a commercial advantage.  Extra diligence will be required to protect contractual rights and ensure that the bargains that parties have entered into are upheld.

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KEY CONTACT

Andrew Rigden Green

Andrew Rigden Green
Partner

T:  +852 2533 2761 M:  +852 6013 2520 Email Andrew | Vcard Office:  Hong Kong

John Simpson

John Simpson
Partner

T:  +65 6622 9565 M:  Email John | Vcard Office:  Singapore

Rory Grout

Rory Grout
Senior associate

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

Elizabeth Sloane

Elizabeth Sloane
Senior associate

T:  +852 3166 6926 M:  Email Elizabeth | Vcard Office:  Hong Kong