Coronavirus charterparty briefing – Q&A
As this is a fast moving topic, please note that this article is current as at 02/03/20. For further information, please contact Michael Biltoo.
The current coronavirus disease outbreak (known as COVID–19) continues to dominate global headlines. It was first reported from Wuhan, China on 31 December 2019 and, as of the end of February 2020, it had spread to 67 countries, infected over 88,000 people and claimed over 3,000 lives. Latest reports advise that the number of new cases identified are higher outside China, including in Europe. Antarctica is the only continent not yet affected.
Here, we answer some of the immediate questions which may arise under charterparties and contracts of carriage subject to English law following the outbreak of COVID-19.
Issues arising from COVID-19 are wide-ranging but some of the more immediate ones are:
- The cargo that the vessel is going to load is not available because of the outbreak.
- The vessel cannot enter a port because there is an outbreak.
- An owner does not want to accept orders to a port where there has been an outbreak.
- The vessel has been to a port where there was an outbreak and so is prevented from entering other ports or is quarantined.
- The crew on board have tested positively for COVID-19.
As ever in charterparty contracts, all will turn on the specific contract and how certain clauses interact with one another.
Clauses that deal specifically with infectious diseases are rare, for example, the BIMCO Infectious or Contagious Diseases Clause for Time Charter Parties. However, many common clauses found in charters address issues surrounding the virus in different ways.
Force majeure | Obeying the charterers' employment orders | Safe ports | Off-hire clauses | Performing the contractual voyage | Free pratique | Seaworthiness | Hague/Hague-Visby Rules
Force majeure does not exist as a general concept in English law and ‘force majeure’ will not be implied into English law governed contract. However, parties can agree to incorporate a clause which dictate when there is a force majeure event and what the consequences are of that event.
Is the outbreak of the virus a force majeure event?
Whether the outbreak of COVID-19 constitutes a force majeure event will depend on the particular force majeure clause.
Is there a force majeure clause in the contract?
Force majeure clauses are often headed as such clauses although they may also be confused with exceptions clauses, which operate differently.
A typical force majeure clause will list a number of events or causes beyond the parties' control, define the effect on a party's performance of the contract which such events must have if the clause is to apply, and specify the consequences on the parties' contractual responsibility when that occurs.
Many force majeure clauses will refer to the outbreak of an ‘epidemic’, a category that COVID-19would certainly fall into, so that where there is an epidemic affecting the performance of the contact, the force majeure clause could be triggered.
Another force majeure event found in these clauses is ‘quarantine’ which is an obvious consequence of the outbreak and could affect vessels in ports where COVID-19 has been identified, or any vessels coming from ports where there has been an outbreak. Moreover, any suspicion that the crew might be affected is likely to result in quarantine restrictions.
Force majeure clauses are interpreted strictly by the English courts and so the party relying on the clause must ensure that the event that they rely on is clearly contained in the force majeure clause.
There is another reason as well as the force majeure event that is preventing performance, can we still rely on the force majeure clause?
This will depend upon the construction of the clause in question. In Classic Maritime Inc v Limbungan Makmur , the clause stated that a party would not be responsible for:
Loss of or damage to, or failure to supply, load, discharge or deliver the cargo resulting from: Act of God, floods, accidents at the mine or Production facility or any other causes beyond the Owners' Charterers' Shippers' or Receivers' control; always provided that such events directly affect the performance of either party under this Charter Party.
The Court of Appeal upheld the finding in the first instance court that this clause contained a “but for” causation test – that is to say the party relying on the force majeure event must show that, but for the force majeure event, it would have performed its obligations. Similar wording would therefore mean that the force majeure event must be the only effective cause.
Equally, if there is a force majeure event which is relied on, the burden is on the party relying on the clause to show that there were no other (reasonable) steps that it could have taken to mitigate the event or the consequences.
The non-performing party has presented a government issued force majeure certificate to justify non-performance. Is this binding?
Chinese authorities have been issuing force majeure certificates as a result of the virus outbreak to declare that the event is a force majeure event on which a non-performing party can rely. The reason is that Chinese law allows a party to plead force majeure even though there may be no reference to force majeure in the contract and so such certificates are of assistance before the Chinese courts.
However, as explained above, English law will only enforce force majeure if that is what the parties have agreed in the contract. If the contract does not contain any force majeure clause, then a government issued certificate is of no relevance as a matter of English law. If there is a force majeure clause, the certificate may be of evidential use in demonstrating that there is a force majeure event.
The different approach of the Chinese jurisdiction needs to be noted in circumstances where there is no force majeure clause but a Chinese party has not performed on the basis of the force majeure certificate. It is likely that before an English court or tribunal they would not be successful and there would be a judgment or award in the innocent party’s favour. A Chinese court may however refuse to enforce the judgment or award on the basis that the force majeure defence would have been available under Chinese law.
What do I have to do to rely on the force majeure clause?
That will depend on the clause but it is usual for a force majeure clause to contain notice provisions so that the party relying on the clause/force majeure event gives notice to the other party of the force majeure event within a stipulated time. Parties should therefore ensure that notice provisions are adhered to.
What is the consequence of the force majeure event?
Again, this should be set out in the clause itself but commonly the force majeure clause will suspend the rights and obligations of the parties relieving them in the meantime of any future liability or it may give the parties the right to terminate the contract. Often it might be the case that the contract can be suspended for the duration of the force majeure event but if the event continues for a certain amount of time, the right to terminate also arises.
Could COVID-19 frustrate the performance of the contract?
It may be the case that the contract is frustrated, however, that would require the fulfilment of the contract to be so radically different from what was contemplated that the parties are then discharged from it. The most likely consequence of COVID-19 will be delay and whether a delay is of sufficient length to be a frustrating event depend on the charter in question.
Obeying the charterers' employment orders
My time charterer has given orders to a port where there has been a COVID-19 outbreak. Must the vessel comply?
A time charterer has a continuing obligation to give valid orders to the vessel, that is to say within the scope of the agreed charterparty (such as to a safe port – see the comments below) and the owner of the vessel (and its servants, ie. the Master and crew) has an obligation to obey them.
However, if that order would endanger the safety of the vessel, cargo or crew, that is not considered a risk that the owner has agreed to bear and they can then refuse the order. Equally, should the Master decide that immediate compliance is not possible, he is entitled to delay obeying it on grounds of safety. This therefore gives some flexibility to owners when receiving orders to ports affected by the virus. However, it would have to demonstrated by owners that there would be a risk to the safety of the crew. If the port had protective measures in place, this may well be challenged by charterers.
A time charterer has an obligation to only give employment orders to safe ports. Likewise, a voyage charter without any contractually identified ports may also imply a safe port undertaking. The ‘classic’ definition of a safe port The Eastern City (1958) requiring that “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…”.
In the case of a voyage charter however, the owner is deemed to have assessed the port’s safety when agreeing the contract at the outset. The same can be said where there is a range of ports, although there is a strong argument in those circumstances that the charterers should not nominate a port within that range that subsequently becomes unsafe.
Can the COVID-19 outbreak render a port unsafe?
The port can be unsafe not only if it is a risk to the vessel, but also if it poses a risk to the crew. However the mere outbreak of COVID-19 would not itself render the port unsafe and the question would be asked whether there are sufficient protective measures in place for the crew when the vessel calls at the port.
Does the quarantine of the vessel mean that the port was unsafe?
If quarantine is imposed on the vessel because where the vessel may have previously called or because of sickness to the crew, that delays the vessel. However it is unlikely to mean that the port was unsafe.
What if the port was safe at the time that the charter was agreed or at the time of nomination?
The sudden outbreak of COVID-19 will mean that there will be many charters agreed prior to the outbreak already providing for a call at a port which may now be considered unsafe. In the case of a time charter, once the nominated port is deemed unsafe, the charterer has a secondary obligation to nominate another (safe) port. However, in the case of a voyage charter, there is no secondary obligation and owners remain bound to perform the voyage (notwithstanding the unsafety of the port) or face a damages claim. Equally, where there is a range of ports and one of the ports is nominated prior to the port becoming unsafe, the owner is nevertheless bound to accomplish the voyage.
If the vessel is affected by COVID-19 and this causes delay, must the charterers continue to pay hire?
A time charterer is bound to pay hire for the use of the vessel unless there are events which might place the vessel off-hire. If so, hire is not payable, usually for the time which is lost or the period that the off-hire event affects the vessel. This generally relates to the working of the vessel but clauses do operate beyond just the working of the vessel and so can be triggered by problems associated with COVID-19.
Matters will turn on the clause itself in every contract, but we take a brief look at some of the common time charterparty clauses:
- The commonly used NYPE and Baltime forms provide that the vessel will be off-hire in the event of loss of time from ‘deficiency of men’. Should the COVID-19 outbreak affect a sufficient number of crew on board, it could be deemed that there is deficiency of men and the vessel off-hire.
- The NYPE form also provides that the vessel will be off-hire where caused “by any other cause preventing the full working of the vessel”. It is sometimes seen that “any other cause” is amended to “any other cause whatsoever”, in which case any fortuitous cause, such as the quarantine of the vessel, which prevents the full working of the vessel, could place her off-hire.
- The Baltime form further states that any ‘detention’ will be for the charterers’ account (unless caused by the negligence of owners).
- The Shelltime 4 form also provides for a deficiency of personnel, but goes further placing the vessel off-hire where time is lost:
(iii) for the purpose of obtaining medical advice or treatment for or landing any sick or injured person (other than a Charterer’s representative carried ……) or for the purpose of landing the body of any person (other than a Charterer’s representative), and such loss continues for more than three consecutive hours; or
(iv) due to any delay in quarantine arising from the master, officers or crew having had communication with the shore at any infected area without the written consent or instructions of Charterers or their agents, or to any detention by customs or other authorities caused by smuggling or other infraction of local law on the part of the master, officers, or crew.
Accordingly whether hire is payable will depend on the specific off-hire clause and the nature of the delay.
Performing the contractual voyage
Under a voyage charter, the vessel must perform the voyage by the contractual route (usually it will be the case that this is the usual shipping route between the two ports) without delay. Any ‘deviation’ from this is a breach of the contract considered to be repudiatory which also renders any exemption clauses inapplicable for losses during the deviation.
In a time charter, it is usually required that the vessel perform the voyage ordered by the charterer with “utmost despatch” or “due despatch” . As with a voyage charter, the vessel must take the usual route when performing this obligation.
There is a risk that the crew or a crew member might be infected by COVID-19. Am I entitled to interrupt the voyage?
At common law, the vessel is entitled to deviate if there is a risk to the maritime adventure. An outbreak of COVID-19 on board the vessel could certainly risk the maritime adventure. Moreover, clauses are often found in voyage charters giving the vessel liberty to deviate “for the purpose of saving life” (cl 3 GENCON 1994) and so if there is a genuine risk to life, which there would be if there is a reasonable concern of infection (or its spread), a deviation would be justified.
Equally, time charter will often contain clauses giving liberty to deviate (i.e. not to proceed with utmost despatch), for the purpose of saving life.
‘Free pratique’ has been defined as “official permission from the port health authorities that the ship is without infectious disease or plague and the crew is allowed to make physical contact with the short; otherwise the ship may be required to wait at quarantine anchorage for clearance.” (‘The Eagle Valencia ).
The crew are, or are suspected of being sick. Do I need to obtain free pratique before tendering the NOR?
Once a vessel completes her approach voyage and becomes an ‘arrived ship’ under a voyage charter, the vessel can tender her Notice of Readiness advising that the vessel is ready to load or discharge her cargo if physically and legally ready to do so. Legal readiness includes having free pratique however, generally, obtaining free pratique is considered a ‘mere formality’ and at common law it will not prevent a NOR from being given.
However if there is a known or suspected problem, obtaining free pratique is no longer considered a ‘mere formailty’. This would certainly be the case if there were crew members infected, or suspected to be infected, with COVID-19. Accordingly the vessel would not be able to tender the NOR and the risk of delay would fall with on the owners.
This remains subject as always to the terms of the charter. In some circumstances charters may provide that laytime can commence “whether in free pratique or not”. For instance, the Gencon 1994 provides that the vessel can give her NOR if the loading/discharging berth is not available on arrival even though free pratique may not have been granted. However, in the Gencon 1994, if it is later found that the vessel is not ready, time lost after the discovery of the problem until loading/discharging can commence is not to count.
One of the underlying and fundamental concepts in maritime law is that the vessel must be seaworthy (alternatively, exercise due diligence to ensure that the vessel is seaworthy if the Hague or Hague-Visby Rules apply). This means that she “must have that degree of fitness which an ordinary careful and prudent owner would require his vessel to have at the commencement of her voyage having regard to all the probable circumstances of it.”
The crew are infected. Is my vessel seaworthy?
In Ciampa v British India Steam Navigation Co. Ltd. is was held, where a vessel had to be fumigated because she arrived at a port without a clean bill of health, that she was unseaworthy. That could give rise to a possible argument that a vessel which must be quarantined because of infection on board is unseaworthy, although this would seem a difficult argument to maintain.
What if my charter contains a clause paramount?
Charterers will often incorporate the Hague or Hague-Visby Rules by way of a clause paramount. The rules contain various exceptions, including the following which are obviously relevant to the COVID-19 outbreak:
Article IV, rule 2:
Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from –
(h) Quarantine restrictions;
(l) Saving or attempting to save life or property at sea
Article IV, r. 4: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.
Owners/carriers will therefore be protected in respect of any loss in cases of quarantine or deviation to protect life.
The outbreak of COVID-19 is going to affect the shipping industry on many levels. Charterparty contracts are amongst those likely to be first tested. Disruption has already been considerable and delays will continue to be faced. As seen from the above, there are a number of different clauses which might operate in the light of this disruption, all of which will interact with one another to determine who will bear the cost of the delays or other costs/losses. This may also lead to more bespoke clauses being inserted into charterparties to address the allocation of time, costs and other losses arising from problems associated with COVID-19.
Related item: Coronavirus – impact on insurers