On 30 January 2020, the World Health Organisation described COVID-19, the disease caused by the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), a "Public Health Emergency of International Concern". On 11 March 2020, it was declared a pandemic. The shipping sector has not been immune to the commercial effects of this pandemic, which are becoming increasingly prominent and will likely persist for the foreseeable future.

Campbell Johnston Clark, like most of the world, has had to adapt.  Complying with Government guidelines across all of our offices, we have ensured that our staff are working from home.  Fortunately, we are well set up with technology allowing us to continue working with minimal, if any, business disruption.  However, other aspects of the shipping industry will inevitably be more directly affected. 

This article, prepared by a CJC team including Ian Short, Angeliki Panera, James MacKay, Professor Filippo Lorenzon and Samuel Jones, addresses some of the main legal issues which are likely to arise as a result of prohibitions and obstructions arising out of the outbreak of COVID-19, in the context of shipping contracts. The first section addresses general considerations that are likely to be relevant to most commercial contracts, while the second section is specific to time and voyage charterparties.

Although analogies may be drawn from past experience, the situation that we find ourselves in is in many respects unprecedented and is also rapidly evolving. As such, the information provided below should not be treated as a comprehensive guide and is merely intended as an overview of the legal position under English law, based on the facts as we currently know them to be. 

General Considerations

Force Majeure Clauses

English law does not recognise "force majeure" as a standalone concept. Such term is, instead, used to describe contractual clauses (commonly referred to as "force majeure clauses"), which are expressly included in many commercial contracts. This includes many types of shipping contracts, such as MOAs, shipbuilding contracts, and contracts for the supply of goods and services. Force majeure clauses excuse or suspend one or both parties' performance of the contract under certain defined circumstances. In this context, the term "force majeure" derives its meaning from the express terms of the contract in question, meaning that the circumstances in which it can be invoked to excuse performance are a matter of construction of that clause or contract.

In determining whether any aspect of the COVID-19 pandemic is covered by a contractual force majeure clause, one has to consider the following factual and legal questions:

1. whether the particular obstacle to performance falls within the definition of force majeure events under the contract. Such events can either be broadly defined (e.g. "events which are outside a party's reasonable control"), or specifically listed (e.g. "epidemic or pandemic"), or, more commonly, a combination of the two.

2. whether the force majeure clause contains any "sweep-up" wording (e.g. "any other cause whatsoever beyond the parties' reasonable control"), and how this should be construed in the scheme of the clause and/or contract as a whole;

3. issues of causation, such as whether the force majeure event must have "prevented" and/or simply "hindered" or "delayed" performance of the contract. For example, if a clause refers to performance having been rendered "impossible", the existence of alternative means of performance will likely prevent its application notwithstanding that such performance may be more onerous or expensive. Moreover, in most cases, it is not the COVID-19 pandemic itself which would have prevented or hindered performance, but its knock-on effects, such as Government restrictions imposed, enforced port closures or, say, seizures of goods following sanitary inspections, but even then such clauses must be expressly covered by the force majeure exceptions and must be causative of the impossibility and/or delay in performance as appropriate

4. any conditions to the declaration of force majeure, for example, whether the clause provides for notices to be issued in a particular form or within a particular timeframe; and

5. the consequences of declaring a force majeure event. Force majeure clauses will not necessarily permit a party to terminate the contract simply upon establishing the occurrence of a force majeure event. More commonly, such clauses provide for a suspension in performance until such event ceases, sometimes with a right to terminate after a certain amount of time. The express terms of the clause may or may not make provision in relation to the costs of performance and other liabilities.

Force majeure clauses will be narrowly construed by a Court or Tribunal applying English law and, often, a list of expressly named events may be treated as exhaustive (or only extended to other events of a similar nature), unless stated otherwise. In line with this strict construction, the English Court of Appeal has held that the force majeure event must be the effective cause of a party's default, certainly when the clause looks to suspend performance of the parties’ obligations under the contract.  An example of the Court’s approach to the construction of force majeure clauses and the difficulty of their application can be found in this recent CJC article dated 24 March 2020.  

Ultimately, whether it be a charterparty, a sale contract involving the sale and purchase of a ship or a cargo or commodity or a shipbuilding contract, it is imperative that the parties carefully consider the proper construction of any force majeure or exceptions clause incorporated into the contract when considering whether or not it applies to the current scenario, with the burden of proof falling on the party relying on the clause to bring themselves and the current situation within it. 

In the absence of a contractually applicable (and suitably worded) force majeure clause, a party must seek to bring itself within the narrow confines of the doctrine of frustration, which is discussed next.

Frustration

A contract may be "frustrated" (i.e. automatically discharged) where an intervening event renders future performance impossible, illegal or radically different from that contemplated by the parties at the time of entering into that contract.

The intervening event must have occurred after entry into the contract, not already existing at the time the contract was entered into. By similar logic, where the parties had (or should have had) such an event in contemplation at the time of negotiating and/or have made specific provision for it in their contract (e.g. through a force majeure clause, as discussed above), then frustration will not apply.

The event relied on must not have been caused by the actions of either party.

Where frustration applies, the contract is automatically discharged, i.e. both parties are released from future performance of any obligations that would otherwise have fallen due under the contract (such as the obligation to supply goods or services). However, rights and liabilities which have already accrued (such as payment liabilities for goods or services already supplied) will survive the termination of the contract. Delay or interruption can, in principle, frustrate a contract but must be of such magnitude so as to render performance radically different. 

Following the market crash of 2008, it became evident that market factors which result in a contract becoming less profitable and/or more expensive and/or more onerous to perform, do not meet the threshold for frustration. So long as performance has not been rendered impossible (whether physically or legally) or radically different from that undertaken, the English Courts have so far been unwilling to relieve parties of their freely assumed contractual duties despite significant obstacles to performance.

In many contracts, alternative options may be permissible, such as options to call at a range of ports, and frustration is only likely to apply if the impossibility of performance extends to all options. 

Specific Considerations

Charterparty Issues

Some charterparties may make express provision for exceptions which are applicable to the outbreak of COVID-19, whether directly (such as an exception specifically referring to "epidemics") or indirectly. For example, Article IV, Rule 2 of the Hague and Hague Visby Rules provides that a carrier will not be responsible for loss of, or damage to, cargo arising or resulting from, "(h) quarantine restrictions; (j) strikes or lockouts or stoppage or restraint of labour from whatever cause, whether partial or general; (q) any other cause arising without the actual fault or privity of the carrier." These exceptions will primarily be relevant to a shipowner's liability towards cargo interests under a bill of lading. However, where the Rules are incorporated into a charterparty, such protection can also extend to claims by the charterers in connection with the cargo.

In the absence of specific exceptions, we outline below certain well-established areas of charterparty law, which may well end up being the focus of COVID-19 related charterparty disputes.

Safe port warranties and Employment orders –

Most time charterparties (as well as certain voyage charterparties, where the ports are not written into the contract) are likely to contain an express or implied safe port warranty, preventing charterers from ordering the vessel to an "unsafe port" and holding them liable to indemnify owners for so doing. What constitutes an "unsafe port" has a fairly settled meaning under English law, as confirmed by the Supreme Court: "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”.

This can, in principle, extend to dangers to the crew (i.e. the risk of illness), political unsafety (such as the risk of quarantine/detention) and/or inordinate delays of such magnitude that would be capable of frustrating the fixture (see Section 1 which concerns the doctrine of frustration). In practice, these risks can arguably be avoided by the exercise of ordinary care and skill, for example, by suitable health and safety procedures implemented onboard and at ports. In addition, for the moment at least, it seems unlikely that an outbreak of COVID-19 at certain ports could be deemed sufficiently permanent so as to amount to a "prevailing characteristic" of those ports, as opposed to an "abnormal occurrence". This may potentially change, the longer the outbreak continues. Finally, where owners know or ought to have known of the danger, they may be deemed to have waived the right to refuse the charterers' orders.

Whether the COVID-19 outbreak will render a port unsafe is a fact-dependent issue. The mere fact of the outbreak will not in itself render a port unsafe. Whether a shipowner can refuse its charterer's orders to proceed to a port is always a sensitive matter, given that refusal of a legitimate order can amount to a repudiatory breach of the charterparty.

Similar considerations apply with regards to employment and indemnity clauses in time charterparties, in determining whether the charterers' order is legitimate or whether owners are entitled to refuse the order and/or claim under the express or implied indemnity. Again, this requires a delicate assessment by the Master/owners, given the consequences of non-compliance with a legitimate order. Further, charterers will only be liable under the indemnity for risks that owners have not agreed to bear. Factors such as the construction of the charterparty, the owners' knowledge, causation and remoteness will all play their part, as usual, making the answer less than straightforward.

Commencement of laytime/demurrage –

Some of the risks posed by COVID-19 may also have an impact on the validity of a Notice of Readiness ("NOR") under a voyage charterparty and, consequently, the commencement of laytime. The primary conditions to the tendering of a valid NOR are well-known as (i) the vessel being an arrived vessel, as per the charterparty; and (ii) the vessel being "ready" in all material respects to receive or discharge the cargo at the time when the notice is given. Readiness has a number of aspects, from physical readiness to legal/documentary readiness.

As regards documentary requirements, such as the granting of free pratique, it is generally accepted that this will not prevent the tendering of a valid NOR, if it can be considered a mere formality. However, where there is a likelihood that free pratique will not be granted because the vessel is quarantined and/or the crew is infected, then this can hardly be called a formality. There is also some doubt as to whether WIFPON ("whether in free pratique or not") clauses can be relied on in circumstances where free pratique is unlikely to be obtained and so the vessel is not, in fact, ready. Additionally, where a vessel is quarantined as soon as she enters the port, it is unlikely that loading or discharge will be permitted while she is detained.

After laytime has commenced, time will continue to run unless and until an applicable exception causes operations to be delayed or suspended. Whether an exception applies will depend on the specific terms of the charterparty. It is also worth remembering that general exclusions clauses do not apply to laytime as a matter of course, absent sufficiently clear wording that the exception interrupts the running of laytime.  Likewise, any exception must expressly interrupt the running of demurrage for it to apply should the vessel already be on demurrage, thus getting around the "once on demurrage, always on demurrage" maxim.

Off-hire –

Off-hire clauses, included in most time charters, excuse charterers from having to pay hire while the vessel is prevented from performing the charter service. Such events are not dependent on any breach of contract but rather deficiencies of "the ship or crew to work her", where "the charterers suffer loss of time in consequence".

The first question to address is whether the full/efficient working of the vessel has been prevented. In other words, it needs to be asked whether the vessel is prevented from performing the next operation that the charter service requires of her. A vessel's "full" working may be prevented by legal as well as physical means, however, the phrase "efficient working" (see Shelltime) is more likely to require a clear link to the vessel's actual or suspected physical condition.

Looking at industry standard off-hire clauses such as those in the NYPE and Shelltime forms, a COVID-19 outbreak on board a vessel could potentially result in a "deficiency of men". This could be where there is a numerical insufficiency of crew members able to work, or fall within the sweep-up wording of "any other (similar) cause (whatsoever)". In the absence of the term "whatsoever", such other causes must relate to the condition of the ship or her crew, including legal or administrative action, provided that they relate to the reasonably suspected physical condition or efficiency of the ship or her crew.

BIMCO Infectious or Contagious Disease Clauses

The 2015 BIMCO Infectious or Contagious Disease Clauses for time and voyage charterparty represent a readily available solution for owners and charterers who may be willing to enter into a contract but need a clear pre-set allocation of costs and liabilities between them for doing so.   In short, the clauses allow the owner/Master simply to leave or refuse to go to a port/area in which, in their “reasonable judgement, […] there is a risk of exposure to the Vessel, crew or other persons on board to the Disease and/or to a risk of quarantine or other restrictions being imposed in connection with the Disease”.  The very wide discretion granted to the owner is a clear sign that the underlying purpose of the clause is the safekeeping of the crew but the fact that “any additional costs, expenses or liabilities whatsoever” are allocated to the charterer may make the clause less popular than it could be. 

The BIMCO clauses however do not seem to be designed with a severe global pandemic in mind as, the more ports become affected worldwide, the more difficult it becomes for the charterers to give alternative orders and avoid an actual or prospective breach.  Moreover, there is no indication in the clauses of any action which may or should be taken by the owner to reduce the risk of contagion, something at odds with the contemporary trend towards self-responsibility and communal care.

Parties negotiating a charterparty at this particular juncture, when the spread and breadth of the COVID-19 outbreak have reached global proportions, should work on a clause offering a more balanced approach on costs while focusing on preventive measures to be taken on board by owners and at quays, jetties and terminals by the charterers. 

For any questions on such clauses or on any legal matters arising out of the COVID-19 global pandemic, please do not hesitate to contact one of our team.