COVID-19: Force majeure, frustration and exclusion clauses

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On 12 March, the World Health Organization declared the Covid-19 outbreak to be a pandemic as the virus spread around the world. The number of infections continues to escalate, and the governments of more countries are imposing strict measures to try and contain the spread of the disease. The result of these measures has had a significant impact on the shipping industry.

Written by Claire Waller, Assistant Vice President, Head of FDD Skuld Singapore

Lockdown of workers and businesses has slowed down activities at countless ports and at production facilities, leading to substantial delays at both loading and discharge ports. Demand for certain goods has reduced, and a shortage of storage capacity for some bulk and liquid cargoes has developed. We have recently heard of stevedores refusing to go to work due to their fear of coming into contact with the virus.

The situation continues to change day by day and new measures are adopted by governments and port authorities at a very rapid rate, often without sufficient time for a full analysis of their potential impact. In this article, we consider the contractual difficulties facing Skuld's charterer and trader Clients as a result of such delays and how Skuld can assist.

Force Majeure

Many charterers will identify that the circumstances arising are likely to amount to "force majeure" and indeed they may be on the receiving end of force majeure notices from suppliers, subcontractors or ports. Whilst some (civil) legal jurisdictions recognize a general concept of force majeure, English law does not. This means that, if a charterparty or contract is subject to English law, a party can only claim protection based on force majeure, if that charterparty or contract includes a force majeure clause.

The scope of the protection which a party can claim will depend on the terms of the force majeure clause:

  • The clause will list the circumstances, in which it can be triggered: for example, this may include disease / epidemic, shutdown of mines or production facilities, shortage of workers, or other causes beyond the reasonable control of the parties.
  • It will set out the consequences of the force majeure event: it will likely provide that neither party is liable for delays or losses arising out of circumstances of force majeure. It may exclude the charterers' obligation to pay demurrage. It may give one or both parties a right to terminate the charterparty, (if cargo has not yet been loaded) if the circumstances continue for a specified period.

  • It may impose obligations on the parties: for example, there may be a requirement to give written notice to the unaffected party, or to take steps to mitigate the consequences of force majeure, for example by looking for an alternative port.


The parties' rights and obligations will therefore be determined by the wording of the clause. Clients who are in a chain of contracts should (if still negotiating terms) ensure that they have equal protection up and down the chain. This ensures that, if their subcharterer or supplier seeks to rely on a force majeure clause to exclude their liability for delays, the same right can be exercised up the chain towards owners. The consequences of not doing so may (amongst other things) be that a party in a chain continues to be liable for payment of hire to owners, whilst being unable to recover demurrage or hire from their subcharterers.

What if the Charterparty has no Force Majeure Clause?

In the absence of a force majeure clause, there are likely to be few other clauses in a standard charterparty, which will offer protection in the event of significant delays at a loading or discharge port.

In a time charter, hire will most likely continue to be payable unless charterers can demonstrate the existence of an off-hire event. Delays caused by slower processes at the port or unavailability of cargo will not cause a vessel to be off hire. Only in limited circumstances are charterers likely to be able to place the vessel off hire, for example, if the vessel's crew are affected by the virus, such that there is a "deficiency of men" (cf. e.g. Clause 15 of the NYPE 1946 form).

In a voyage charter, delays may arise before or after NOR is tendered. Delays may arise before the vessel is entitled to tender NOR due to the vessel's need to comply with quarantine restrictions. Charterers' lability for delays due to quarantine restrictions will depend on the wording of the charterparty, and, in particular, if the charterparty incorporates BIMCO's infectious or contagious disease clause, time lost will count as laytime. Once the NOR has been validly tendered, laytime will commence and thereafter demurrage will start to accrue. A standard charterparty is unlikely to include exceptions or interruptions to laytime which will be triggered due to delays in loading a cargo in such circumstances, but the precise scope of wording should be reviewed carefully.

Frustration

Under English law, a contract or charterparty is terminated, if it becomes impossible to perform. Charterers may therefore want to argue that the charterparty has been terminated, because it is impossible for them to load a cargo due to the restrictions in force at the relevant port(s). However, the reality is that the charterparty has not become "impossible" to perform, because the measures imposed at the ports are only temporary and will be lifted in due course. Accordingly, the restrictions are only delaying the affected party's ability to perform.

A delay may be enough to frustrate a charterparty, but the delay would have to be very substantial – enough to render the performance of the charterparty radically different from that which the parties anticipated.

BIMCO's Infectious or Contagious Disease Clauses

BIMCO's Infectious or Contagious Disease Clauses have understandably come under some scrutiny in recent weeks. BIMCO themselves have published two sets of FAQs in relation to the clauses with specific reference to Covid-19 and have temporarily made all Covid-19 content freely available. The clauses offer substantial protections to owners, giving them rights to refuse to proceed to a port, or even terminate a voyage charter, and to recover additional costs incurred from charterers where a port is affected by Covid-19 and pose a risk to the crew's health. If Clients are still in the process of negotiating their charters at present, they may try to agree alternative wording or seek amendments to the BIMCO clauses to reach a more balanced position, since the BIMCO clauses are very owner friendly.

As for charters which have already been concluded, charterers should bear in mind that, owners' rights and charterers' liability under the clause are highly fact dependent: charterers should consider (among other factors) the actual risk to the crew as well as the information available about the circumstances at the port when the parties entered the charterparty. Owners may not be entitled to rely on the clause, if the risk to the crew is low or if they should have known that the port was affected at the time the charterparty was entered into.

For those Clients who have vessels on time charter and are continuing to charter those vessels out on a voyage charter or trip time charter basis, it is important to ensure that the sub-charter terms align with the terms up the chain. If the time charter incorporates the BIMCO infectious disease clause, Clients should ensure this is incorporated into subcharters (bearing in mind that BIMCO has published separate clauses for time and voyage charterparties).

Alternative Performance and Mitigation

Circumstances are changing rapidly, but both parties should seek to keep themselves informed about the situation at a given port by speaking to their local agents and keeping abreast of press releases and announcements from the port. The available information at the time of concluding a fixture or nominating a port is likely to be important in the context of any future dispute.

If circumstances change after such time, the charterparty may hold the parties to their agreement or may require charterers to nominate an alternative port. These are unprecedented times and, regardless of the contractual terms, those owners and charterers who have good working relationships should seek to communicate regularly, voice concerns and work together to find possible ways to mitigate any delays.

The landscape for charterers is likely to be difficult to negotiate in the present circumstances. In the absence of specific force majeure clauses or other bespoke exclusion clauses in charterparties, delays seem more likely to fall at charterers' feet. The current difficulties some charterers are facing highlight the importance of reviewing charterparty wording to improve or tailor it for the future. 

Skuld team ready to assist

Skuld is ready to assist members and clients in understanding their contractual liabilities under existing charterparties and protecting and improving their position in future fixtures. Our dedicated in-house lawyers and claims handlers work closely with our charterer and trader Clients to ensure fast and professional response in all matters. Assistance for disputes concerning COVID-19, as well as many other types of disputes can be given under Skuld's service product.

We continue to monitor the situation closely and our claims and underwriting team will be happy to assist our members and clients with advice and recommendations in the context of a specific dispute or query. Skuld's worldwide network of offices and correspondents provides additional service and expertise when needed, and the network can be used to obtain up-to-date information on the pandemic in various ports.

Should you have any comments or questions, then please do not hesitate to contact us at any time.

On behalf of your Skuld team of underwriters and claims handlers who serve our charterers and traders 24/7/365.