Channel closures

Skuld Charterer

Who pays when a channel is closed? Safe port/safe berth, force majeure and general exceptions clauses in voyage charters.

Written by Charles Anderson and Aase Naaman Jensen, Skuld New York

On Sunday 17 March 2019 at approximately 10:00 am, a large fire erupted at the Intercontinental Terminals Company (ITC) bulk liquid storage terminal in Deer Park, Texas. The fire originated in an 80,000-barrel aboveground storage tank containing naphtha, a flammable liquid used as a blend stock for the production of gasoline. Responders were unable to stop the release of product from the tank and the fire continued to burn and intensify, spreading to other tanks until it was extinguished on the morning of 22 March.

Fortunately, the incident did not result in any injuries, but it had a serious impact on schools and businesses in the local community. On 22 March, a breach in the containment wall surrounding the tank farm allowed contaminants to enter the Houston Ship Channel, also delaying 17 ships scheduled to move into the area, and 16 ships awaiting departure.

Incidents like the ITC fire inevitably give rise to issues as to the rights and liabilities of ship owners and charterers who sustain economic losses and other damages as a result of the delays to their vessels.

The principal charterparty provisions that come into play in such cases are safe port/safe berth clauses, general exceptions and force majeure clauses, and notice of readiness and other clauses dealing specifically with laytime and demurrage.

The New York arbitration decision in M/T GLEFI, S.M.A. No. 3199 (1995) provides a good illustration of the interplay of these clauses. In that case the shipowner commenced arbitration to recover damages for detention of the vessel as a result of the closure of the Houston Ship Channel following a ship collision. The owner claimed the charterer breached the safe port and berth provisions because the vessel could not safely depart the berth promptly at the completion of discharge. The owner also contended that the General Exceptions Clause in the ASBATANKVOY charterparty did not excuse the charterer from liability for the detention.

The charterer argued that it did not breach the safe port warranty because the vessel could always leave the berth and that the collision causing the channel closure was an abnormal, unexpected event beyond its control.

The panel majority [1] rejected the charterer's arguments. Referring to the classic definition of a safe port in The Eastern City, [1958] 2 Lloyds Rep. 127, the arbitrators noted that a port will not be safe unless the particular ship can reach it, remain in it, and depart from it without, in the absence of some abnormal occurrence, being exposed to danger. They found no indication in Clause 9 of the ASBANTANKVOY charter ("Safe Berthing - Shifting) that "departing from" meant "if possible" or "in a reasonable time".

On the contrary, in their view the word "depart" meant "without delay or impediment of the right of free and prompt departure on completion of discharge."

The arbitrators held that the collision and grounding were not abnormal or unexpected, noting that narrow channels are "notorious for causing maritime/navigational problems, just as the Houston Shipping Channel has done for years."

Turning to the exculpatory provision in Clause 6 ("Notice of Readiness") and Clause 19 ("General Exceptions) the panel held that Clause 6 was only concerned with berth availability for a vessel on arrival, and Clause 19 exonerated only the vessel, her master and owner for delays arising from collisions or accidents on navigable waters and afforded the charterer no protection.

The decision in M/T GLEFI should be contrasted with the award in S/S LLANO, S.M.A. No. 1411 (1980), which involved a consolidated arbitration under similar but not identical EXXONVOY 69 charterparties arising from a Coast Guard channel closure in Beaumont, Texas because of a sunken barge and potential oil spill. In that case the panel majority held that under Clause 6 of the charterparty ("Notice of Readiness") the blockage of the Sabine channel caused a delay over which the charterer had no control.

The majority of the arbitrators found that the charterer had nominated a safe port and safe berth. The evidence submitted to the panel indicated that the closure was not an abnormal occurrence, and neither party claimed that the delay rendered the berth unsafe or frustrated the contract.

The owner argued that the charterer should have reversed the rotation of the loading ports after the sinking of the barge, but the panel majority found the charterer did not act imprudently and that in the absence of a mutual agreement, a change of rotation to Houston would have constituted a third loading port that was not contemplated in the charterparty.

The panel majority held that "closure of the channel due to a marine casualty most certainly is beyond Charterer's control and to try to read something different under [Clause 6] would be ignoring the basic concept of contract law."

The dissenting arbitrator found that Clause 6 "only precludes charterers being penalized when a situation is imposed on them in which they have no say" and that charterers actually took control of the situation when they directed the vessel to wait out the closure of the channel.

An important lesson to be learned from these decisions is that Force Majeure and General Exceptions Clauses should be carefully tailored to the particular transaction and generic clauses should be avoided. Courts or arbitrators may differ on whether a particular channel closure is an "abnormal occurrence" under a safe port or berth warranty, but a properly drafted Force Majeure or General Exceptions Clause may offer an alternative "safe harbor" for owners or charterers in such cases.

Under both US and English law, the General Exceptions Clause in a voyage charterparty is usually insufficient to relieve charterers from their obligation to pay demurrage because of other charterparty clauses specifically dealing with the running of laytime. Charterers may, however, be relieved from liability if expressly provided by clear language in the General Exceptions Clause or when such an exemption can reasonably be implied from the terms of the clause as a whole. For example, in a demurrage dispute arising from the ITC incident described above, the ASBATANKVOY General Exceptions Clause was amended by a "Force Majeure" clause providing "[n]either party shall be liable for damages or otherwise to the extent that its ability to fulfill any provision of this Charter Party is delayed, hindered or prevented by, without limitation [...] perils of the sea or accident of navigation, compliance with any law, regulations or order imposed by any state or local authorities [...] closing of canals or rivers, blockage of canals, rivers, ports or waterways, any event, matter or thing wherever occurring and whether or not of the same class or kind as those set forth which by the exercise of due diligence the party concerned is unable to overcome, whether or not such occurrence is reasonably foreseeable."

Such a clause is arguably detailed enough to relieve the charterer from any liability arising from the delays attributable to channel closure. Moreover, even in the absence of specific wording dealing with such closures, by extending the protection to events both similar and dissimilar to the enumerated events, it avoids the common pitfall created by the ejusdem generis canon of contract construction, which limits general wording such as "any other events beyond the reasonable control of the parties" to the same type of events that are specifically listed.

It is important to note that owners and charterers who sustain demurrage or detention damages in the event of a channel closure due to an oil spill may have a right of recourse against the party responsible for the spill. Under US general maritime law, claims for pure economic loss without accompanying physical damage to property are barred by the 1927 Supreme Court decision in Robins Dry Dock v. Flint, 275 U.S. 303 (1927); however, the U.S. Oil Pollution Act of 1990 (OPA-90) overruled the Robins rule in oil pollution cases by authorizing the recovery of lost profits or earning capacity against responsible parties regardless of property ownership. Ironically such recovery was not possible in the ITC case, since the spilled product was naphtha, a hazardous substance regulated by a different statute, the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), which does not contain an economic loss provision similar to that of OPA-90.

How Skuld can help

Dedicated in-house Skuld lawyers and claims handlers work closely with our charterers and traders members to ensure a fast and professional response in all matters.

Assistance for disputes concerning safe port/berth, force majeure and exception clauses as well as many other types of disputes can be given under Skuld's service product.

Skuld's worldwide network of offices and correspondents provides additional service and expertise when needed and specific assistance is available from the dedicated legal team in our New York office should the dispute be related to North and South America.

Our lawyers and claims handlers will assist members and clients in relation to disputes and can also assist before a dispute arises in reviewing charterparty clauses to prevent losses and protect members' and clients' position.

[1] The dissenting arbitrator agreed with the majority's finding of liability but disagreed on the calculation of damages.