Only Safe Ports in the Covid-19 Storm
Ayush Thakrar discusses how shipowners and charterers can mitigate the effects of the Covid-19 virus when it comes to commercial shipping contracts.
The context
Abigail Beall, a reporter for the BBC, argues that “the potential for disease outbreaks to become pandemics has grown as exponentially as our ability to travel has made the world shrink.”[1] Ever since the WHO classified the Covid-19 virus as a global pandemic, governments around the world have struggled to contain the virus. The spread of the virus has now accelerated to the point of plunging the world into a global recession.[2] Many countries, including the UK, now employ a complete lockdown as a response to the virus; with only essential services, such as healthcare and grocery stores, still operating. Despite the Covid-19 virus, the global trade of essential commodities is ongoing. For example, India, one of the largest producers of generic drugs in the world, continues to export drugs, such as Paracetamol and Hydroxychloroquine.[3] The necessity of this was exemplified after its temporary export ban decimated half of the USA’s supply of those drugs.[4] Moreover, countries such as Singapore, which do not have a sufficiently-sized agricultural industry, are heavily dependent on international trade to feed their populations.
In the UK, the “Coronavirus Act 2020” received royal assent on the 25th of March, 2020. It confers power on the Secretary of State of the Home Office to suspend port operations if and when they consider there to be a real and significant risk of insufficient border force controls.[5] A single suspension period can last up to six hours and the suspension can be extended indefinitely, as long as the risk persists. In addition to this suspension, a vessel may also face delays prior to berthing due to more stringent health checks and/or disinfection requirements at individual ports. Contracts being formed in the wake of the pandemic may have express terms dealing with various issues such as increased costs or delays. However, contracts formed prior to the outbreak of the virus may not enjoy the same luxuries that accompany the benefits of contingency planning.
Charterparties
A charterparty is a contract for the hire of a vessel, concluded between the charterer and the shipowner. They routinely include ‘Safe Port’ clauses to protect the shipowner’s vessel against a charterer who may disregard port safety in favour of maximizing profit margins. Due to the costs of maintaining adequate safety standards, in tandem with employing a sufficient and capable crew to operate it, shipowners generally prefer vessels to be engaged with minimal gaps between each of its contractual obligations to different charterers. Due to the nature of a charterparty, the commercial use of a vessel is often under the control of the charterer,[6] who may elect to take the vessel to a port where the vessel may face military threats, or natural hazards which can damage the vessel. Any damage to the vessel could result in lengthy repair operations before the vessel can be considered “seaworthy” again. This article aims to assess the applicability of ‘Safe Port’ clauses, where the legal effect of a force majeure clause may not have contemplated the impact that the Covid-19 virus would have on the performance of such contracts. First, it will explore why the doctrine of frustration or a force majeure clause may not be applicable due to the impact the pandemic could have on vessels. The article will then explore different types of charterparties, and how a ‘safe port’ clause operates within those charterparties to determine the rights and obligations of the parties within the context of the current pandemic. The article assumes that the governing law of any disputes arising from the charterparty would be subject to the exclusive jurisdiction of the courts of England and Wales.
The problem
The doctrine of frustration discharges both parties from their obligation to perform a contract.[7] If the contract strays from the purpose it was entered into for, it could be frustrated. A change in circumstances, subsequently to the formation of the contract, which results in a fundamental and radical difference in performing the contract in comparison to what was envisaged during the formation of the contract can discharge both parties from any further obligations.[8] A frustration of the contract can occur in three forms. Firstly, a contract can be frustrated by the loss of the subject matter. Secondly, it can be frustrated by the delay in the performance of contractual obligations. Finally, a contract can also be frustrated if the performance of the contract becomes illegal after the contract is entered into. A prolonged delay caused by Covid-19 may lead to the frustration of a contract. However, that is dependent on whether the delay was sufficient to frustrate the adventure[9] and whether the applicability of the doctrine of frustration was not excluded by the parties.[10] The existence of a force majeure clause can indicate the intention of the parties to exclude the doctrine of frustration, though it is dependent on the drafting of the clause.
“An event will be considered to be a force majeure event when it constitutes a legal or physical restraint on the performance of a contract which is both unforeseen and irresistible.”[11] A vital element required for the enforcement of a force majeure clause is that it must consist of a statement of all extraneous events which would fall within the ambit of the clause.[12] Therefore, if drafted appropriately with a coronavirus-caused delay expressly included, it would likely apply to the current pandemic. However, the difficulty lies where a force majeure clause does not contemplate certain circumstances, such as those accompanying the Covid-19 outbreak. The drafting of the clause must be sufficiently certain for it to be effective in the context of charterparties, given the current global reality. In the absence of such a clause, the parties must rely on various standard contractual clauses and the common law to determine how each parties’ obligations as derived from a charterparty are affected by the Covid-19 virus.
A possible solution
There are three main types of charterparties: voyage, time, and bareboat charterparties.[13] Under a time charterparty, the charterer hires the vessel for an agreed duration of time. Under a voyage charterparty, the charterer usually hires a vessel for a pre-determined voyage. Therefore, the freight (cost of hire) is determined after assessing the travel duration and risks involved with the particular destination and journey. A bareboat charterparty, also known as a demise charterparty, is the only form of charterparty where the charterer is provided solely with the vessel, and no management crew is provided, unlike the previous charterparties. As a bareboat charter is the least common form of charter in practice, this article will focus on ‘safe port’ clauses in relation to voyage and time charterparties only. A classic definition of what constitutes a safe port clause is provided for by Lord Justice Sellers; “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.”[14] Measures taken by governments and port authorities may cause issues for vessels arriving into or leaving new ports. These issues could cause the port to no longer be considered safe for the purposes of the charterparty. Therefore, the safe port clause will be analysed in the context of time and voyage charterparties to assess its applicability in determining the impact of Covid-19 on pre-existing contracts.
Time charterparties
A safe port clause is not restricted exclusively to dangers arising from the perils of the sea, but may also apply to ports considered to be politically unstable.[15] A generic safe port clause as found in a time charterparty states, “The vessel shall be employed in lawful trades (...) between safe ports or safe places where she can enter, lie always afloat, and depart.”[16] A suspension of port operations for an indefinite period of time can leave a vessel in a position where it is unable to obtain any port clearance, which is essential for departing the port. A port clearance is documentary evidence provided by the relevant port authority when the vessel has complied with all port obligations and has paid its dues to the port. Major ports, such as Singapore, also require vessels to submit the original port clearance from the last port of call prior to their arrival. As a vessel cannot depart or arrive at another port without such documentation, it is likely that such a suspension of activities could fall outside the scope of the example clause provided above. Such action could result in the port being deemed unsafe for the purposes of the charterparty, however, the parties must be mindful of the amount of delay this would result in before declaring the port unsafe. Due to the nature of the time charterparty, courts will consider the amount of time the vessel was hired for when assessing whether the amount of delay can cause the port to be unsafe.
The level of safety required by a safe port clause is “perspective safety”.[17] This means that the safety of the port cannot solely be considered at the time of nomination, and the charterer must also consider the safety of the port for the vessel in the future, during its arrival. While such a situation can be difficult to assess, especially due to its prospective nature, parties must remain aware of the quarantine and suspension procedures at every port of loading/discharge to determine its safety and what procedures/delays their vessel could be susceptible to at various ports. If a vessel cannot successfully enter the port without being seized by the government, the port will likely be deemed unsafe.[18] Vessels have been quarantined when there has been a virus outbreak on board.[19] Such a quarantine would likely be considered as restraint of princes. The term restraint of princes covers most situations where the voyage is interrupted by agents of a government.[20] Such restraint of princes can also render the port to be unsafe under the definition of a safe port, as the vessel may not be able to depart. However, if the result of such restraint is a minor delay, it is unlikely that the port would be considered unsafe. It will be the express wording of the charterparty clauses that will determine the extent of delay that would be deemed to be minor.
Voyage charterparties
As a voyage charterparty is concluded with a pre-determined voyage, freight is calculated accordingly. The obligation on a charterer to renominate a port under a time charterparty does not exist with a voyage charterparty. Case law suggests a strict approach; Lord Roskill stated that “once the voyage charterer has selected the contractual port or ports of loading or discharge, the voyage charterparty usually operates as if that port or those ports had been originally written into the charterparty, and the charterer then has no further right of nomination or renomination.”[21] In the absence of any express provision allowing for a secondary nomination, the charterer may be unable to call at a different port to avoid such delay or risk to health and safety without renegotiation with the shipowner.
A warranty of safety is usually expressly provided under a voyage charterparty. However, when there are no such express provisions, the court will not enforce an implied warranty of safety.[22] The concept of perspective safety remains consistent across both time and voyage charterparties. Contrary to a time charterparty however, for the warranty of perspective safety to apply to a voyage charterparty, the wording of the charterparty must expressly provide for such a provision. When expressly provided for, the charterer should consider the safety of the port at the time of the vessel’s arrival and departure when nominating the port of discharge. For example, nominating a port which could be considered as the “affected area”[23] for a contagious virus, can be considered unsafe. The vessel’s arrival can expose its crew and the goods it carries to the virus, and therefore, this involuntarily facilitates further virus transmission when goods are further transshipped. Future ports the vessel may wish to call at would be unwilling to provide the vessel a berth due to its travel history. If the vessel is then unable to call at a future port, or if it will be subject to extreme measures at the port of arrival, such as fumigation, the vessel may be considered unseaworthy.[24] It can be argued that if a port visit can render the vessel unseaworthy, the port should not be a safe port as the vessel cannot return from it without being exposed to such danger.[25] As it is a warranty, such a breach would entitle the shipowner to damages.
Alternative wordings
The safe port clause may contain a due diligence provision where an owner may have to prove that the charterer ought to have realised his mistake in nominating a port that was prospectively unsafe, and that he was negligent in making such a mistake.[26] However, this clause seems to protect charterers from liabilities in situations where the “charterer did not know or ought to know of the circumstances that gave rise to the unsafety”.[27] It appears unlikely for an event such as the current pandemic to fall under the ambit of ‘did not know or ought to know’ for the chartered.
Another alternative is a safe berth clause where the promise of safety does not extend to the whole port. The berth is essentially the parking spot for the vessel within the port limits. This undertaking is described to be confined to movements within the port to and from the nominated berth and the risks affecting the stay at the berth rather than the port or other berths within the port.[28] These differences, however, do not change the situation for either party in this context.
To conclude, the “safe port” clause can assist various parties to the charterparty, depending on its express wording. For a time charterparty, procedures implemented at various ports as a result of Covid-19 can allow the parties to consider the port unsafe and nominate an alternative port. It could also allow the shipowner to reject the nomination and cease obeying the charterers’ orders. The shipowner may also be entitled to damages while waiting for an alternative nomination. They may further be entitled to terminate the charterparty if the charterer insists on proceeding to the unsafe port. Under a voyage charterparty, the charterer does not have such a right to choose an alternative port, and unless expressly provided for, the charterer may be in breach of the clause and could be liable for damages to the shipowner.
Written by Ayush Thakrar.
[1] Abigail Beall, “The global fight against coronavirus“ (BBC Future, 10 February 2020) https://www.bbc.com/future/article/20200210-coronavirus-finding-a-cure-to-fight-the-symptoms, Accessed 24 April 2020.
[2] IMF Communications Department, “Statement by IMF Managing Director Kristalina Georgieva on Egypt” (IMF Press Release No. 20/188 26 April 2020) https://www.imf.org/en/News/Articles/2020/04/24/pr20188-egypt-statement-by-imf-managing-director-kristalina-georgieva, Accessed 28 April 2020.
[3] Archana Chaudhary, “India partially lifts export ban on potential coronavirus treatment after Trump call” (Time Health, 07 April 2020) https://time.com/5816617/india-lifts-hydroxychloroquine-export-ban/, Accessed 24 April 2020.
[4] Lisa Du, “Half the U.S. supply of Trump-touted virus drug now cut off” (Bloomberg, 06 April 2020) https://www.bloomberg.com/news/articles/2020-04-06/half-the-u-s-supply-of-trump-touted-virus-drug-now-cut-off, Accessed 24 April 2020.
[5] Coronavirus Act 2020, Schedule 20.
[6] Whistler International Ltd v. Kawasaki Kisen Kaisha Ltd (The Hill Harmony) [2001] 1 A.C. 638 at 641.
[7] Howard Bennet et al, Carver on Charterparties, (1st edition, Sweet & Maxwell 2017) Page 958 at [10-978].
[8] David Foxton et al, Scrutton on Charterparties and bills of lading, (24th Edition, Sweet and Maxwell 2019) Article 21 at [2-088].
[9] Eridinia v. Rudolf A. Oetkar, (The Fjord Wind) [2000] 2 Lloyd’s Rep. 191 at 191.
[10] Ewan Mckendrick et al, Force Majeure and Frustration of contract (2nd edition, Lloyd’s Law Commercial Library 1995) Page 7.
[11] Ibid.
[12] Ibid. at Page 68.
[13] David Foxton et al, Scrutton on Charterparties and bills of lading, (24th Edition, Sweet and Maxwell 2019) Article 3 at [1-006].
[14] Leeds Shipping Company v. Societe Francaise Bunge (The Eastern City) [1958] 2 Lloyd’s Rep 127 at Page 131 as per LJ Sellers.
[15] Kodros Shipping Corp of Morovia v. Empresa Cubana de Fletes (The Evia)(No. 2) [1983] 1 A.C. 736 at 765.
[16] Bimco Gentime 1999, Clause 2(a)
[17] Howard Bennet et al, Carver on Charterparties, (1st edition, Sweet & Maxwell 2017) Page 196 at [4-004].
[18] Ogden v. Graham (1961) 1 B&S 773 at 781.
[19] Lauren Smiley, “27 Days in Tokyo Bay: What happened to the Diamond Princess” (Wired Science, 30 April 2020) https://www.wired.com/story/diamond-princess-coronavirus-covid-19-tokyo-bay/, Accessed 01 May 2020
[20] Halsbury’s Laws of England, Carriage and Carriers (Volume 7 (2020)), 3. Carriage by Sea, (1) Carriage of Goods, (i) The Contract, B. Charterparties, (H) Shipowner’s Liability for Loss or Damage to Cargo, 214. Restraints of princes and rulers. (Accessed online via Lexis Library).
[21] Kodros Shipping Corp of Morovia v. Empresa Cubana de Fletes (The Evia)(No. 2) [1983] 1 A.C. 736 at 763.
[22] Mediterranean Salvage & Towage LTD v. SEAMAR TRADING & COMMERCE INC (The Reborn) [2009] 2 Lloyd’s Rep. 639.
[23] Bimco Infectious or Contagious Diseases Clause for Time Charterparties 2015.
[24] Ciampa v British India Steam Navigation Co Ltd [1915] 2 KB 774.
[25] Lianjun Li et al, “Charterparty issues arising from the novel coronavirus” (Reed Smith Client Alerts 04 Feb 2020) https://www.reedsmith.com/en/perspectives/2020/02/charterparty-issues-arising-from-the-novel-coronavirus, Accessed 28 April 2020.
[26] D. Rhidian. Thomas et al, Legal Issues Related to Time Charterparties (First Publication 2008, Informa 2008) Page 64 at [4.44].
[27] Howard Bennet et al, Carver on Charterparties, (1st edition, Sweet & Maxwell 2017) Page 197 at [4-007].
[28] D. Rhidian. Thomas et al, Legal Issues Related to Time Charterparties (First Publication 2008, Informa 2008) Page 64 at [4.44].