COVID-19 and Charterparty Disputes. Part I – Common Issues

14/7/2020

The continuing COVID-19 pandemic has had its impact on all sectors of the maritime industry without exception – including the ship chartering market. In Part I of this post RUMLA’s team will discuss which aspects of charterparties are most likely to give rise to disputes – regardless of the type of charter. In Part II we will consider problems peculiar to time and voyage charters.

What are charterparties?

The term ‘charterparty’, or simply ‘charter’, refers to several different types of contracts under which a shipowner transfers to the charterer a degree of control over his ship. The most frequently used kinds of charterparties in the market are bareboat, time, and voyage charters.

Under a bareboat charter, the owner gives the charterer possession of the entire vessel, without crew, for an agreed period of time. The charterer becomes a de-facto owner of the ship: he employs his own crew and fully maintains the vessel for the duration of the charter. The shipowner merely receives hire (i.e. periodic payments). Bareboat charters are frequently entered into as financing arrangements to purchase new ships or for tax purposes.

In a time charter, the charterer effectively buys the ship’s commercial earning capacity for a certain period of time. During the charter period, the charterer decides to which ports the vessel should proceed and which cargoes it will carry. He also bears all expenses related to the ship’s commercial use (bunker fuel, port charges, etc.). Meanwhile, the shipowner retains possession of the ship and his own crew on board. He also provides technical maintenance and determines how to execute the charterer’s commercial orders from the navigational point of view. The time charterer operates at a profit if his earnings from carrying other companies’ cargoes on the chartered ship exceed the rate of hire which he pays to the owner every month or two weeks.

Voyage charters work very much like ordinary contracts of carriage. The charterer purchases the right to use all or part of the ship’s carrying capacity during one or more voyages to carry cargoes specified in the charter between agreed ports. Often, the voyage charterer himself is the shipper (consignor) or receiver (consignee) of cargo carried on board. Overall, he exercises very little control over the commercial or navigational uses of the ship. Most such decisions are taken by the owner, who also bears almost all expenses of the voyage. The charterer only pays a single sum of freight – lumpsum or in two instalments, before and after the voyage.

Charters are almost always concluded on standard contract forms developed by specialized organisations, like the Baltic and International Maritime Council (BIMCO), or by large oil & gas companies (e.g. Shell or BP). These standard forms are identified by abbreviated code names, e.g. NYPE 1946 – which stands for the New York Produce Exchange Form, as revised in 1946). Parties frequently subject their charters to English law, so in this post we will on occasion refer to English decisions.

Seaworthiness of the chartered vessel

Almost any charterparty contains provisions about seaworthiness. Usually the shipowner’s duty is two-pronged: to ensure the vessel’s seaworthy condition before and at the moment the charter begins [1] and to maintain the ship in that condition during the charter period. [2]

The charterer may refuse to accept delivery of an unseaworthy vessel and can withhold freight until the unseaworthy condition is rectified. If it has not been for a sufficiently long time, the charterer may terminate the contract and claim damages caused by the breach.

Why can the COVID-19 pandemic potentially lead to disputes about seaworthiness and what does the virus have to do with it at all? The reason is that ‘seaworthiness’ means a great deal more than just readiness of the ship and its mechanisms for the voyage. The vessel must also be fit for accepting and carrying agreed cargoes (‘cargoworthy’), have competent and sufficient crew, [3] as well as comply with the ever-growing number of international and domestic regulations. For example, ships have been considered unseaworthy merely because:

  • only one crew member suffered from alcohol addiction; [4]
  • the vessel’s passage plan failed to include just one notice to mariners (i.e. an update to sea charts); [5]
  • some members of the crew were not properly trained to use firefighting equipment on board; [6]
  • the vessel did not have a valid deratisation certificate (i.e. a confirmation that it was free of rats). [7]

During the COVID-19 pandemic, a vessel may be found unseaworthy if, for example, some of the crew are infected [8] or if the ship has previously called at an infected port and got detained at its current port for disinfection or quarantine. [9] To a great extent, the outcome of possible seaworthiness disputes will depend on whether the shipowner implemented adequate protocols to prevent infection on board and whether such protocols were in fact followed.

Safe port clauses

An overwhelming majority of standard charter forms contain express or implied safe port provisions. [10] In short, these clauses oblige the charterer to only order the vessel to ports which would be safe by the estimated time of arrival. The master may legitimately refuse to proceed to an unsafe port. If a given port becomes unsafe after nomination or after arrival, the shipowner may require the charterer to nominate a different, safe port. If the charterer nevertheless insists on proceeding to an unsafe port, the owner will likely be able to claim indemnity for all losses caused by entering that unsafe port.

A port will generally be considered safe if ‘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’. [11] This definition is sufficiently wide for any port with confirmed cases of COVID-19 to be treated as unsafe. However, the owner’s unjustified refusal to proceed to a nominated port constitutes a breach of the charter and may be perceived by the charterers as a repudiation/termination. Accordingly, the shipowners will have to present strong evidence of the port’s unsafety, considering a number of factors below:

  • possible length of delays in the port;
  • risk of infection for crew members;
  • distance from the port to infected areas;
  • risk of contact with shore personnel;
  • risk of stowaways accessing the ship;
  • risk of detention or quarantine;
  • response measures taken in the port;
  • whether calling at the port may subsequently lead to detention, quarantine or denial of entry in other ports.

The shipowners will probably have a hard time proving that the COVID-19 pandemic actually rendered a port unsafe. It is more likely that the spread of the virus is no longer an independent ‘danger’, but rather a general characteristic of a port – which the owner must be prepared for and which can be avoided by good seamanship. Crewmembers can most of the times take sufficient precautions to avoid contact with shore workers. Quarantine-related detentions last 14 day on average – which is probably not long enough for a port to be considered unsafe to call at. Fumigation and disinfection requirements are likewise not sufficiently intrusive for owners to refuse a nomination. Lastly, possible restrictions in subsequent ports of call are not as ubiquitous and permanent to significantly reduce the vessel’s earning capacity and therefore make a port unsafe. Nonetheless, safe port disputes are likely to be quite fact-specific and much will depend on the circumstances of a particular case.

BIMCO Infectious or Contagious Diseases Clauses and INTERTANKO Coronavirus Clauses

Sometimes parties expressly incorporate special infectious diseases clauses in their charters. One set of such clauses was developed by BIMCO during the Ebola outbreak, separately for voyage [12] and time  [13] charters.

How do these provisions work? For example, BIMCO’s time charter clauses specifically allow the owners not to proceed to any port or place where:

  • there is a risk of exposure to the vessel, crew or other persons on board to ‘a highly infectious or contagious disease that is seriously harmful to humans’, or where
  • there is a risk of ‘quarantine or other restrictions’ being imposed in connection with such a disease.

The charterers are obliged to nominate an alternative, safe port. They bear all risks of entering an unsafe area and must in any event indemnify the owners for any delays, costs, expenses or liabilities incurred as a result of entering an affected port or area. The vessel also remains on-hire whilst awaiting the charterers’ alternative orders or if delayed in the affected port.

It should be noted that BIMCO’s clauses have not yet been tested in court during COVID-19. It is therefore not entirely clear whether they apply to the current pandemic at all. For example, a court may find that the coronavirus is not ‘a highly infectious or contagious disease that is seriously harmful to humans’, given its relatively low mortality rates compared to other similar pandemics. A court may also consider that there was no risk of infection in a specific port, provided the owners had an opportunity to take sufficient precautions against such infection getting on board. Finally, in practice, many charterers simply refuse to incorporate the BIMCO clauses in their charters. They reason that if COVID-19 is in fact ‘seriously harmful to humans’, then a vast number of ports may potentially become off limits for them.

In February 2019, probably in response to the charterers’ dissatisfaction with very pro-owner BIMCO clauses, INTERTANKO released its own ‘coronavirus’ clauses for time and voyage charters. [14] They allow the owners not to proceed to a nominated port only if there is a risk of infection to the ship or crew – but not if there is a risk of quarantine or other restrictive measures.

Deviation

If an outbreak of COVID-19 has been found on board, the vessel may need to call at the nearest available port, e.g. to provide medical treatment to an infected crew member. Most of the time, standard charterparty provisions called ‘liberties clauses’ allow the owner to deviate from the route agreed by the charterer ‘for the purpose of saving life at sea’. [15] Moreover, Arts. 62 and 63 of the Russian Merchant Shipping Code impose on the master (the owners’ employee) an express duty to enter the nearest port to receive urgent medical treatment. Nonetheless, the owners will still have to prove that the crew member’s life was in fact in danger, i.e. to show life-threatening symptoms and the need for immediate medical care.

If deviation was required for the purpose of saving life, the charterer is not entitled to claim damages for the resulting delay. However, in time-charters, such deviation will most likely put the vessel off-hire for the period of deviation. [16] In voyage charters, the risk of deviation is already on the owners – so the charterers will not be liable for extra freight for increased voyage distance.

Deviation may also occur if the port of entry is closed (e.g. to prevent the risk of infection coming from the entering ships) or there are other significant obstacles to entry. In this case, some standard charterparty forms specifically allow the owners to discharge cargo at the nearest available port. Even where such a right does not follow expressly from the charter, Art. 153 of the Russian Merchant Shipping Code entitles the owner to do so if the charterers fail to give alternative instructions within a reasonable time.

Fumigation/disinfection expenses

A vessel may require fumigation or disinfection – e.g. if some of the crew have contracted COVID-19 or if the ship arrives from an infected area. Under most standard charterparty provisions, if fumigation is necessary due to crew infection, it is for the owners’ account; if due to previous calls at an infected port – for the charterers’. [17] BIMCO’s contagious diseases clauses or INTERTANKO’s ‘coronavirus’ clause also provide that fumigations required due to the vessel’s previous calls are paid for by the charterers.

Force majeure clauses

Parties frequently add force majeure provisions to the standard charter forms. Usually, these clauses list a number of evidence beyond either party’s control or foreseeability and specify the consequences of such events occurring – whether the party relying on force majeure must notify the other, whether an event gives the right to terminate/rescind the charter or whether it merely suspends performance or excludes liability. [18]

Whether a force majeure clause is triggered by COVID-19 will depend on the wording of a particular clause (e.g. whether the it lists ‘epidemics’, ‘quarantines’ or ‘any government intervention, requirement, or interference’). Force majeure provisions may apply together with other clauses in the charter – for example, early cancelation, automatic termination, or mutual exceptions clauses.

Specialised organisations in some states (e.g. Russia or China) issue so-called ‘force majeure certificates’. These documents have no predetermined evidential value for courts or arbitral tribunals.  At least in Russia, a certificate is merely a piece of evidence that a force majeure event may have occurred. [19] The final determination as to whether or not COVID-19 or any government measures taken in response constitute force majeure will still be made by a court or tribunal interpreting a specific clause in a given charterparty.

The burden of proving force majeure is on the party invoking it. That party must also prove causation, i.e. that the force majeure event prevented or hindered the party from performing the charter.  If a given event merely makes performance less commercially practicable, there is likely no causation – e.g. if a charterer refuses to take delivery of the vessel because the project for which the vessel was intended has been suspended due to ‘public holidays’ being declared by the Russian president in response to the pandemic.

Finally, many force majeure clauses will only apply if the party invoking them gives timely notice to the other party and also takes all reasonable steps to avert and minimize that other party’s losses.

Unavoidable force, impossibility of performance and fundamental change of circumstances

Apart from express force majeure provisions, Russian law recognize three somewhat similar concepts, which apply even if not specifically mentioned in the text of a charter.

1) Unavoidable force (Art. 401(3) of the Russian Civil Code)

To qualify as ‘unavoidable force’, a circumstance must be extraordinary and unavoidable by any other person engaged in the same type of trade or business as the person invoking it. [20] Like some force majeure provisions, unavoidable force will not terminate the charter or any obligations arising out of it. Rather, it will merely suspend performance until the unavoidable circumstance ceases to exist. However, until such time comes, the party invoking unavoidable force is not liable for possible breaches of the charter [21] (which also means that penalties and interest do not accrue and neither damages for delay [22] nor demurrage may be claimed [23]). Nevertheless, the other party may still validly terminate the charter if unavoidable force caused the charter to be materially breached. Unavoidable force is also similar to force majeure in that the party invoking it must notify its counterparty and must take all reasonable steps to minimize that party’s losses. [24] Whether the COVID-19 pandemic itself or any governmental measures taken in response to it (e.g. closures of ports and other businesses, quarantines, introduction of prolonged ‘public holidays’, etc.) will qualify as unavoidable force will very much depend on the facts of a particular case.

2) Impossibility of performance (Arts. 416-417 of the Civil Code) and fundamental change of circumstances (Art. 451)

‘Impossibility’ will only apply if it (1) arises after the conclusion of the charter, (2) is objective, (3) insurmountable (permanent), and (4) is caused by a circumstance for which no party is in some way responsible. [25] Unlike unavoidable force, impossibility of performance terminates contractual obligations, in part or in full.

Given how many requirements must be satisfied, it is quite unlikely that a party will be able to establish true impossibility in a charter dispute. Fist, the impossibility must be ‘objective’ – i.e. a party must be unable to perform the charter either by itself or by engaging any third parties. Second, the circumstance must be ‘insurmountable and permanent’ – i.e. guaranteed not to pass until the time for performance expires. However, most government restrictions imposed to combat COVID-10 are temporary and are not so significant as to fully prevent a party from performing – either by itself or through third parties.

Third, ‘impossibility’ only relieves a party from liability if that party has not assumed a risk of that event materializing – i.e. that particular risk was not shifted or foreseen in the charter. Bur almost any standard charterparty form contains very wide mutual exceptions clauses or includes additional force majeure provisions – which inevitably mention the risk of government actions. [26] Most likely, it will mean that the parties considered and foresaw the risk of government restrictions in the charter – thereby ousting Arts. 416-417 of the Civil Code on impossibility.

3) Fundamental change of circumstances (Art. 451 of the Russian Civil Code)

For exactly the same reason, it is quite unlikely that in charter disputes we will see parties successfully relying on fundamentally change circumstances in order to modify or terminate their contracts. To do so, a party must show that at the time of conclusion of the charter both parties assumed that the particular change of circumstances will not occur [27]. However, if a specific risk has been shifted or foreseen in the charter, this means that the parties could take it into account when entering into the contract. Also, coronavirus-related delays in ports are usually not prolonged enough to be considered ‘a fundamentally changed circumstance’ – i.e. that if the parties had known about it when contracting, they would not have entered into that contract all or would have done so on substantially different terms. [28]

Using chartered vessels as floating storage

Due to temporary closures of manufacturing facilities and the overall decrease in production in main oil-importing countries, the supply of oil has far exceeds the demand. As a result, chartered tankers fully laden with oil now cannot unload their cargoes at discharge ports – either because the ports themselves are closed or too congested, or because the buyers have rejected that oil, which is now difficult to resell. Can charterers in this case use the ships as floating oil storage facilities?

In time charters, the charterers may ordinarily use the vessel however and wherever they wish subject to trading limits and the duration of the charter itself. Although some standard forms do expressly allow to convert the chartered vessel into a floating storage, [29] the vast majority  of forms do not. Whether it would be permissible to use the ships for storing oil will depend on the length of storage – the longer the period, the more justified the owners will be in refusing to comply with the charterers’ order. Also, the charterers will need to bear in mind that if the owners do agree to a proposed conversion, receivers of cargo under bills of lading may still potentially sue the owners (e.g. for breach of the duty to proceed with reasonable despatch). In turn, the owners will likely be able to claim these losses from the time charterers under express or implied indemnity provisions in the charter. Accordingly, the charterers should be careful to include bill of lading holders in any negotiations concerning floating storage.

The position in voyage charters is more complicated. Such charters usually fix the port of loading beforehand. The owners must also proceed with all reasonable despatch to avoid liability to bill of lading holders. It is likely that owners in voyage charters will be far less willing to convert the chartered ships into floating storage facilities. On the other hand, they may be persuaded to do so if the charterers remain on demurrage and the rate of demurrage exceeds the current hire rate on the market.

In Part 2 of this post RUMLA’s team will discuss COVID-19 problems and possible disputes peculiar to time and voyage charterparties.

Sources: [1], [2], [3], [4], [5], [6], [7], [8], [9], [10], [11].

This material and all other materials on RUMLA’s website are intended for general information purposes only and do not constitute legal advice.

[1] E.g., lines 5, 21-25 NYPE 1946, cl. 2 NYPE 1993, cl. 2 GENCON 1994, cl. 1 ASBATANKVOY.

[2] E.g., cl. 1 NYPE 1946, cl. 6 NYPE 1996, cl. 2 GENCON 1994, cl. 1 ASBATANKVOY.

[3] Art. 124(1) and Art. 203(1) of the Russian Merchant Shipping Code (MSC).

[4] Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26.

[5] Alize 1954 v Allianz Elementar Versicherungs AG (The CMA CGM Libra) [2020] EWCA Civ 293.

[6] Manifest Shipping Company Ltd v. Uni-Polaris Shipping Company Ltd (The Star Sea) [2001] UKHL 1.

[7] The Madeleine [1967] 2 Lloyd’s Rep. 224.

[8] The Eurasian Dream [2002] EWHC 118 (Comm)

[9] Ciampa v British India Steam Navigation Co Ltd [1915] 2 KB 774.

[10] E.g., lines 20, 27, 31 NYPE 1946; cl. 5, 12 NYPE 1993; cl. 1 GENCON 1994; cl. 1 ASBATANKVOY.

[11] The Eastern City [1958] 2 Lloyd’s Rep. 127.

[12] https://www.bimco.org/contracts-and-clauses/bimco-clauses/current/infectious_or_contagious_diseases_clause_for_voyage_charter_parties_2015

[13] https://www.bimco.org/contracts-and-clauses/bimco-clauses/current/infectious_or_contagious_diseases_clause_for_time_charter_parties_2015

[14] https://www.intertanko.com/info-centre/model-clauses-library/templateclausearticle/intertanko-covid-19-coronavirus-clause-voyage-charterparties-explanatory-notes

[15] cl. 16 NYPE 1946, cl. 22 NYPE 1993, cl. 27(b) Shelltime 4, cl. 19 ASBATANKVOY, cl. 3 GENCON 1994, impliedly in cl. 12 BALTIME 1939 (as revised 2001).

[16] See, e.g., cl. 17 NYPE 1993, cl. 21(а)(iii) Shelltime 4.

[17] cl. 2 NYPE 1946, cl. 7 NYPE 1993, cl. 17(b) ASBATANKVOY – though cl. 4 BALTIME 1939 imposes the duty to pay for fumigation exclusively on the charterer, while cl. 6 Shelltime 4 – exclusively on the owner.

[18] E.g., cl.cl. 31-32 SUPPLYTIME 2005.

[19] Russian Supreme Court’s Review of COVID-19 Related Case-Law and Legislation №1, question 7.

[20] Resolution of the Plenum of the Supreme Court of 24.03.2016 № 7, para. 8.

[21] Ibid, para. 9.

[22]  Resolution of the Plenum of the Supreme Court of 11.06.2020 № 6, para. 38.

[23] i.e. agreed payment for using the vessel in excess of laytime.

[24]  Resolution of the Plenum of the Supreme Court of 24.03.2016 № 7, para. 10.

[25]  Resolution of the Plenum of the Supreme Court of 11.06.2020 № 6, para. 36.

[26] E.g., cl. 16 NYPE 1946, cl. 21 NYPE 1993, cl. 27(а) Shelltime 4, cl. 32 SUPPLYTIME 2005, cl. 19 ASBATANKVOY, impliedly – in cl. 12 BALTIME 1939.

[27] Art. 451(2) of the Russian Civil Code.

[28] Art. 452(1) of the Russian Civil Code.

[29] E.g., cl. 21 BPTIME 3.