COVID-19 and Charterparty Disputes. Part II – Issues Under Time and Voyage Charters

16/7/2020

In Part I of this post, RUMLA’s team discussed how COVID-19 may affect charterparty disputes – regardless of the type of charter. This is Part II, in which we will consider coronavirus-related issues peculiar to time and voyage charters.

Time charters

In time charterparties, the charterer effectively buys the ship’s commercial earning capacity for a certain period of time. During the charter period, he 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. COVID-19 in the time charter context will likely give rise to disputes around off-hire, owners’ indemnities from the charterers, as well as releasing cargoes against letters of indemnity.

The owners’ indemnity for following the charterers’ orders

In Part I, we described how special coronavirus clauses like those developed by BIMCO or INTERTANKO may allow owners to claim indemnity from the charterers for losses caused by entering an area affected by COVID-19. However, even in the absence of these new provisions, most standard time charter forms already oblige the charterers – expressly or impliedly – to indemnify the owners for losses caused by complying with the charterers’ orders. [1] During the COVID-19 pandemic, the owners are quite likely to rely on these indemnity rights in a variety of situations – e.g. if the charterers insist on entering an infected port or a port where quarantine or other restrictions on arriving ships and crews are in place.

Off-hire

Under most time charterparties, the charterers continue to pay hire even if the vessel is detained. By default, the risk of detention is on them. However, the charterers may stop paying hire if they show that the cause of detention falls within a so-called ‘off-hire clause’ in the contract. [2] Usually, an off-hire clause would include a list of events interfering with the vessel’s operation within the owners’ sphere of control.

In the context of COVID-19, the most relevant events listed in off-hire clauses would be the ‘deficiency of men/personnel’ and the catch-all phrase ‘any other cause preventing the full working of the vessel’. Depending on how the particular off-hire clause is worded, the charterers may avoid paying if they show, for example, that the detention was caused by a crewmember contracting COVID-19 and the need to provide treatment on shore. Similarly, the charterers will likely prove that the vessel is off-hire if it has been quarantined – unless the quarantine is required for all ships arriving at a port regardless of any infections on board. In such a case, the detention would not be due to problems with the particular chartered ship. On the other hand, delays in ports due to port closures, congestion or reduced speed of cargo operations would most likely not put the vessel off-hire – because such delays are not caused by deficiencies of the chartered vessel either.

However, it appears that even if detention in a port affected by COVID-19 does put the ship off-hire, the owners would still likely be able to claim the lost freight from the charterers – as an indemnity for complying with their order to enter the infected port in the first place.

Letters of indemnity

Coronavirus-related delays in ports also prevent cargo receivers from obtaining the necessary cargo documents – most importantly, original bills of lading. Because of this, receivers are now more likely to ask shipowners to release cargoes without production of original bills. In turn, owners are only likely to do that against letters of indemnity from the charterers or third parties (e.g. cargo insurers). In a typical letter of indemnity, the guarantor undertakes to indemnify the owners for all losses caused by releasing the cargo without an original bill of lading – e.g. if a lawful holder of the original later sues the owners for misdelivery. Some standard time charters already contain clauses dealing with the owners’ duty to release cargo against a letter of indemnity and the form of such letters. [3]

COVID-19 makes issuing letters of indemnity more complicated, which leads to delays in releasing cargo. This is because delivery of cargo without an original bill of lading is not covered by the owners’ standard P&I insurance cover. Therefore, owners must be certain that guarantors named in such letters are financially sound – which is harder and harder to be sure of given the growing number of coronavirus-induced bankruptcies among even successful companies. Financial due diligence thus seems to be key for owners.

Voyage charters

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. Voyage charters present unique problems during COVID-19 and will likely cause disputes around notices of readiness, free pratique, demurrage, detention, as well as incorporation of Hague-Visby Rules.

Free pratique and notices of readiness

Under a voyage charter, the charterers are allowed a number of free days for loading/unloading, called ‘laytime’. [4] After laytime expires, the charterers must pay to the owners a fixed sum for each day the vessel is detained, called ‘demurrage’. [5] If the charterers’ time on demurrage expires too, the owners may claim unliquidated damages, known as ‘detention’. [6]

COVID-19 may give rise to disputes in this area, because in order for laytime to commence, the owners must give a valid notice of readiness (NOR) to the charterers. [7] For a NOR to be valid, the vessel must be ready, both physically and on paper, for loading/discharging cargo – which includes receiving from the port authorities a confirmation that the ship is free from contagious diseases (known as ‘free pratique’). Ordinarily, obtaining free pratique is a mere formality and does not affect the commencement of laytime, so the owners can give a valid NOR even before free pratique is obtained.

However, if there are infected crewmembers on board or if the vessel has previously called at infected ports, getting free pratique ceases to be a mere formality. This means that until the owners obtain it, they will not be able to validly give a NOR to the voyage charterers and they bear all expenses arising out of the vessel’s delay in port. However, some standard form voyage charters allow owners to give a valid NOR even before receiving free pratique – so called WIFPON clauses (‘whether in free pratique or not’). [8]

Disputes about demurrage and detention

Assuming the vessel did receive free pratique, increased pressure on port infrastructure, shortage of shore personnel, mandatory sanitary requirements and delays in producing original cargo documents may cause the charterers to exceed their allowed laytime and go on demurrage.

Under general rules of interpretation of voyage charters, exclusions and interruptions of laytime (e.g. due to weather or holidays) [9] do not apply if the charterers are already on demurrage. Moreover, general clauses excluding charterers’ liability or force majeure provisions do not apply to either laytime or demurrage – unless they specifically say otherwise. In this connection, charterers would be well advised to inquire about possible port delays in loading/discharge ports in advance and, if delays are substantial, to negotiate reduced demurrage rates/increased laytime with their owners.

It should be noted that some standard voyage charter forms already contain provisions reducing demurrage by half if, for example, delays are caused by stoppage of works at the charterers’ or receivers’ plants – which may very likely occur during the pandemic. [10] Also, if the delay is caused by events in the owners’ sphere of control (e.g. infection of some crewmembers and subsequent quarantine), time lost due to these events will not count as either laytime [11] or demurrage. [12]

If the terms of the charter restrict the number of days in demurrage and the charterers exceed those, the owners may claim unliquidated damages (knows as ‘detention’) for any delays of the vessel. Unlike demurrage, the amount of detention if not fixed in the charter beforehand and is calculated based on the market freight rate multiplied by the number of days the vessel is detained. Where delays are likely to be lengthy, charterers should consider terminating the contract – if the existing force majeure/early cancelation provisions or applicable rules on unavoidable force or fundamental change of circumstances allow such termination.

Voyage charters incorporating Hague or Hague-Visby Rules

Many voyage charterparties incorporate Hague or Hague-Visby Rules or their domestic enactments by reference, using so-called ‘clauses paramount’. If such rules are validly incorporated, this means that owners/carriers will be able to exclude their liability to charterers/receivers if they show that a particular loss is caused by quarantine [13] or other government actions, [14] measures taken for the purpose of saving life at sea [15] or other circumstances causing stoppage or restraint of labour, whether partial or general. [16]

At the same time, owners should bear in mind that the above exclusions will not apply if the charterers/receivers show that their losses are caused by the vessel’s unseaworthiness (e.g. by crewmembers getting infected or if the vessel has previously called at infected ports and is now detained for quarantine). If this is the case, the owners/carriers will have to prove that they took all reasonable steps to make their ship seaworthy before or at the commencement of the voyage [17] – for example, that they implemented and followed adequate protocols for preventing the spread of COVID-19 on board.

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] Expressly – in cl. 9 BALTIME 1939 (as revised 2001), cl. 13 Shelltime 4; impliedly – in cl. 8 NYPE 1946; cl. 8(а) NYPE 1993.

[2] E.g., cl. 15 NYPE 1946, cl. 11 BALTIME 1939 (as revised 2001), cl. 17 NYPE 1993, cl. 21 Shelltime 4.

[3] Cl. 30.3 BPVOY 4, cl. 33(6) SHELLVOY 5.

[4] Art. 130(1) of the Russian Merchant Shipping Code (‘MSC’).

[5] Arts. 131 and 132 MSC.

[6] Art. 135 MSC.

[7] Art. 130(2) MSC.

[8] Cl. 6(c) GENCON 1994. But see cl. 6.3.3 BPVOY 4 and cl. 13(1)(а)(iii) SHELLVOY 6.

[9] Art. 131(3) MSC.

[10] E.g., cl. 8 ASBATANKVOY.

[11] Art. 130(3) MSC.

[12] Art. 131(3) MSC.

[13] Art. 4(2)(h) Hague-Visby Rules.

[14] Ibid., Art. 4(2)(g).

[15] Ibid., Art. 4(2)(l).

[16] Ibid., Art. 4(2)(j).

[17] Ibid., Art. 4(1).