The Impact of the COVID-19 Pandemic on Charterparty Agreements in the Shipping and Maritime Industry
Written by: Lucky Sithole, Candidate Attorney
The outbreak of the coronavirus pandemic (COVID-19) has caused chaos and panic all over the world resulting in many disruptions in business operations. Almost every coastal state’s trade chain, including the major import and export trade, is faced with a downturn. The ripple effect of the pandemic has led to uncertainty in the interpretation of charterparty agreements and more especially the allocation of risks associated with Covid-19 in a charterparty.
Now more than ever, a charterparty agreement entered between a shipowner and the charterer who hires a ship for a particular voyage or period of time requires scrutiny to avoid disputes. This article discusses clauses making reference to port safety, force majeure, laytime, demurrage, off hire and quarantine.
Most charterparty agreements will contain an express warranty that charterers will nominate a “safe port”. Safety relates not just to the risk of damage to the vessel or cargo due to the physical characteristics of the port, but extends to other risks, including risk to the crew through the threat of infectious disease. Considering the rapid escalation of COVID-19 cases in a number of countries, the risk of infections may also increase between the date of the fixture, nomination of the port and arrival. Therefore, should the port be deemed unsafe before arrival time charterers (or voyage charterers where there is no named port identified in the charterparty) are obliged to nominate an alternative safe port. Generally, in the case of a voyage charter, owners remain obliged to perform the voyage to any named port, having assessed its safety at the time they fixed the ship.
In the circumstances where the nominated port becomes unsafe whilst the vessel is in the port due to a sudden surge of the COVID-19 virus, charterers will be responsible if this was predictable at the time when the vessel was nominated and could not be avoided by ordinary good seamanship practices. If the sudden outbreak otherwise amounts to an abnormal occurrence, owners would be responsible for managing events. Whether a vessel would be required to leave the port to avoid the risk of infection will depend on an assessment of these competing legal divisions in responsibility.
Shipowners will still be bound by charterers’ orders unless the nominated port is considered unsafe and an order to go there refused . Shipowners should not be too quick to refuse an order from the charterers due to the risk of COVID-19 without first conducting a due diligence investigation of the facts in each case. Refusal of a legitimate order from charterers may put owners in repudiatory breach of the charter and there can be knock on consequences under the bill of lading for any cargo on board.
The issue of whether “force majeure” can be used to justify suspension of the performance of charterparty obligations due to the outbreak of COVID-19 is critical. A force majeure clause relieves a party from contractual performance when an unexpected event beyond the parties’ control occurs, and for it to have effect it must be recorded in the charterparty. The clause may also include a requirement to prevent or mitigate the effects of force majeure, meaning it is not open to a party to walk away from its contractual obligations.
If a charterparty agreement contains a force majeure clause, it is still imperative that one look carefully at the specific wording to see if applies to an outbreak of COVID-19. In most cases, one should look for references to pandemic, epidemic, quarantine or extended delays. The burden will be on the party seeking relief to show that the circumstances of the COVID-19 outbreak has prevented them from being able to perform. There must therefore be a causal link between the event and the loss, delay or non-performance of the charterparty.
It has become apparent that a party may rely on a force majeure clause, only in limited circumstances, for example, an inability to load at the nominated port due to generic, and not specific restrictions from the local authorities could trigger the clause. On the other hand, inability to perform a voyage or discharge a cargo because of substantial delays at the discharge port (even if known), will most likely not trigger the clause. If the charterparty agreement does contain a force majeure clause, requiring the event to be unforeseen or unforeseeable, then it will not apply to COVID-19 risks which were known at the time of the fixture. So, for any recent or new fixtures, COVID-19 is a known global risk and parties will not be able to rely on such force majeure provisions. Courts will not come to the assistance of parties merely because the contract has become more onerous or expensive than anticipated when agreed.
COVID-19 risks may force strict port restrictions including, for example, quarantine. In each case the terms of the charterparty must be assessed to see which party will bear the risk of the delay and any associated costs or losses. For a time charterparty, where there is delay in arrival or departure from a port, a vessel will generally remain on-hire unless the reason for the delay is linked to the vessel or crew. Time charterers are therefore required to continue to pay hire unless there are events which fall within the off-hire provisions of the charterparty affording them the right to stop paying hire. One should always look at the wording of the off-hire clause as well as the factual cause of any COVID-19 related delay.
Will a vessel be off-hire if it is quarantined? In the absence of a specific quarantine provision, and if, following charterers’ orders, the vessel calls at a port and is quarantined as a result of those orders, then the vessel will remain on-hire. The same will apply if the vessel is then prevented from entering, or is delayed at, the next or subsequent ports. The vessel would remain on-hire as charterers cannot rely on an off-hire event if they have caused it themselves.
If on the other hand, the quarantine (and any subsequent delay) is linked to crew change or infected crew members requiring medical treatment, then charterers may seek to rely on the commonly used ‘deficiency of men’ provisions in many off-hire clauses. The effectiveness of this may depend on the number of crew members affected. The material test will be whether the vessel can still perform the services required of it without the crew members affected. If so, and no time is lost, the vessel will remain on hire. However, if time is lost due to any delay in quarantine arising from crew communication with the shore at an infected area without the written consent or instruction of charterers or their agents, the vessel will be off hire.
In a voyage charter it is important to establish when time counts for laytime and demurrage. Usually, time will count from tender of a valid notice of readiness (NOR) in the usual way in any port affected by COVID-19. However, it may be necessary to obtain free pratique (a clean bill of health for the vessel ) prior to NOR if there are health issues on board the vessel. If there are infections on board, then a valid NOR cannot be tendered. In these circumstances, the risk and cost of any delay in obtaining free pratique will fall to the owners.
Regarding a vessel quarantined while on a voyage charter, parties need to look at any quarantine provisions in the agreement. In the absence of any provisions, the usual laytime regime will apply, and laytime will not commence as the vessel will not be at charterers’ disposal, for example, ready to load. Generally, most charterparties provide that if charterers order the vessel to proceed to a port where quarantine is known to exist, then any quarantine period will count for the purposes of demurrage. If the quarantine is declared at a port after charterers have made their nomination of that port, then time will not count, and the delay will be for owners’ account.
In attempting to address how the risks associated with COVID-19 in a charterparty may be allocated, and to avoid disputes, parties must check the terms of their charterparty agreement to see if the issues identified above and indemnity clauses are adequately covered. For example, most standard tanker charterparty agreements contain quarantine provisions, and deal with the consequences of delay in obtaining free pratique. Some agreements may even contain force majeure provisions, though with great caution.
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