Effect on contracts of end of Black Sea Corridor deal – Gard

Norway-based marine insurer and Group Club Gard has updated members on the effect on contractual obligations of the cessation on July 17th of the Black Sea Grain Initiative (BSGI), which had allowed grain products to be shipped from Ukrainian Black Sea ports.

Cliff Notes:

The ending of the BSGI had not affected the contractual risks in relation to trade to Russian ports, said Gard. It had however effectively ended trade to Ukrainian northern Black Sea ports, and raised contractual issues around safety and war risks in relation to Ukrainian Danube ports. For the small number of vessels still awaiting BSGI approval when the agreement expired the split of liabilities between the owners and charterers will depend on the contractual provisions. If there are no relevant contractual provisions those contracts may be frustrated, if not now, imminently (particularly in the case of vessels fixed to load at Odessa). In such circumstances the best solution is to renegotiate terms. 

Recent attacks on two Russian vessels in the Black Sea have led to the market for war risks being considered to be volatile and quotes being valid for 24 rather than 48 hours. However, on balance as things stand at the moment, Russian Black Sea ports would likely still be considered to be ‘safe’ within the meaning of the charter party.

More detailed analysis:

Gard said that Russia and Ukraine had warned that they might strike commercial vessels heading to the other country‘s Black Sea ports. Access to the northern part of the Black Sea, west of Crimea, is prohibited by the Russian Navy. The Sea of Azov is closed to commercial vessels except those that operate with Russian approval.

The security level has increased at Ukrainian and Romanian Danube ports because of strikes against port infrastructure on the Ukrainian side. The Ukrainian Danube ports were never part of the BSGI, but their profile had risen as a result of its ending.

Strikes have been made against port infrastructure in Odessa, putting into question whether the port could be used even if the BSGI were revived. 

The threat to shipping from mines has increased in the Western part of the Black Sea area.

Ukrainian forces struck the Olenegorsky Gornyak from Russia’s Northern Fleet (used to transport troops and equipment) in the port of Novorossiysk. They also struck the tanker Sig, a sanctioned vessel used to transport fuel for Russian forces in the Black Sea near Crimea.

Gard has examined some of the pressing issues that have arisen out of this new reality. Gard added the caveat that its comments were based on the factual circumstances as at the date of publication. “In a war situation, things change quickly and much depends on your contractual wording so please seek advice from your FD&D advisor where necessary”, Gard said.

Are Ukrainian ports contractually “safe”?

Put simply: No.

Ukrainian sea ports in the Northwestern area of the Black Sea are no longer ‘safe’ ports as the term is understood contractually. The security guarantees given to shipping by both sides under the BSGI are no longer in effect. This means that means that the Ukrainian Black Sea ports effectively are blockaded and out of use for commercial vessels. The reality is that, although the BSGI expired on July 17th, no new ships had been approved since June 27th.The last sea export of Ukrainian grain under the BSGI left Odessa early on July 16th, ahead of the deadline.

The ports on the Ukrainian side of the Danube are open, but port infrastructure has been targeted several times by Russian attacks (particularly the grain silos). Russia has also made it clear that any commercial vessel in the Black Sea calling at Ukraine is at risk.

Are the Danube ports contractually “safe”?

Put simply: Perhaps, perhaps not.

Gard said that it was “always difficult to characterize a port as unsafe when there is a perceived threat but not actual damage to ships”. This was particularly the case where shipments from ports such as Izmail had been continuing. In addition, most loading was done by lightering barge, so the risk of damage from a strike on land was probably reduced. Nonetheless, traffic to and from the Danube ports had been much reduced; war risks pricing had been volatile and high.

Are Russian Black Sea ports contractually safe?

Put Simply: Probably yes.

Ukraine said in response to Russian announcements relating to the Black Sea that it would be targeting shipping bound for Russian Black Sea ports. On August 4th and 5th it struck two vessels: the Russian navy vessel Olenegorsky Gornyakin and the tanker Sig .However, there had been no attack on commercial shipping so far (the Sig was considered to be a carrier of oil for military purposes). It was considered unlikely that the Ukrainian military would attack non-Russian commercial ships, although there might be a danger of such vessels being caught in crossfire.

All Russian waters fall within a Joint War Committee Listed Area (War Risk Area) and Gard said that “certainly there is a risk to commercial shipping of damage by drones (whether deliberate or not)”. There was also still an ongoing risk to shipping from mines.

But despite all this, given that there was still substantial trade out of Russia and no commercial vessel had been damaged, Gard said that the Russian Black Sea ports were likely still to be considered as ‘safe’.

Legal issues arising out of the cessation of the BSGI

Given that the options for carriage of goods to the Ukrainian ports were now few and all the vessels authorized to use the BSGI have left the Ukrainian BSGI ports, the relevant legal questions are limited. Gard outlined the position on a few issues.

Vessels waiting in the Bosphorus that did not obtain approval under the BSGI:

Prior to the termination of the BSGI the delays in obtaining the approvals had made this a less attractive option for vessels. According to the UN report on July 15th there were 29 vessels in Turkish waters awaiting approval under the BSGI. The contractual position in relation to delays to those vessels and the failure to obtain approval would very much depend on the wording in the contract, said Gard. In most cases it was likely that the burden of delays in obtaining approval would be on the charterers.

Given that the BSGI has ended, and despite the statements from Ukraine, Russia, the UN and Turkiye that given the right circumstances it could be resuscitated, Gard said that there seemed to be no prospect of commercial trade to the ports covered by it, which Gard said “looks unlikely at the moment”.

Gard said that, in the circumstances, it was likely that any voyage charter parties to those ports were now ‘frustrated’ or would be imminently, unless they included an ‘or so near there to as she may safety get’ provision. In those cases, said Gard “it is always better to seek a negotiated end to the charter or agreement to an alternative fixture, since the losses fall where they lie once a contract is frustrated”.

For those vessels under time charter the owners would be able to seek new orders on the basis that the ports to which they were originally ordered were now unsafe.

Vessels with orders to call at Danube ports in Ukraine – Voyage Charters:

Given that the Danube ports in Ukraine were not covered by the BSGI, its termination did not affect those orders. It was possible that owners could refuse orders to Danube ports if they had a safe port warranty, but the actual risk would have to be assessed in each case.

In the absence of an express safe port warranty in the voyage, Gard said that it was difficult to see any grounds on which the orders could be refused by the owners, unless there was a favourable war risk clause such as VOYWAR 2013, which owners might be able to use to cancel the charter, providing the charter was not entered into after the recently reported attacks.

From the charterers’ point of view, they might no longer be willing to carry out the charter because the war risk premium rendered it uncommercial. In those circumstances, if the charterers terminated, they would likely be liable for breach of charter, said Gard, adding that “the fact that the charter has become uncommercial for the charterers is not a basis for termination unless there is a specific agreement to that effect nor is it a basis for a frustration argument”. In circumstances where the risk was high for owners and the contract made no commercial sense for the charterers, there was an incentive for the parties to renegotiate the terms of the charterparty.

Vessels with orders to call at Danube ports in Ukraine – Time charters:

As previously noted, it was not clear whether the Danube ports would be considered to be unsafe. “However, given the heightened level of danger at least onshore at these ports it would be understandable if owners were now more reluctant to follow orders to load there”, said Gard.

Such owners might be able to rely on specific war risk wording to refuse orders, such as CONWARTIME 2013, or similar bespoke wording. But Gard commented that the fact that trading out of these ports was continuing (although much reduced) would offer a counter argument to charterers. “Even if the owners do not have favourable war risk wording to rely on it may be in both parties’ interests to negotiate an agreement for alternative orders to be given since the war risk premium has substantially increased”, Gard said.  

Vessels with orders to call at Russian Black Sea Ports – Voyage Charters:

The position in relation to calls to Russian Black Sea ports had not been affected by the termination of the BSGI. It might be possible for an owner to refuse a particular voyage instruction on the basis of a favourably worded sanctions clause, but Gard felt it to be unlikely that there would be any other contractual grounds, given that commercial shipping had not been affected by the Ukrainian strikes. “The war risk market is keeping an extremely close eye on the situation which the underwriters see as volatile, and quotes are now generally only valid for 24 hours rather than the previous 48”, observed the insurer.  

Vessels with orders to call at Russian Black Sea Ports – Time charters:

At the moment, on balance, Gard felt that Russian ports were likely still to be deemed ‘safe’, but the insurer warned that this would “have to be kept under careful review by owners”. This meant that at the moment there were unlikely to be grounds on which owners could refuse orders to Russian ports. Gard said that it had not received reports of harassment of Ukrainian nationals for some months, but said that this might be because they were not on vessels going to Russian ports. The perceived threat to US/European vessels also seemed to have subsided from the high point at the beginning of the war, since there had been a great deal of normal trade in and out of Russia.