English Law Charterparty issues relating to potential hostilities between the Ukraine and Russia

Skuld has released a timely FAQ on English Law Charterparty issues relating to potential hostilities between the Ukraine and Russia

Skuld said that obviously while it was hoped by all that a conflict could be avoided, as a precautionary measure it was publishing the following general FAQs, providing members, assureds and interested parties with some general guidance on a few fundamental questions.

Skuld noted that each case turned on its own specific facts. In the event that an actual matter arose, members and assureds should immediately contact the club for further guidance.

Glenn Winter of Winter Scott, London Solicitors, provided assistance in the formation of and comment on these FAQs.

1. Are Owners currently entitled to refuse to follow orders to proceed to a Ukrainian port?

This was likely to depend on the type of war risk clause in the Charterparty, and on how events developed over the next few days and weeks.

Owners might well be entitled to refuse if the Charterparty contains a standard war risk provision such as one of the Conwartime clauses (as incorporated into many dry time charters) or Voywar clauses (as incorporated into Gencon voyage charters). At present, the risk of war would appear to be probably sufficient to justify Owners exercising their discretion not to proceed provided Owners have genuine safety concerns; see, for example, The Triton Lark [2012] 2 Lloyd’s Rep. 151.

On the other hand, war risk clauses in tanker charters (such as Shelltime and Shellvoy charters) are more restrictive and may not apply unless and until hostilities actually break out.

If hostilities break out it is likely to become clearer that Owners will be entitled to rely on standard war risk provisions, whereas if tensions de-escalate, Owners may well lose any right to do so.

Charterparty provisions should be reviewed very carefully to determine whether there are any bespoke provisions that would affect the legal position for owners.

A decision to refuse to proceed should not be taken lightly, particularly if there is cargo on board bound for the Ukraine. That would likely result in complications and potential liabilities under any Bill of Lading, unless the Bill itself effectively incorporates an applicable war risk clause.

2. Are ports in the Ukraine (at present) legally unsafe?

Skuld said that this was a more difficult question because it was currently unclear whether the risk of prospective danger was sufficient to make ports legally “unsafe”, bearing in mind that hostilities had not yet broken out and that, even if there was an outbreak of hostilities, that might not affect the safety of ships.

For these purposes, a relevant question (as formulated in In The Ocean Victory [2017] 1 Lloyd’s Rep. 521 at 529) would be “whether a reasonable shipowner in the position of the particular shipowner trading the ship for its own account and knowing the relevant facts would proceed to the nominated port”. Skuld noted that it was “difficult to answer such a highly theoretical question”. Some Owners would no doubt be concerned about sending a vessel to Ukraine when hostilities could be imminent, but it was noteworthy that, notwithstanding the threat of war, the Joint War Committee had commented: “The current assessment is that there is armed balance and the area is not Listed as there have been no maritime incidents”. (However, see story today about the JWC’s elevation of the danger level for the area: Ed.).

Consequently, although this was an issue on which different Courts and Tribunals might hold different views and although those views might no doubt be heavily influenced by subsequent events, it was doubtful whether all Ukrainian ports would, at present, be treated as legally unsafe, said Skuld.

The situation should be monitored on a case-by-case basis. It might also be the position that certain Ukrainian ports (for example those in the Sea of Azov) were more exposed to potential imminent danger than others.

If ports were deemed prospectively unsafe, then Owners would be entitled to refuse to follow orders to proceed to such ports, even if there was no applicable war risk clause in the Charterparty.

3. What about Russian Ports?

It was also arguable that Owners might be entitled to refuse to proceed to Russian ports in the Sea of Azov under standard war risk clauses or that such ports were also legally unsafe, although these arguments would appear weaker than those applicable to Ukrainian ports (as the threat of invasion only applies to the Ukraine).

4. How will sanctions affect Charterparties?

If further sanctions are imposed on Russian companies in such a way as to make performance of a Charterparty illegal, the Charterparty would probably be treated as if it were frustrated (by supervening illegality), unless there was a sanctions clause in the contract, such as the BIMCO Sanctions Clause for Time Charter Parties 2020 or BIMCO Sanctions Clause for Voyage Charter Parties 2020. In that case Owners might be in breach if they or other vessels’ interests become sanctioned; Charterers might be in breach if they, Sub-Charterers, Shippers, Receivers or Cargo Interests become sanctioned.

5. What if vessels become trapped in the Sea of Azov?

In this case the Charterparty would become frustrated if the delay and prospective delay were so lengthy as to radically change the nature of the contract, unless either party was in breach (which would be the case if Charterers, for example, were in breach of their safe port obligations). In the absence of a breach or a frustrating event, loss would generally lie where it falls, so that Charterers would be obliged to pay hire under a Time Charterparty, but Owners would not be entitled to recover the costs of detention under a Voyage Charterparty.

6. What if vessels are unable to enter the Sea of Azov due to Russian restrictions?

A Time Charterparty would continue, with Charterers being entitled to trade the vessel elsewhere. A Voyage Charterparty might be frustrated if the delay and prospective delay involved in proceeding to a nominated port in the Sea of Azov were so lengthy as to radically change the nature of the contract.

7. What is the insurance position in respect of liabilities, costs or expenses caused by war?

War risk liabilities, costs or expenses are generally excluded under standard P&I Cover. However, the IG has arranged an excess War policy for all members. It applies excess of the value of the vessel or $500m, whichever is the less, and it has a cover limit of $500m.

8. What should Owners and Charterers take into account before entering into a new Charterparty?

If Owners do not wish to trade to the Ukraine or Sea of Azov, these places should be expressly excluded from permitted trading areas. Owners should also ensure that the Charterparties contain favourable war risks and sanctions clauses.

Conversely, If Charterers wish the vessel to trade to the Ukraine or Sea of Azov, they should insert a clear clause entitling them to do so (although it would probably be necessary to agree to some restrictions in the event of an outbreak of hostilities).

If (due to their particular trading requirements), Charterers are concerned about potential war risks or sanctions, they should not agree to standard (pro-owner) clauses but insert clauses protecting their interests (for example, permitting them to terminate in appropriate circumstances).