Gard: Impact on shipowners of war in Ukraine

Norway-based marine insurer and Group Club Gard published two long pieces on Monday March 7th on the impact on shipowners of the war in Ukraine. IMN summarizes the first of them today and will publish the second tomorrow/

The first was War in Ukraine – Impact on contractual obligations, and the second was War in Ukraine – impact on crew contracts, claims and repatriation

In the first article Gard outlined some of the Frequently Asked Questions primarily related to Defence issues. While many questions would depend on the specific facts, Gard has provided some general guidance. These will be supplemented as events unfold. The answers are based on the charterparty being subject to English law.

Issues of “safety/unsafety”  

The classic definition of unsafety from the case of The Eastern City applied to both voyage and time charters, but the consequences of unsafety were different.  

“A port will not be safe unless, 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…”

The questions raised were:

1. If the charterparty contains a safe port warranty, can orders to Ukrainian ports be refused?

The answer is likely, “yes”, although advice should be sought on your specific situation before doing so. Since February 24th the northwest Black Sea waters, bordering Ukraine, have been closed to all shipping. Ukraine is under sea blockade, carried out by the Russian Black Sea Navy Fleet. Merchant ships nearing the zone prohibited for navigation are warned by Russian Navy ships via VHF, that navigation near and in Ukrainian waters is prohibited, because the Russian Navy is performing “counter terrorist operation,”. All ships entering this zone would be considered to be terrorists. Ukrainian ports would not be considered safe for most vessels, and in the very unlikely event of the vessel being ordered to them, they could be refused.

2. If the charterparty contains a safe port warranty can an order to Russian ports be refused?

Gard warned that Russian ports could be unsafe for Ukrainian crew. It said that it had received reports of some Ukrainian crew being taken off and questioned about their political beliefs, and on one occasion at least a Ukrainian crew member was not returned to the vessel. The facts were currently very unclear, so care should be taken if this is the ground being relied upon. “It might be incumbent on the owner to change the Ukrainian crew rather than refusing the order”, said Gard.

Russian ports were not currently unsafe for all vessels. However, the situation could change quickly, and risks might arise in the future to vessels and crew from NATO countries, in view of the seizure of Russian vessels and assets in Europe and the increase in sanctions against Russia, which have been said by Russia to be akin to a declaration of war. 

3. If there is no express safe port warranty in the charterparty, can one be implied?

Gard said that, while it could be implied, it was quite difficult. It was most likely to be implied in a time charter with wide trading limits and will not be implied in a voyage charter or time charter trip with named ports. Gard advised that clients consult with their claims handler before assuming that the charterparty had an implied safe port warranty. 

4. What if the charter does not include an express or implied safe port warranty?  

There might be other clauses that would enable an insured to refuse calls to Russian or Ukrainian ports.

5. Can the owner ask for revised orders if the port becomes unsafe?

“Yes”, if it is a time charter, but “No” if it is a voyage charter. In the case of a time charter the charterer must provide revised orders.

In the case of a voyage charter there was no automatic right to renomination, but in the vast majority of the cases the parties would reach an agreement to cancel the charterparty. 

In the absence of an agreement the vessel would have to wait outside the port until the charter became frustrated. Gard observed that this was “not a practical solution, so a negotiated solution should be found”.

Frustration

There were various scenarios where the question might arise of whether charterparties had been frustrated, i.e., impossible to be performed or their principal purpose is radically changed. As has been observed innumerable times, it was very difficult to prove frustration under English law. Gard said that it was “always better to seek a negotiated end to the charter rather than relying on frustration”.

In addition, the results of frustration were unlikely to be ideal for either party since the losses lay where they fell. Money paid in advance for services not provided when the contract was terminated could be recovered by the party who paid it, although the court could order those expenses incurred should be deducted from it. 

6. Are the charterparties for vessels trapped in Ukraine frustrated?

Time charters were not yet likely to be frustrated, and hire would continue to be paid until they became frustrated by extraordinary delay, which could mean a delay of weeks or months.

Voyage charters were more likely to be frustrated, but there would be no practical difference to the owners since they would not be able to claim detention as a result of the delays. Their best chance of obtaining payment of freight “may simply be to wait it out”, said Gard.

7. Are charterparties for vessels bound for Ukrainian or Russian ports frustrated?

Voyage charters and time charter trips for Ukraine were likely to be frustrated since it was impossible to get there. Time charters would not be frustrated since the owner could call for alternative orders and the charterers would be obliged to provide them.

Russian ports were still reachable. Gard said that, as things currently stood, they were not “unsafe” except potentially for vessels with Ukrainian crew on board (and the crew can be changed). Neither voyage nor time charters were likely to be frustrated at the moment. 

8. Are charterparties for Russian vessels to UK ports frustrated?

The UK has banned any vessels owned or operated by anyone connected to Russia from UK ports. EU ports are proposing to impose similar restrictions. In those circumstances voyage charters and time charter trips of those vessels to UK ports were likely to be frustrated, since the ban was indefinite.

Time charters of those vessels were unlikely to be frustrated at the moment, but the situation could change if the banning of Russian vessels becomes more widespread within the trading zone for those vessels.

Gard said that a negotiated solution should be found.

Contractual clauses have been developed to address the allocation of war risks.  These might be negotiated on a case-by-case basis between the parties, or they might elect to use standard industry clauses, such as the BIMCO war-related clauses. These clauses would vary, but Gard considered some common clauses that have been the subject of questions from Members.   

9. Can an owner cancel if the charter contains a clause allowing for cancellation in the event of war between the following countries: United Kingdom, United States of America, France, the Russian Federation, the People’s Republic of China (the so-called Five Powers)?  

No – because there is not currently a war between any two of those countries.

10. Can an owner cancel if Ukraine is included in the list? 

Yes – there is war between the Russian Federation and Ukraine. 

11. Can an owner refuse voyage orders given by a time charterer to proceed to a Russian port in the Black Sea by relying upon a CONWARTIME 2013 clause? 

Gard said that, while it was clear that owners may refuse orders to go to a Ukrainian port by reason of being exposed to “war risks,” it is not so clear in respect of Russian ports. The presence of a Ukrainian crew may expose the vessel to war risks as defined within the clause, but this is a question of fact to be determined at the material time and in respect of the intended port of call. Furthermore, the clause gives owners the express liberty to call at an alternative port to change the crew where there is concern for their safety. 

12. Who is liable to pay the significantly increased Additional War Risk Premiums (AWRP) in respect of calls to Russian ports in the Black Sea?

Gard said that, if such a call was considered to involve going through a war risks area as defined in the CONWARTIME 2013, and this clause was included in the charter, then charterers would be responsible for the AWRP. The same was equally true of the VOYWAR 2013 clause. 

Delay

Vessels were currently stuck in Ukraine. Although vessels were not currently being detained in Russia, it was possible that a vessel could go into a Russian port in the Black Sea, load its cargo and subsequently be prevented from departing as a result of a Russian Naval blockade or otherwise. Who is responsible for what?

13. If the vessel is on time charter, does it remain on hire whilst detained?

Yes. Unless there is an express clause in the charter providing otherwise. The vessel remains at the service of the charterer and is fully efficient in all respects (subject to any force majeure provisions in the charter). 

14. If the vessel is on voyage charter, can Owners claim for the loss of time/delay to prosecution of the voyage?

During cargo operations, laytime and demurrage run as usual, unless there were specific laytime or demurrage exceptions clauses which were triggered. Once cargo operations had been completed and the vessel’s documents had been returned, owners would only be able to claim against charterers for the delay by way of detention. However, to claim the same charterers would have to be in breach of the charter which they would not be if the delay was the fault of neither party.

15. If cargo operations are delayed does the ASBATANKVOY exceptions clause interrupt the running of laytime or demurrage?

No. Unless specifically referred to the general exceptions clause does not apply to the running of laytime and demurrage.  

Force majeure

As had been pointed out many times, under English law there was no common law concept of ‘force majeure’, so the application and effect of a Force Majeure Clause depends entirely on what the clause states. Gard said that “care must be taken to understand and follow them precisely”. If there was no clause, neither party would have a right to rely on the principles and they would potentially have to fall back on the difficult-to-argue English law doctrine of frustration.

16 If the Member has a force majeure clause in the charterparty are owners and charterers obligations suspended?

Gard said that everything depended on the wording of the clause, which would have to be considered very carefully. The recently published BIMCO Force Majeure Clause 2022 defines “actual, threatened or reported war, act of war” and “warlike operations” as being among the Force Majeure events. It was therefore likely that events in Ukraine would qualify as an event which would trigger the application of the clause.

However, the clause does not operate to suspend payment obligations, i.e., hire must continue to be paid and laytime or demurrage would continue to run in accordance with its provisions. In addition, this force majeure clause would permit termination of the charterparty where the parties have agreed to this option and there was no cargo on board. 

In general terms, a vessel waiting off Ukrainian ports to load cargo might well be experiencing a force majeure event, which could substantially change the parties’ rights and obligations to each other, if there is a force majeure clause. Members and clients were recommended to seek guidance from their normal FD&D lawyer if they think a force majeure clause might be triggered. 

Cargo issues

Gard noted that it members were also concerned about potential claims from cargo owners under bills of lading if the cargo was damaged or delivery delayed or if delivery became impossible. The potential liabilities for owners would depend on whether the charterparty was incorporated into the bill of lading and its terms. However, generally speaking the Hague or Hague Visby Rules would be incorporated. 

17. Are owners likely to be liable under any bills of lading issued for any damage to the cargo as a result of the delay to the voyage and the ensuing delayed arrival of the cargo at destination? 

On the basis that the bills should incorporate the Hague or Hague Visby Rules, owners would most probably be able to rely upon one or more of the defences set out in Article IV r 2 of the same. For example: (e) Act of war or (q) Any other cause arising without the actual fault or privity of the carrier.

Many standard form bills of lading also qualified the discharge port with the protective wording “or so near thereto as she may safely get” which would entitle the shipowners to discharge the cargo at an alternative discharge port where the contractual discharge port was no longer safe.

If shipowners exercised this right, discharge at the alternative port would not be a breach of the bill of lading contract and they should be able to rely on the wording in defence of any claims for late or non-delivery.

Shipowners should undertake an outturn survey to capture the condition of the cargo upon discharge in case it had been subsequently damaged.

Insurance covers

The events in Ukraine touched on all covers available to Members. This article primarily covers defence issues, and Hard has predominantly looked at issues relating to FD&D (Defence). 

18. If Members have potential claims against their counterparties arising out of the war in Ukraine will the legal costs of pursing these claims be covered by FD&D.

Gard’s FD&D handlers would advise members on claims and would assist as far as possible in finding a solution. If a claim must be brought, FD&D would be provided subject to the usual rules.

Sanctions

As guidance for members Gard touched upon some of the questions that had most commonly been asked of defence lawyers. 

19. In the absence of a charterparty provision specifically requiring it can owners require charterers to provide due diligence information about cargo and shippers and receivers before accepting a voyage and/or loading cargo?

In the absence of an express term, there was no direct implied term entitling owners to require charterers to provide due diligence information.

Terms dealing with lawful merchandise or trading range/included/excluded cargoes might include specific wordings, but these could be very particular, and were often limited to one or more specific cargoes to be carried. 

If there was a sanctions clause in the charterparty it might be possible to argue that the charterers must provide information to enable due diligence to be carried out, so that the sanctions clause can function, but Gard said that this was uncertain.

“The best way to deal with this type of issue is to have a strong sanctions clause requiring charterers to provide reasonable due diligence information requested by owners or their underwriters”, said Gard.

20. Are the owners sufficiently protected if charterers provide a warranty that no applicable sanctions will be breached?

No. Sanctions’ legislation requires each party to a transaction to undertake its own due diligence, and it would be no answer in the event of a sanctions breach, to point to a reliance upon a warranty.

Gard said that parties had to address the increasing sanctions risk at the stage where the charterparty was negotiated by inserting strong sanctions clauses requiring due diligence information to be provided, and this should be duplicated down the charterparty chain.

21 If the owners refuse to perform a charterparty because of reasonable but unfounded sanctions concerns, will they be liable to the charterers?

Probably yes. In those circumstances owners would likely be in repudiatory breach of contract unless their charterparty contained a sanctions clause allowing the owners to reject orders which in their reasonable judgment would expose them to sanctions. In order to rely on this this owners should be able to point to some respectable market intelligence that they relied on. 

22. Can a port be unsafe because of sanctions risks?

Probably not. At least so far sanctions are directed at individuals and entities rather than a state. The risk of blacklisting, or other commercial consequences of going to a particular port is not sufficient to render it unsafe.

Tomorrow’s issue will cover  ” War in Ukraine – impact on crew contracts, claims and repatriation”

https://www.gard.no/web/updates/content/33217469/war-in-ukraine-impact-on-contractual-obligations