Standard Club explains club cover rules in light of Gulf of Oman attacks

Standard Club has issued guidance, with input from Max Lemanski of Stephenson Harwood, a legal expert in the field, on club cover, risk mitigation and legal implications on contractual issues that members may face as a result of the recent tanker attacks in Fujairah and the Gulf of Oman.

Club cover

The club’s rules contain no definition of (or exclusion for) piracy and armed robbery. Therefore, the third-party liabilities insured by the club remain covered when they arise out of incidents of piracy and armed robbery.

Third-party liabilities, however, are excluded from club cover if caused by the use/engagement of certain ‘weapons of war’ that are specifically named in the club’s rules or any ‘other similar weapons of war’.

‘Weapons of war’ are identified as being mines, torpedoes, bombs, rockets, shells and explosives. While the club’s rules do not define ‘similar weapons of war’, the specifically identified weapons of war indicate that something more than guns/rifles/conventional ammunition would be needed to trigger the operation of the exclusion.

P&I liabilities arising from terrorism are excluded. P&I liabilities arising from the use/engagement of weapons of war, terrorism and other war risks would fall to be covered under a shipowner’s P&I war risks cover.

Members were reminded that the club provided all members with excess P&I war risks cover of $500m excess of the ship’s value (deemed not to exceed $100m). Private Maritime Security Contractors (PMSC)

There is no cover restriction or prohibition regarding the engagement of armed or unarmed PMSCs or the use of convoy escort protection. The decision as to whether to engage PMSCs is an operational one for members, which the clubs said “should be based on a voyage-specific risk assessment”.

The club said that it expected its members to exercise due diligence in the selection of a PMSC, including following the latest version of the IMO’s guidelines. The club also recommended that members confirm that any chosen PMSC holds the applicable international standard – ISO/PAS 28007 – and that it also complies with the IMO’s guidelines.

Recent industry guidance is that Privately Contracted Armed Security Personnel (PCASP) should not be used in the Arabian Sea, Gulf of Oman and Strait of Hormuz, because the use of force against threats recently encountered in the Gulf of Oman carried significant risk and had the potential to escalate security situations, to the detriment of the safety of ship and crew.

Mitigation Measures

Members were recommended to review BMP5, in particular Section 2, which outlines threats posed to vessels.

Legal implications

The Club noted that questions were being asked about the obligations of parties to associated shipping contracts. For example, when additional costs were incurred on a voyage by reason of the recent events, who would bear the costs? Could a carrier refuse to comply with orders for a voyage through the Strait? Could either party cancel a contract which involves such a voyage?

The Club said that there were “plenty of pitfalls for all involved” and strongly advised that contracts be checked carefully.

War Risks clauses

One of the key clauses in any such contract is the War Risks clause. It is standard practice for charterparties to include a War Risks clause which is intended to deal with the obligations of the parties so far as War Risks are concerned (bills of lading rarely set out such clauses, but they often incorporate charterparty terms which include them).

The Club noted that the terms of such clauses varied widely The current clauses recommended by BIMCO are CONWARTIME 2013 and VOYWAR 2013, but earlier versions of these are also still in use and there are many other clauses in circulation.

The application of a war risks clause is usually not limited to situations where there has been a formal declaration of war. The BIMCO clauses define ‘War Risks’ very broadly, including but not limited to ‘warlike operations’, ‘acts of terrorists’ and ‘acts of hostility or malicious damage’ and even ‘laying of mines’.  

Frustration

Parties often want to know if they can get out of their contracts.

One issue may be whether the particular contract of carriage has been brought to an end by the change in circumstances.

The Club noted that it was sometimes asked whether a party could use the concept of ‘frustration’. A contract is frustrated if events occurring after it was entered into make the performance of the contract impossible, illegal or radically different to what was originally envisaged. If frustration is established, both parties are released from their obligations.

It is significant that the presence of a War Risks clause in a contract of carriage will be relevant, because a contract cannot be frustrated by changed circumstances if a part of the contract makes provision for the changed circumstances in question.

Even if there is not such a clause, there will still be a factual question as to whether the carriage has become impossible or radically different from that originally envisaged. If the circumstances had not changed since the time when the contract was agreed, then the contract could not be frustrated.

Commercial parties often want to know whether a contract can be frustrated by unanticipated cost rises. The Club said that it was very unlikely that a contract of carriage would be frustrated by such an increase. This means that dramatic rises in insurance costs, freight rates or bunker prices were unlikely to bring the contract to an end by way of frustration.

Other cancellation rights

If the contract is not frustrated, whether either party nonetheless has a right to treat it as at an end, will depend upon the wording of any cancellation provisions in the contract, and whether such rights are triggered.

A War Risks clause for voyage charters typically includes a right to cancel in specified circumstances. For example, VOYWAR 2013 allows the carrier to cancel if, in the reasonable judgment of the master and/or owners, performance of the voyage may expose the vessel to War Risks (which, of course, are broadly defined).

In time charters a right to cancel is much less common, but War Risks clauses often provide that the vessel will not be obliged to proceed to any port (or through any area) where the master or owners reasonably judge that the vessel may be exposed to war risks.

Charterers must be notified of any such refusal, which enables them to issue new voyage orders.

In other multi-voyage contracts (such as contracts of affreightment), it may be that cancellation applies to the entire contract and not just to a particular voyage.

Safety (or not) of ports and the route to a port

If the relevant contract is a time charter (or the relevant contract contains an express safe port warranty or includes options as to the load/discharge port), then the question of the safety of the port will arise.

Because of the implied (and often express) term that a ship will only be ordered to a port if the ship can reach, use and return from it without being exposed to danger which cannot be avoided by good seamanship, it is not just a matter of the port being safe, but also of the safety of the route to the port – this is of course particularly relevant in the context of the Strait of Hormuz.

If an order is given to proceed to an unsafe port, the master/owners can reject the order and call for new orders. But if the orders are complied with and a loss is suffered because of the unsafety of the port, then charterers will be liable in damages.

A decision to reject orders is one which requires very careful consideration: if it turns out that the port was not unsafe, then the rejection was wrongful and owners may be liable in damages. In order for the port to be unsafe, the risk must be sufficient for a reasonable shipowner to refuse those orders.

Who pays?

Performing a voyage via the Strait may have financial consequences ranging from increased war risks premiums to damage to (or loss of) the vessel.

Who has to foot the bill is likely to be found in the wording of the relevant War Risks clause. VOYWAR 2013 provides that where, in order to fulfil their obligations under the voyage charter, the vessel proceeds through an area which is subject to war risks, then charterers will reimburse any additional premium required by insurers. CONWARTIME 2013 is to similar effect when incorporated into time charters.

If there is no express provision covering the particular cost incurred, owners may be able to rely on an implied indemnity. The general principle is that, where owners suffer loss or incur liability by reason of complying with charterers’ orders, then charterers must indemnify owners.

However, owners will not have a right to an indemnity in every case: if the effect of the contract was that owners accepted the risk which caused the loss or liability, then owners cannot claim an indemnity.

The Club concluded that the recent events in the Strait of Hormuz represented a significant increase in risk and cost for the shipping industry, and those whose ships (owned or chartered) trade in these areas “should tread very carefully”.

In view of the heightened tensions in the area, all members operating in the Southern Red Sea, Gulf of Aden, Gulf of Oman, Strait of Hormuz and Arabian Gulf had to remain vigilant and listen for military warnings. Members were also “strongly encouraged” to comply with the latest version of BMP and other related guidance. Club cover remained in place for members whose vessels were trading in the area, subject to the exclusions that fall within members War Risks policy.

http://www.standard-club.com/news-and-knowledge/latest-updates/2019/07/web-alert-tanker-attacks-in-fujairah-and-gulf-of-oman.aspx