The Chinese/Australian trade wars and implications for shipping: Gard

Norway-based marine insurer Gard has reviewed some of the complications that could arise with respect to both voyage and time charterparties when there was significant delay, such as that which has been experienced by laden vessels off the Chinese coast.

Ian Goulson, Senior Manager based at Arendal, Norway, and Kelly Wagland, Special Adviser, Defence Claims, said that everyone was conscious of the influence that geopolitical events had on shipping and the trade disagreement between China and Australia was a recent example of this.

Gard said that the disagreement was having “a huge knock-on effect on international trade”.

China has imposed a trade ban on Australian coal and this had caused significant delay to ladened vessels lining up off shore China, waiting for discharge. “There is nothing more that owners and charterers dislike in the world of shipping than a delayed or stuck vessel”, said Gard.

Concerns under a voyage charterparty

More often than not by the time the ship has arrived at the discharge port in China, the owners will have received a significant freight payment. Provided the vessel was able to tender a valid Notice of Readiness (NOR), the laytime and demurrage provisions should kick in, meaning that the owners should be in the position of receiving demurrage. However, Gard observed that the demurrage rate was rarely adequate compensation for the value of the vessel’s earning capability at market rate. Therefore owners were always keen to get the vessel moving and delivered into its next fixture.

In this scenario a big issue for owners is serving a valid NOR and getting the clock running. Whether or not demurrage would become payable depended upon the terms of the charter and in particular, when a valid NOR was tendered. A correctly tendered NOR is the trigger to the commencement of time counting for the purposes of laytime (or demurrage if already on demurrage). If the charter is not a berth charter and contains a WIPON (Whether in port or not) provision, such that the NOR can be tendered upon arrival at the anchorage, rather than waiting until it reaches the designated berth, waiting at anchorage should not prevent the vessel from being defined as “an arrived ship”.

Provided the vessel is legally and physically ready in all respects to discharge and has obtained free pratique, the laytime clock will start.

Gard observed that, by contrast, a voyage charterer in the above scenario might want to be able to stop time running at its earliest opportunity. That said, the voyage charterer might (for example) have entered into a sale and purchase contract with the buyers of the coal. The terms of this sale contract might not be back-to-back with the laytime and demurrage provisions of the voyage charter. “If no demurrage is payable, the charterer will be losing money hand over fist vis-a-vis owners and will no doubt look to the charter to try and find a way to minimise such losses”, said Gard.

One clause which might assist charterers in these circumstances is the Exceptions to laytime clause. If applicable, this might stop time from running and thus might result in significantly less, if any, demurrage being payable to owners. However, Gard warned that such clauses were construed strictly. In the absence of an express application of such a clause to demurrage, an Exceptions to laytime clause would normally be construed as applying only to the period covered by laytime. Furthermore, such exceptions clauses in most standard voyage charters did not contain wording that was sufficiently wide in scope to encompass delays resulting from congestion only and in the absence of a strike that subsequently caused congestion.

If charterers are unable to invoke any exceptions to the laytime clause they might look to plead a case of force majeure. They might seek to argue that the ban on coal imports from Australia was an unforeseen event at the time the charter was entered into. As such it would qualify to relieve them from their contractual obligations under the charter, or at the very least, suspend performance while the ban remained in place.

Gard said that this was a doctrine of law recognized in civil law jurisdictions, but not in English common law. “As such, unless there is express wording in the charter giving effect to the concept of force majeure, charterers will not be able to rely upon it before the English courts and tribunals”, said Gard.

Even where there was an express force majeure type clause in a contract it would be construed against charterers as the party seeking to rely upon the same to excuse performance of their obligations and charterers would need to show that the event in question was named in the clause.

Charterers would need to show that, at the time of fixing the vessel, the ban was not foreseeable. This, said Gard, might be difficult to achieve. In addition, charterers would need to show that there were no reasonable steps that could have been taken to avoid or mitigate the consequences of the event.

What might be described as the equivalent doctrine to force majeure under English law is that of the common law concept of Frustration. Where, as a result of an event beyond the control of the parties and for which there was no contractual provision in the contract, performance of the charter would become impossible, or if the principal purpose for entering into the contract as envisaged by the parties was rendered radically different, then the charter would automatically come to an end.

In such a case, both parties would be discharged of their ongoing obligations. A significant period of delay might, in the context of a voyage charter, lead to frustration.

However, Gard observed that English courts were reluctant to make such a finding. Financial hardship for one or other of the parties would not generally be sufficient to trigger frustration. Since the current ban was likely to be lifted at some point in the future, the charters would ultimately be capable of being fulfilled.

Concerns under a time charterparty

Due to the nature of a time charter there would be less opportunity for argument as to who was responsible for particular situations.

It was even less likely that time charterers would be able to show that the contract had been frustrated. Here, subject to the provisions of the off-hire clause, the risk of delay clearly lies with the charterer.

Neither would the standard off-hire clauses come to the aid of charterers. While there was clearly a loss of time to the charterer, the vessel would have remained fully efficient and at the disposal of the charterer, ready to perform the service immediately required of it.

Gard asked whether help could be found in a standard mutual exceptions clause in a time charter, such as clause 16 of the NYPE 46 form. It said that if the ban on imported thermal coal from Australia could be considered as mandated by the Chinese government then might this constitute a “restraint of Princes, Rulers and People” type mutual exception of liability?

Gard said that the problem for charterers seeking to rely upon this type of clause was that they would need to show that the ban prevented them from discharging their obligation to pay hire – which was not easy to do.

The restraint of Princes exception might, however, be of help to time charterers when it came to a late redelivery of the vessel. Significant delay at anchorage in China might lead to an overrun of the maximum duration of the charter. In the absence of a “without guarantee” qualification to the duration, charterers might find that they were liable to owners for damages as late redelivery would constitute a breach of this term of the charter. “Whereas, this mutual exceptions clause may negate any such liability”, said Gard.

Hire and prompt payment

The issue of hire and prompt payment was always a concern for an owner. Unlike the payment of freight, which was for the most part paid up front, hire was payable periodically throughout the duration of the charter, commonly every 15 days. Gard said that “desperate charterers who for whatever reason are not receiving a steady income from sub-charterers or buyers under the sale & purchase contract may simply withhold payments of hire due”.

This in turn would mean that owners would have to look to their charterparty for available remedies. Gard advised that “the drastic measure of withdrawing the vessel from service and terminating the charter should be undertaken with caution, but whilst this frees up the vessel for new employment, the cargo on board must still be delivered to the receivers, as owners’ separate obligations under their bills of lading will survive any withdrawal”.

There might be an express right to suspend services where hire was due and was outstanding. But, to what extent such a step would persuade charterers to pay was “questionable”. The vessels were idling at anchorage with no immediate berthing prospects so, other than to continue waiting, no immediate service of the ship was required by charterers.

Gard said that the exercise of a lien was sometimes a powerful tool in the hands of an owner. However, liening cargo on board and/or liening sub-freights had their own legal and practical niceties to contend with, such as the need to have the contractual right of lien in the charter also incorporated into the bill of lading and, for Chinese law, to recognize the right to lien cargo. Or, the likelihood that any sub-freight due under a sub-voyage charter to the Time Charterers had for the most part largely been paid.

Gard said that one major issue which both parties should consider under the time charter if there was significant delay was the issue of hull fouling and who should be responsible for cleaning. Hull fouling was likely to become an issue due to the prolonged stay in Chinese waters. In the absence of an express clause in the charter stating otherwise, the costs of hull cleaning would not generally fall to charterers, whether by implied indemnity as a result of compliance with charterers’ orders. or otherwise. The risk of fouling was considered as an ordinary risk of trading and as such would fall to Owners.

Cargo and crew issues common to both voyage and time charters

Whichever charter was in play, there was potential for a cargo of coal to self-heat and ultimately catch fire. A prolonged voyage might increase this risk. This in turn would give rise to questions about the dangerous nature or otherwise of the cargo and how the cargo had been cared for during the voyage.

Gard also noted that crew changes were difficult enough, with Covid-19 restrictions being imposed in many ports; “the delays to vessels discharging their coal and subsequently sailing to ports where crew can be disembarked and fresh crew taken on will only compound these problems.”

Finally, the writers noted that “it was reported recently in the shipping press that there is a rumour about the possibility of China lifting the ban on Australian coal. Hopefully the rumour is true and shipping will have one less headache to cure”.

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