William Turner

Head of FD&D / General Manager / Senior Legal Advisor, Singapore Branch

In recent months the world has seen profound changes with trading routes previously considered safe subject to severe disruption.

For the shipping industry, war is no longer a distant geopolitical risk but a direct operational reality. The continuing war in Ukraine has transformed trading conditions in the Black Sea; repeated attacks on commercial shipping have made passage through the Red Sea increasingly uncertain and most significantly in recent months the conflict in the Persian Gulf has brought widespread disruption to the Straits of Hormuz.

As we have seen, following the spillover of geopolitical conflicts into vital international trading routes vessels may be forced to deviate, ports and waterways may without warning become inaccessible and voyages that were seemingly straightforward when a charterparty was concluded may suddenly become dangerous, delayed or vastly more expensive. The recent blocking of the Straits of Hormuz demonstrates how rapidly and dramatically established trading patterns can be disrupted.

This article considers how English law operates when geopolitical tensions spill over and impact the safety of the worlds’ maritime trading routes. In the final part of the article we will consider how an evolving trend, the imposition of blockades, impacts the parties’ obligations under Charterparties.

Validity of Employment Orders

A recurring friction that exists when war affects trading routes is the divergence of interests between Owners and Charterers. Frequently Charterers will have entered into binding agreements with other contractual counterparties meaning they are keen to call at particular ports or pass through certain areas even though such areas may have become dangerous due to war. Owners on the other hand will understandably be concerned about potential damage or loss of their vessel and the safety of the crew and wish to avoid such areas.

The starting point under a time charter is that the Owners have a general obligation to follow Charterers’ orders as to the employment of the vessel within the trading limits specified within it. That said, there are some limited but very important exceptions to this obligation.

One of these is where following Charterers orders would expose the vessel to danger. This key principle is set out in the English law case The Hill Harmony [2001]. In the case the court found that the Master has an overriding responsibility for the safety of the vessel, her crew and cargo and that if an order is given compliance with which exposes the vessel to a risk which the owners have not agreed to bear, the Master is entitled to refuse to obey it.

The principles above will be applicable across most Time Charters and in cases where conflict has made areas dangerous may give Owners the right to refuse Charterers’ orders to proceed there. However, it is very common to have both War Risks clauses and provisions requiring Charterers to nominate only safe ports and berths. These significantly affect the rights and responsibilities of the parties when trading in dangerous areas and we will deal with each in turn.

WAR RISKS CLAUSES

War risks clauses are one of the principal contractual mechanisms by which owners and charterers can allocate risk and responsibility in the event of conflict affecting the vessel’s proposed trading route.

One of the most widely used is the CONWARTIME produced by BIMCO. The CONWARTIME wording enables the Master to refuse to transit areas if, in his reasonable judgment it appears that the Vessel, her cargo, crew or other persons on board the Vessel, “may be” exposed to War Risks.

For Voyage Charters BIMCO have produced a similar clause but for use in Voyage Charters.

In both clauses a War Risk is defined in the clause as something that in the reasonable judgement of the Master and/or the Owners, may be dangerous to the Vessel, cargo, crew or other persons on board the Vessel. Under the clause War Risks will include any actual, threatened or reported war and acts of war.

A frequent source of disagreement between Owners and Charterers concerns whether there is a level of risk that is sufficient to trigger the provisions of the war risks clauses.

A key case on this is The Triton Lark [2012] which involved the application of a CONWARTIME clause.

The Court in the Triton Lark held that Owners could only refuse to transit an area where there was a “real likelihood” that the vessel would be exposed to War Risks:

In their judgement they stated that the likelihood must be based on evidence rather than speculation. It includes an event that is more likely than not to happen, but also an event which has a less than even chance of happening, although a bare possibility would not be included.

If a party seeks to rely upon the War Risks wording in the Charter, then it is of paramount importance that they take steps to ascertain the level of risk the vessel will potentially be exposed to. Such investigations may involve local correspondents and independent companies specialising in such risk assessments. Taking such measures will allow them to defend their decision not to follow otherwise lawful employment orders in the event that it is challenged by Charterers.

FORCE MAJEURE

In situations involving the outbreak of war Force Majeure provisions contained within the contract may also be relevant.

The term “Force Majeure” which originates from the French legal system refers to an unexpected and exceptional event. In certain cases, the occurrence of such an event may allow a party to terminate a contract without being liable for damages.

Under English law the term has no formal legal definition, and it will not be implied into contracts. Whether the parties can rely on it will depend on the specific wording of the clause in question.

Under many common Force Majeure clauses there will be a list of events that will trigger the clause. Usually, one of those events will be the occurrence of war or warlike events.

In cases where there has been an unexpected outbreak of war affecting the trading of the vessel then it is certainly worthwhile reviewing any Force Majeure wording and considering whether it applies.

FRUSTRATION

In certain extreme cases involving the outbreak of conflict the English law doctrine of frustration may become relevant. Unlike Force Majeure, Frustration operates independently of the contract. It applies where, without the fault of either party, a supervening event renders performance impossible or transforms one of the parties’ contractual obligations into something radically different from that which the parties originally undertook. The effect of Frustration is to terminate a contract without either party being liable.

The threshold that needs to be met for frustration to occur is understandably very high. When ascertaining whether frustration has occurred the fact that performance has become more onerous or expensive is not enough, the change must be sufficiently fundamental that it would be unjust to hold the parties to their bargain.

In the context of geopolitical risk, frustration will be an available remedy in only a very narrow range of situations. Even serious war related disruption will be unlikely to terminate a charterparty where an alternative method of performance remains available. For example, the closing of the Red Sea would be unlikely to frustrate a time Charter trip when it is possible for the vessel to reach its destination by sailing around the Cape of Good Hope. In contrast a Voyage charter providing for discharge in the Persian Gulf could potentially be frustrated by the blockage of the Straits of Hormuz as there would be no other way to perform the contract other than by passing through this area.

SAFE PORTS

Safe port wording is of particular relevance when determining whether Owners are required to follow Charterers employment orders to call at ports either directly affected by war or only accessible by passing through areas affected by war.

Most time charters only permit charterers to nominate “safe” ports. The effect of such a term is that if Charterers nominate a port that is unsafe then Owners are entitled to refuse to follow such orders and request alternative orders. Refusal to do so may constitute a repudiatory breach of contract giving Owners the right to terminate and claim damages.

The classic test of whether a port is safe remains that in The Eastern City [1958] in which it was stated that “a port is unsafe if, during the relevant period, the particular vessel cannot reach it, use it and leave it without being exposed absent some abnormal occurrence to danger which cannot be avoided by good navigation and seamanship.”

A safe port warranty is therefore concerned not only with conditions inside the port, but with the vessel’s ability safely to approach, use and depart from it. As an example in recent months ports within the Persian Gulf would, in many cases, be considered unsafe under their Charters as the vessel would have to pass through the Straits of Hormuz in order to reach them. This would be the case even though there had been no attacks at the ports themselves.

When assessing whether a port is safe, the English courts will consider the specific characteristics of the vessel and her cargo. As an example, the level of risk for a tanker carrying cargo bound for China through parts of the Red Sea may be significantly different from a vessel carrying cargo bound for the the United States (US) or Israel.

BLOCKADES

Thus far, we have looked at how the outbreak of war can affect trade but geopolitical friction between nation states can manifest itself in ways that fall short of all out war but nevertheless have a profound impact on shipping. One of these is the increasing incidence of blockades.

In recent months we have seen the imposition of blockades by US against various countries including Venezuela, Cuba and Iran as well as an effective blockade imposed by Russia on Ukrainian Black Sea ports through the attacking of port infrastructure as well as vessels.

The legal consequences under a Charterparty will depend upon both the nature of the blockade and the contractual wording in each case. Modern BIMCO war risks clauses such as the CONWARTIME and VOYWAR expressly include blockades within the definition of War Risks.

Owners may therefore be entitled to refuse an order requiring the vessel to proceed to or through a blockaded area where, in the reasonable judgement of the Master or Owners, the vessel, cargo or crew may be exposed to danger. When assessing the level of risk the Owner would be expected to take into account the specific characteristics of the vessel such as her cargo, flag and trading route.

A blockade may also engage safe port warranties. As set out earlier in this article a safe port warranty will extend beyond conditions within the port itself to the vessel’s ability safely to reach and leave it. If a vessel cannot reach a port without passing a blockade applying to a vessel with its specific characteristics, then that port is likely to be considered unsafe.

If a blockade delays a vessel, it will not normally have the effect of placing the vessel off-hire. This is because the delay is considered to be caused by a factor unrelated to the vessel itself and therefore falls outside the scope of off-hire clause wording.

In certain limited cases a sufficiently prolonged blockade may ultimately raise questions of frustration. However, the existence of a blockade will not automatically discharge the Charterparty. If the voyage can still be performed by another route, even at considerably greater cost, frustration is unlikely. Similarly, a blockade may in certain cases trigger Force Majeure provisions within the contract. Whether it will do so will depend on the specific wording of the Force majeure provisions contained within the contract.

FINAL THOUGHTS

Trading areas affected by war often raises complicated legal issues in an environment in which the facts on the ground are often rapidly changing. In a world where the trend is towards more instability in key trading areas around the world both Owners and Charterers need to be prepared to operate in areas where there is conflict. Having a clear understanding of the terms on which they have contracted and ensuring that their contractual wording is fit for purpose is vital so that they may safely navigate this rapidly changing world.