Covid-19’s possible impact on shipping contracts

1. Introduction – Covid-19 and its current impact 

The outbreak of Covid-19 in Wuhan, China, mid-December 2019 has spread globally prompting the World Health Organization (WHO) to declare the virus a Pandemic on 11 March 2020.

Covid-19 poses an international health threat, and the impact on business activities and the global economy is being felt worldwide. As China dominates the world’s manufacturing market the current reduced capacity has had a major effect on economies around the world. Additionally, ports all over the world are implementing various restrictions to docking and berthing, including the imposition of quarantine and even refusal of berthing, making it problematic for all types of businesses and particularly the shipping industry to comply with contractual obligations. In the oil and gas and offshore service sector, Covid-19 has come on top of the sharp decline in the crude oil prices, which has resulted in a sudden drop in activities.

Consequently, many affected companies are invoking force majeure clauses in their contracts to excuse liability for breach. In the following we will discuss Covid-19’s possible impact on shipping contracts, focusing on whether the current Covid-19 outbreak could constitute a force majeure event. Furthermore, since the current situation can give rise to a range of charter party disputes between owners and charterers, we will touch upon relevant issues that may arise under charter parties.

2. Force majeure and Covid-19

The objective of force majeure clauses is to excuse one party from performance of the agreement where the occurrence of an event beyond a party’s reasonable control, defined in the contract as an event of force majeure, has hindered such performance or made it impossible to fulfill their obligations. The clause will also determine whether the agreement continues, is suspended or if it can be terminated. There is no uniform concept of force majeure and hence the wording will be decisive in assessing whether an event could constitute force majeure.  

In most civil law countries, the concept of force majeure is recognized as both a statutory term and contractual term. English common law, however, has no general concept of force majeure. Consequently, the rights and protections available to a party under a force majeure clause in an English law contract will be strictly interpreted based on the precise contractual language. If no force majeure clause is included in a contract governed by English law, the doctrine of frustration may provide relief for the contracting parties, making it possible to set aside contracts but only where an event makes performance of a contract impossible, illegal or pointless.

In contracts governed by Norwegian law, the question of whether the current outbreak of Covid-19 may constitute a force majeure event under a specific charter party, will be subject to interpretation considering the wording and other relevant sources.

Contracts including force majeure clauses generally comprise the following provisions:

• Description of what events would qualify as force majeure events
• Requirement that the event affects performance
• Requirement that the event is not within the affected party’s reasonable control, and that it could not have been foreseen, prevented or overcome
• An obligation to take all reasonable steps to mitigate the impact of the event
• An obligation to notify the other parties to the contract

Some contracts set out an exhaustive list as to the occurrences which qualify as force majeure events, whilst other contracts operate with a non-exclusive list of events which are outside the party’s control. Examples of common force majeure events include certain weather conditions, acts of war, contamination of different kinds and lastly, health related events commonly including epidemics, pandemics and quarantine.

By way of example; Bimco’s Supplytime 2005 includes the wording “epidemics” and “any other similar cause beyond the reasonable control of either party” in its list of force majeure events. If a force majeure clause does not specifically include epidemics or pandemics as events to qualify as force majeure, more broad definitions of events such as “Acts of God” or “Acts of Government” may be argued in the ongoing situation. Typically, not defined in the contract, Acts of God may be interpreted as events outside human control. Further, contracts which include “Acts of Government” as events of force majeure may apply where governments have imposed restrictions on port operators making it impossible for parties to comply with their contractual terms. Some force majeure clauses also include “quarantines” as a qualifying event which will certainly apply for some in the current situation.

Bareboat charter party; the Barecon 2017 does not include a force majeure clause entitling either party to invoke force majeure should an unforeseeable hinderance occur during the period of contract. Similarly, the NYPE 2015 charter party has no force majeure clause. If a charter party is governed by Norwegian law however, the question of whether force majeure may be asserted from a party even if no force majeure clause is included could be raised. If no force majeure clause is included it is likely that based on court practice and other applicable legal sources, force majeure may be argued as a defense for a claim for damages from the other party due to the failure to comply with the contractual terms caused by the force majeure event. However, the other terms and conditions of the contract would continue to apply.

A common misconception is that the existence of a force majeure event may in itself excuse contractual performance.  In fact, this will only be the case to the extent that the force majeure event actually prevents or hinders such party from performing its contractual obligations (or any of them). i.e., for a party to be excused performance (or excused from liability for non-performance), there has to be causal link between the failure to perform and the force majeure event.

Generally, a party will only be able to invoke force majeure to the extent that the occurrence of the relevant event is not within such party’s reasonable control. If the occurrence of the impediment should have been taken into account at the time the contract is concluded, it will be difficult to successfully claim a force majeure relief. Hence, invoking force majeure due to the outbreak of Covid-19 will inevitably become harder in contracts entered into from January 2020 onwards.

Furthermore, force majeure clauses will typically require the affected party to take reasonable steps to mitigate the impact of force majeure events.

Lastly, force majeure clauses commonly include notice requirements and relief will usually depend on the issue of a notice to the other party. Hence it is important to pay close attention to the contractual requirements.  In some cases, the failure to provide notice within a fixed time period will disentitle the affected party from claiming force majeure relief.

Chinese ports are currently operating on reduced capacity as quarantine has been imposed on numerous port operatorsCCPIT (China Council for the Promotion of International Trade) is issuing force majeure certificates to companies able to demonstrate that they have been affected by the Covid-19 outbreak. By issuing certificates, allegedly up to 5 000 as of early March 2020, the Chinese government seeks to protect Chinese industries from additional damage stemming from the virus outbreak.

While the aforesaid certificate may provide relief in contracts between companies governed by Chinese law, it will not suffice for contracts governed by common law countries unless the contract includes specific force majeure clauses which cover the current outbreak of Covid-19 and the impact this has had on the relevant party. However, for contracts including force majeure clauses the certificate could help as evidence that the party in question has been affected by the Covid-19 outbreak.

3. Other relevant Charter Party clauses in light of Covid-19

In light of the current circumstances and the various measures being taken worldwide to combat or contain with Covid-19, parties should be careful to consider all of their contractual rights and not limit themselves to the force majeure provisions. In particular, there are standard terms relating to quarantine or infectious diseases.  We include a brief introduction to some of these below: 

Under time-charters, off-hire clauses often place the vessel off-hire for deviations due to crew health or delay due to quarantine.  As an example, pursuant to Supplytime 2017 Cl. 13(a), the vessel is placed off-hire, with some exceptions, if the Vessel is prevented from working as a result of “deficiency of crew”. However, the Vessel remains on-hire pursuant to the extent if the vessel is prevented from working due to quarantine or risk of quarantine, except where caused by the crew having communication with the shore or other vessels at any affected area not in connection with the employment of the vessel and without the consent or the instruction of the charterers.

Furthermore, some charter parties incorporate the Hague-Visby Rules which, pursuant to Article IV 2(h), exonerate the carrier and the vessel for loss or damage resulting from quarantine restrictions, but also from “Acts of God” (cf. subparagraph (d)). If incorporated in the charter party, owners should be protected if quarantine related to Covid-19 cause loss or damage to charterers.  

BIMCO Infectious or Contagious Diseases Clause enables owners to refuse to proceed to continue to or to remain at an “Affected Area”, meaning a port or place where there is risk of exposure to highly infectious or contagious disease that is seriously harmful to humans, to the vessel, crew or other persons on board.  Further, in such an event the owner is not obliged to load cargo and the charterers shall not allow or authorize the issue on the owner’s behalf of bills of lading, waybills or other documents evidencing contracts of carriage for any affected area. As WHO has declared the outbreak of Covid-19 a pandemic, it would certainly fall within the definition of disease as stated in the clause.

4. Moving forward

The outcome for world shipping is yet to be seen. However, as quarantines continue to apply in many countries, i.a. charter rates for tankers and bulk freighters have plummeted and shipping lines are facing significant challenges replacing or repatriating crew globally as borders are being closed and air travel is restricted.  It can be expected that the consequences to the industry will be far-reaching.  As well as the human cost, many companies will need to take steps to protect their businesses and ride out the turbulent times.