Covid-19 and Force Majeure in the Shipping Industry
Updated: May 5, 2020
On 11 March 2020, the World Health Organisation announced that the novel Corona Virus (COVID-19) was being treated as a world pandemic. It has resulted in the lockdown of various nations, with many non-essential services being ordered to close in order to mitigate the spread of the virus.
Though ports largely remain open to cargo vessels, the pandemic has impacted the shipping industry due to shortages of crew, the closure of shipyards delaying necessary refit works and restrictive measures being implemented by certain ports in order to ensure the safety of their personnel. As supply chains break down, and contractual deadlines are missed, parties are investigating how to mitigate their exposure to the damages being incurred as a result of this unprecedented virus.
Force Majeure is a principal at law which is a defence to performance and which allows a party to refuse liability for damages caused to another due to an unforeseeable or unpreventable event which has rendered the performance of an obligation, impossible. The question that arises, therefore, is whether COVID-19 can be considered an unforeseeable or unpreventable event – a force majeure, and whether parties may rely on such a principle to mitigate their liability for damages.
The application of this principle largely depends on the choice of law provisions in the contract. The UK for instance, does not recognise force majeure as a principle outside of contract law and therefore, its applicability would depend on its express inclusion within the contract and the specific wording contained in the clause. Typical scenarios covered under a force majeure clause include acts of war, floods, earthquakes, restraint of government and strikes. If the contract included a force majeure clause, this needs to be carefully analysed to determine whether terms included are wide enough to cover defaults caused by a pandemic such as COVID-19. Broadly speaking these clauses are triggered by the occurrence of an unforeseeable event at the time when the contract was made. In this light, the terminology used in a number of standard forms frequently used in the shipping industry is being considered below.
Force Majeure and the Shipping Industry
Ship Sale Agreements:
Under the Singapore Sale Form, a Seller is exempt from his responsibility to pay compensation to the buyer for losses and expenses for failure to give notice of readiness ‘where the failure was caused by matters outside of the Sellers’ reasonable control’. The burden of proving this shall be on the sellers. Similarly the Nipponsale 1999 includes a widely drafted force majeure clause that annuls the agreement and exempts either party from liability ‘should the Vessel not be able to be delivered before the Cancelling Date through the outbreak of war, the restraint of Governments, Princes or People political reasons or any other cause over which the Sellers have no control’. Both these clauses require the Seller to prove that the contractual obligation could not be completed due to matters beyond their control that arose as a direct result of COVID-19. The Nipponsale inclusion of ‘restraint of Governments’ can also be argued to include, lockdowns, closure of non-essential businesses and quarantining measures. On the other hand, the Norwegian Sale Form does not include a force majeure clause, therefore this will be dependent on the choice of law provisions and if the jurisdiction selected contains free-standing provisions in its local law to cater for force majeure events.
Saving amendments made to the standard clauses, The Shipbuilding Contract of the Shipowners Association of Japan (SAJ), provides in Article VIII that ‘intervention of government authorities…labour shortages, plague, epidemics’ constitute grounds for postponement in the delivery date. Similarly the BIMCO NEWBUILDCON allows for the delivery date to be extended on the basis of force majeure events which include ‘any government…control, intervention, requirement or interference….epidemics…any other cause of a similar nature to the above beyond the control of the Builder or its Sub-Contractors’. While these clauses would seem to cater for delays caused by COVID-19, under BIMCO the Builder would have to prove that such events were not caused by the error, neglect, act or omission of the Builder, could not have been reasonably foreseen at the date of Contract and that the Builder would have taken all reasonable efforts to avoid and minimise the effects such events would have on the delivery of the vessel.
Under THE NYPE and BALTIME forms, the vessel will be considered off hire if unable to operate due to a ‘deficiency of officers/men’. The NYPE allows for off-hire where this is caused ‘by any other cause preventing the full working of the vessel’. Under Shelltime 4, the vessel will be placed off-hire where time is lost … ‘for the purpose of obtaining medical advice or treatment for or landing any sick or injured person…[or]…due to any delay in quarantine’. These clauses would seemingly cover situations where a ship is delayed or becomes inoperable due to a number of crew becoming unwell due to the virus. While time charterparties require the voyage to be performed with the utmost dispatch, most charterparties would include a clause to allow for a deviation in order to save a life. In a time charterparty, charterers will have an obligation to nominate a safe port and therefore where a port has become unsafe due to COVID 19 an alternative port may be nominated . Many charters include reference to the Hague/ Visby Rules which under Article IV rule 2 (h) exclude carrier responsibility for loss or damage arising from quarantine restrictions, a useful provision in the current circumstances.
Force Majeure provisions are interpreted strictly in order to ensure that they are not used unscrupulously by a party in order to evade responsibility. The existence of COVID-19 does not in itself create an automatic force majeure event. It must be causative, and directly impede the performance of the obligation due to say a port closure, a shortfall of crew to operate a vessel, a closure of shipyards to carry out repairs/building by government decree or due to mass infection or some other related act. Therefore, it is not sufficient that the performance of the obligation has become more burdensome, or is suddenly more expensive to fulfil. A party claiming force majeure will have to prove that they have employed the standard of care that is expected from a bonus pater familias to fulfil the contract, mitigate losses and must further prove that they have not contributed to the failure or delay in performance of the obligation through their own actions or negligence. Thus it is exceptionally difficult to apply the principle of force majeure when the obligation is inherently dangerous and risky. In this regard, persons who entered into a contract after the outbreak of the COVID 19 virus and the imposition of various restrictions might have a hard time proving that the non-performance of their obligation was unavoidable.
Author: Dr. Martina Farrugia.