CORONAVIRUS AND ITS POTENTIAL IMPACT ON THE SHIPPING INDUSTRY
Marco De Leo, partner (Dubai), and Enrico Vergani, leader of the Shipping and Transport Focus Team (Genoa) of BonelliErede discuss the facts
On 30 January, the World Health Organization declared the outbreak of the Coronavirus a Public Health Emergency of International Concern. Clearly, the Coronavirus is having an impact on business not only in China but also in the other countries. The shipping and international trade sector in particular must ready itself for the possibility of disputes arising from the coronavirus. Indeed, its eëect will not be limited to delays or contract breaches caused by quarantines or port closures but also sale and purchase agreements, trade Ënance arrangements, shipbuilding, oëshore construction projects, ship Ënancing and leasing, and insurance.
FORCE MAJEURE
Naturally, force majeure is the first issue that comes to mind and whether this concept covers the consequences of the spread of the coronavirus.
The China Council for the Promotion of International Trade, accredited with China’s Ministry of Commerce, is now issuing force majeure certificates (upon request) to shipyards in China if their contracts with overseas partners have been affected by the coronavirus outbreak, and some Chinese shipyards have already declared their willingness to refer to force majeure and its exculpatory effects for delays/disruptions in the running of a shipbuilding project.
The suggestion here is to ask the right question. At first glance, the most obvious one is: Does the coronavirus constitute a force majeure event? Regretfully, this approach will not work for most shipping contracts, which are subject to English law and jurisdiction.
Unlike civil law systems, common law has no general definition of force majeure – it is purely a contractual concept. Therefore, force majeure has only the meaning given to it by the contract governing the relationship between the parties in question. If the contract makes no specific mention of the event – or of one very similar to it – it cannot be invoked as a force majeure event. It is thus very important to adhere to the requirements of the contract in question when considering whether to invoke a force majeure event or what to do with a force majeure notice relating to the coronavirus. No ‘one-size-fits-all’ solution exists.
Thus, we strongly advise against adhering to general concepts of domestic continental law in the hope they can provide a defence – rather, you must carefully examine the terms and conditions of your contracts, with the support of professional advice. Based on the above, some main features of the shipping business that could be affected by the Coronavirus can be summarised as follows.
SHIPBUILDING
Most shipbuilding/offshore construction contracts contain force majeure clauses. As mentioned above, some Chinese shipyards are already issuing force majeure notices to buyers. Force majeure clauses must be carefully examined to ensure that these notices are properly tendered and to check whether they can even be validly given under the circumstances.
Some issues to consider are whether the situation properly falls within the scope of the force majeure clause in question, and whether the consequent disruption of supply is enough to affect the critical path of the building or
construction project. The purpose of force majeure notices is to allow any delay in an affected project to be considered a ‘permissible delay’ and thereby extend the delivery date.
Whether a party can rely on Chinese governmental certificates bearing a declaration of force majeure will depend on a careful analysis of the facts and the wording of the force majeure clause in question (as mentioned above).
The crux of the matter is whether the party has truly and seriously been affected by the coronavirus outbreak – i.e., whether it is facing the possibility of halting its business operations or is unable to fulfil its contractual obligations due to the outbreak.
SHIP FINANCE
Lending and leasing arrangements that involve a bareboat charter with a ‘hell or high water’ payment clause require the borrowers/charterers to pay hire regardless of whether the ship is earning. Clearly, this could place the borrowers/charterers in financial difficulty. Although the effect of coronavirus might not be immediate, if the outbreak continues for significantly longer, borrowers could attempt to redeliver the vessel under the bareboat charter or could even become insolvent.
This could result in a lender becoming an operational shipowner and, thereby, being exposed to the general commercial shipping market – which includes the potential liabilities and complexities mentioned above.
OTHER FACTORS TO CONSIDER
SEAWORTHINESS
A vessel may become unfit to receive and carry the cargo it is chartered for after calling at an infected area. Similarly, if a vessel is delayed due to quarantine regulations that in turn damage cargo, the vessel may be considered unseaworthy.
SAFE PORT WARRANTIES
Charter parties often contain express or implied warranties given by charterers to order vessels to safe ports. A port is considered safe only if, in the relevant period, the ship in question can reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to danger that cannot be avoided by good navigation and seamanship. If a given port is unsafe, a shipowner may be able to refuse to comply with a charterer’s order. This can be a complex issue because port safety is a question of fact and is likely to depend on medical evidence, such as the likelihood of the crew being exposed to the coronavirus and the fatality rate.
MARINE INSURANCE
P&I will cover many losses relating to the Coronavirus outbreak. The cover could extend to cargo loss related to a delay if the delay is associated with the exercise of a force majeure clause.
In quarantine or port closure situations, charter party disputes could arise – in which case the legal costs of defending such claims could be covered by defence insurance.
That said, many insurance policies contain exclusions for global pandemics. This is mainly because insurers are unable to calculate the risks and costs of such an event.
Standard business interruption insurance cover is usually triggered only by physical damage to property or equipment
–the fact that a virus has broken out does not necessarily mean physical damage will ensue. Some businesses might have contingent business interruption insurance, though this triggers only if the circumstances described in the policy are met. As with force majeure clauses, each policy’s wording warrants careful attention.
Many unknowns remain: How quickly will the coronavirus continue to spread? How far afield will it spread? How deadly is it? How will governments, shippers, charterers, traders, banks and port authorities respond? The anxiety surrounding these questions will, if it has not already, lead many stakeholders to take action to protect their position or to gain a commercial advantage. Extra diligence is required to protect contractual rights and to ensure that each party upholds its side of the deal.
The warehouse team is often left to ‘make do’ with outdated technology, manual tools and labourintensive processes.”
JONATHAN WOOD, INFOR GENERAL
MANAGER, MIDDLE EAST AND AFRICA (MEA)