Coronavirus: effect on international shipping and trading contracts
The coronavirus outbreak is now a global pandemic affecting most, if not all, countries in the world and causing serious disruption to international trade. Shipowners, charterers and commodity traders doing business on English law contracts will be considering what they can do to mitigate the risks presented by this crisis.
There appear to be few reports of port closures due to the pandemic (other than for passenger traffic). However, many countries have introduced extra inspections, health checks or quarantine requirements, and cargo operations may be slowed down by shortages of personnel. ‘Lockdown’ measures and business closures will cause reductions in demand for certain goods as well as shortages of supply or delays in the supply chain, making it impossible, difficult or simply uneconomic to perform pre-crisis commitments. How does English law deal with all of these problems?
Force majeure clauses
The first question must always be: what does the contract say? Under English law “force majeure” does not apply automatically but only if it is provided for in the contract, and only in the terms specified in the contract. Even if there is a force majeure clause, it may not relieve the parties of their obligations in the current crisis. It all depends on the precise wording of the clause.
Many standard clauses refer to a list of specified events followed by general wording such as “or any other event comprehended in the term ‘force majeure’” (as in the “Prevention of Delivery” clause in Gafta sale contracts). Since there is no legal definition of the term force majeure in English law, this kind of clause creates some uncertainty. However, if coronavirus leads to an event which is expressly mentioned (such as a government export ban or closure of ports) this may count as force majeure even if the disease itself is not mentioned.
The wording of the clause may also define how the specified events affect the contract. A party may be exempted from liability if performance is “prevented” but not if it is simply delayed or becomes less profitable. Relying on force majeure may even lead to additional cost, if the clause requires the affected party to prove that he has used “all reasonable endeavours” to perform the obligations. The wording must always be carefully checked before deciding how to proceed.
There is no general rule under English law that a force majeure event must be unforeseeable at the time of the contract. When negotiating any new contract, it may therefore be possible to amend a broadly-worded clause and limit it to unforeseeable events.
Frustration of contracts
In the absence of a special clause, a contract can come to an end automatically under the common law doctrine of “frustration of contract”, but this applies only if performance becomes impossible due to an unforeseen event outside the parties’ control. In the present situation, this could potentially apply to contracts made before the outbreak began, but clearly not to any recent or future contract.
A variety of issues will arise under time charters and voyage charters. Some standard clauses exist, such as the BIMCO “Infectious or Contagious Diseases” clauses published in 2015 after the Ebola crisis, but these may not be appropriate for the current situation unless suitably amended. In the absence of special clauses, a time charter generally requires owners to comply with charterers’ orders to proceed to a nominated port unless it is unsafe. If the port has implemented extra protective measures this will be taken into account in assessing its safety. Equally, charterers must generally pay hire without interruption unless excused by the off-hire clause, which might apply if, for example, the vessel cannot work due to illness of a large proportion of the crew. Under a voyage charter, it is clearly important to consider the laytime and demurrage provisions, including standard provisions such as “WIFPON” (whether in free pratique or not). For new fixtures, parties may wish to modify these clauses or negotiate special terms to allocate the risks of delays due to quarantine or similar measures.
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