Article by Douglas Grant – Coronavirus: legal implications for the shipping industry

Douglas Grant

On 30 January 2020, the World Health Organization (WHO) declared the outbreak of the Wuhan coronavirus (Covid-19) an international public health emergency. The WHO has not, as yet, recommended international travel restrictions. However, a number of governments are now denying entry to foreign nationals coming from China, while Australia and Singapore are refusing to allow ships which have called at Chinese ports to enter until the crew has been declared virus-free. Although Chinese ports remain open, operations have slowed due to a shortage of workers. As the outbreak worsens, shipowners and charterers will have to consider the risk of calling at certain ports, and determine who will bear the cost of this disruption.

When can owners refuse to proceed to the nominated port?

Shipowners are obliged to comply with the charterers’ legitimate orders as to the employment of the vessel. But are they obliged to comply where to do so would put the vessel and her crew at risk?

Most charterparties provide that the charterers may only nominate a ‘safe port’. Even where there is no express provision to that effect, such an obligation will ordinarily be implied in charters where no ports are named and the vessel is permitted to operate in wide trading limits: The Reborn (2009).

The classic definition of a safe port was given by Sellers LJ in The Eastern City (1958), where he held that “a port will not be safe unless, in the relevant period of time, the particular ship cannot reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship“.

The ‘safety’ of a port will usually relate to its physical characteristics and the threat they may pose to the vessel or her cargo. However, the authors of Carver on Charterparties suggest that the threat of contagious disease can in principle render a port unsafe, although it is unlikely to do so in practice. At present, it seems that any risk to the crew could be avoided by taking reasonable precautions (such as those proposed by the International Maritime Health Association) and would not, therefore, render the port legally unsafe, unless the nature of the vessel and loading techniques are such as to render those precautions ineffectual. Some standard form charters, such as the Baltime form, avoid this problem by providing that the vessel is not to be ordered to a port where fever or epidemics are prevalent.

A port may also be unsafe if to call at it would expose the vessel to a risk of detention. In Ogden v Graham (1861), a ship was ordered to proceed to a port in Chile, where she would have been liable to confiscation by the local authorities. It was held that the port was unsafe. Similarly, where the port is affected by an epidemic, the editors of Voyage Charters suggest that it would be unsafe if this might result in the vessel being blacklisted, detained or impounded at a subsequent port. As it stands, it does not appear that calling at a Chinese port will lead to detention, but at worst a ‘floating quarantine’ of the kind currently deployed in Australia and Singapore. Although this will result in delay, it will not mean that the earlier port was unsafe.

Individual cases will be fact-specific, but shipowners should be slow to conclude that they are entitled to decline orders due to risks associated with Covid-19: a refusal to proceed could constitute a repudiatory breach if it is later found that the port in question was safe.

Port closures, delay and quarantine

It may be that the nominated port is closed, or that there are significant delays caused by quarantine restrictions or a shortage of workers. This could give rise to claims by charterers, cargo receivers and other affected parties.

Many charters will include a clause excluding liability for loss caused by ‘acts of God’ or ‘restraint of princes’. The latter is generally understood to encompass action taken pursuant to customs or quarantine regulations. Where the charterparty incorporates the Hague-Visby Rules, the owners will also benefit from Article IV(2), which provides that neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from “Quarantine restrictions“; “Strikes or lockouts or stoppage or restraint of labour from whatever cause, whether partial or general“; or “Any other cause arising without the actual fault or privity of the carrier…“.

Moreover, owners will generally have the benefit of an implied indemnity against loss suffered or liability incurred as a consequence of complying with the charterers’ orders, provided that there is an unbroken chain of causation between the order and the loss. In The Island Archon (1994), for example, the charterers gave an order for the vessel to carry cargo to Iraq, where spurious cargo claims were made against the owners. The Court of Appeal held that the owners were entitled to an indemnity from the charterers, since the owners had not agreed to bear the risk of such claims. Thus, if the vessel is delayed at an at-risk port, or has been quarantined by reason of calling at an earlier port, any consequent loss ought to be recoverable under the indemnity.

A vessel which is delayed in reaching or leaving a port will generally remain on-hire, unless that delay is linked to the condition of the ship or crew. A vessel subject to a ‘floating quarantine’ because of a suspected outbreak of Covid-19 would, depending on the terms of specific charterparty, therefore be off-hire. However, off-hire clauses will not be engaged where the off-hire event is caused by charterers’ orders. If the quarantine could be said to be a direct consequence of the charterers’ earlier nomination of an at-risk port, then the vessel would remain on-hire. The same is true if a crew member were to fall ill: the need to quarantine that crew member or deviate to obtain medical assistance would ordinarily place the vessel off-hire, unless the infection resulted from the charterers’ orders.

In the case of voyage charters, laytime will not commence until a valid notice of readiness (NOR) has been tendered. At common law, a ship may be ‘ready’ without obtaining clearance from the health authorities or free pratique, provided that such clearance is a formality. Some charterparties expressly provide that the vessel will be ready “whether Customs cleared or not” or “whether in free pratique or not”. However, the effect of such provisions is not for laytime to commence even where free pratique is or may be refused. This is because they are premised, like the position at common law, on the grant of free pratique being a mere formality. Thus, in London Arbitration 11/00, the charter provided that NOR could be tendered whether in free pratique or not. Four crew members did not have valid vaccination certificates and the grant of free pratique was therefore delayed. The tribunal held that laytime did not commence until free pratique had been granted: although the charterparty dispensed with the requirement of free pratique as a formality, this provision did not apply where there was an identifiable reason for refusing free pratique.

Frustration?

If the outbreak worsens and more stringent restrictions are imposed on vessels’ movements, arguments may arise as to whether charterparties have been frustrated. Where a contract is frustrated, it is immediately brought to an end and the parties are discharged of their obligations. However, for a charter to be frustrated the delay or disruption would have to be so radical that “performance is really in effect that of a different contract“: Tatem v Gamboa (1938). Covid-19 is, as matters now stand, some way from having that kind of impact.

Conclusion

The Covid-19 outbreak – and its impact on the shipping industry – is developing fast. Should any potential dispute arise, owners, charterers and other affected parties will have to carefully consider the specific contractual terms and facts of the case in order to ascertain their rights and obligations.

Date added: February 18th, 2020


Area of Expertise

Shipping, admiralty & transport