The Senkaku Island conflict and possible implications under War Risk Clauses

March 2013

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If it were to escalate, the territorial dispute between China and Japan over the Senkaku/Diaoyu islands could have an effect on shipping in the area. If so there are likely to be issues surrounding the performance of Charterparties - specifically concerns that shipowners and charterers may have in relation to the frustration of the Charterparty, safe port warranties and implied indemnities.

The Managers have previously published articles on other similar issues potentially the performance of charterparties - for example, piracy (www.simsl.com/Piracy0908.html). In view of the potential significance for shipping if the dispute between China and Japan developed the Mangers asked MFB solicitors to address the issues in general terms, and have worked with them to produce the following article: 

The territorial dispute between China and Japan over the Senkaku / Diaoyu islands (refered to for the purposes of this article as the “the Islands”) has once again escalated following the Japanese government’s announcement last year that the country would purchase the privately owned Islands, renowned for its abundance of fishing grounds and speculation of oil deposits. The latest incident earlier this year between the Chinese Navy and a Japanese warship in the Island’s surrounding waters (with accusations of weapons being aimed at warships) has once again fuelled the political unrest between the two Asian superpowers, both asserting their claim to ownership of the Islands and their territorial waters in the East China Sea.

The incident could trigger an undercurrent of worldwide political interest including Taiwan and Japan’s military ally, the United States. These actions have raised concern on a global political level as well as for ship owners and charterers with current and future voyages through the shipping routes surrounding the Islands.

This article looks at some of the implications such warlike operations may have on Charterparties, and specifically concerns that shipowners and charterers may have in relation to the frustration of the Charterparty, safe port warranties and implied indemnities.

As a starting point we look at some of the more commonly used War Risk Clauses and the concept of war risks.

War Risk Clauses

War Risk Clauses are typically wide enough to include situations where war is not formally declared but “warlike operations” are encountered, as included under “War Risks” in the CONWARTIME 2004 and Voywar 1993 clauses. Whilst most modern Charterparties include warlike operations, which include warlike acts even though no state of war is declared, the extent to which vessels would be exposed to “War Risks” would largely depend on the wording of the clause. For purposes of this article we will discuss the application of the CONWARTIME 2004 clause, being the most commonly used War Risk Clause at present.

Ordinarily, the Master and shipowners are entitled to refuse orders where they believe that there would be a risk to the vessel in transiting the area or where a situation is likely to become dangerous to the vessel, her cargo or crew. Similarly, the charterers are not entitled to insist that the vessel should proceed on such a voyage.

The “War Risk” Clause deals with the nature of the risks and not with the likelihood of those events occurring. In the event that hostilities between China and Japan escalate much further they are likely to be regarded as “warlike operations” that could be considered a dangerous, particularly to persons on board vessels which could be caught up in the conflict.  The War Risk Clause goes onto provide as follows:

The Vessel, unless the written consent of the Owners be first obtained, shall not be ordered to or required to continue to or through, any port, place area or zone… where it appears that the Vessel, her cargo, crew or other persons on board the Vessel, in the reasonable judgement of the Master and/or the Owners, may be… exposed to War Risks”.

This part of the Clause sets a low threshold as to the likelihood that the vessel will be subjected to attack. It is clear that the test is whether the vessel “may be” exposed to attack and the Master or shipowners do not need to show that there is a substantial risk or probability of attack, although it is likely that there must be more than just a background risk of attack. In the “Triton Lark”, (2012) I LLR, p. 151, “may be” in the CONWARTIME was further explained by the Judge to mean a real likelihood based on evidence, and that a fanciful likelihood based on speculation would be insufficient. However, if a shipowner can show that there is a real likelihood that his vessel may be attacked or caught in crossfire this is likely to be sufficient to trigger the rights under the CONWARTIME clause.    

Accordingly, whilst at the present it is doubtful whether the hostilities between China and Japan are sufficiently serious as to establish the possibility that merchant ships are at risk of attack or being caught in crossfire, if there is even a fairly limited escalation in hostilities then, it is possible that orders by charterers to proceed through the East China Sea could expose vessels to “War Risks” as defined.

The Voywar 1993 adopts a materially identical definition of War Risks as CONWARTIME 2004 and therefore has similar application. Being a voyage charter it provides the shipowners with a right to refuse to perform the voyage if they reasonably believe that to do would expose them to a war risk, or if cargo has been loaded, to discharge at a safe port. This right to cancel a voyage must be exercised by the shipowner within a reasonable time.

Frustration

Frustration of a charter will occur if independent supervening circumstances have arisen which means that (1) the performance of the contract as originally envisaged is now impossible or (2) that the performance required would be radically different to that originally envisaged. If such circumstances exist, the Court will release both parties from their obligations under the Charterparty.

Frustration of a Charterparty alleged by either the shipowner or charterer would need to be assessed on a case by case basis by looking at whether the party has successfully proved one of the above requirements.  The conduct of that party must not have caused the intervening event and it would be necessary to assess whether the contract expressly / impliedly makes provision for the events that constitute frustration, in which case frustration will not be upheld. Events that may lead to the frustration of a charter include, for example, detention in port and blockage of the sea route (specifically where the vessel cannot get to the relevant port at all). However, mere prolongation of the voyage will often be insufficient to establish frustration.

Implied Indemnities

In certain circumstances there is an implied obligation on the charterer to indemnify the shipowner for the consequences of complying with the charterer’s orders, notwithstanding that the order is a legitimate one that the shipowner is bound to obey. Such an indemnity will not ordinarily apply to matters in which risks / consequences, on the construction of the Charterparty as a whole, would be borne by shipowners.

By way of example, the ordinary risks of navigation are risks borne by the shipowners and losses as a result of those risks are not subject to an implied indemnity. As with the risks of navigation, it is arguable that charterers would not be required to indemnify shipowners when their orders bring the vessel into the path of war-like operations / acts of war. This is likely to be the case where the shipowner has the right to refuse to send the vessel to a dangerous zone.

War Risk clauses do not generally impose an express right to an indemnity for any damage actually suffered by the vessel and for this reason shipowners should consider very carefully whether to exercise the right to refuse to send the vessel through a particular zone.

In the event that warlike operations arise before or during a charter, the parties should consider their rights to indemnify / be indemnified and negotiate an express indemnity if necessary.

Safe Port Warranties

In the event of actual, threatened or reported “War Risks” shipowners will need to consider the extent of their obligation to proceed to a port ordered by charterers. It will be necessary to assess whether the charterparty contains a warranty as to the safety of the port (which, again, could be express or implied) and whether the port is unsafe (both physically and politically unsafe).

If the charter includes a warranty of safety and the charterer orders the vessel to proceed to a port which is unsafe, the shipowner is entitled to reject the order and to require the charterer to order the vessel to proceed to a different port and which is safe. On the other hand, if the shipowner does not reject the order and complies with the order to proceed to an unsafe port, the shipowner may lose his right to reject the order at a later stage or to terminate the charter. However the shipowner will not lose his right to claim damages or an indemnity from the charterer if the vessel is damaged or he suffers loss as a result of the unsafety of the port unless the shipowner has unequivocally waived his right to claim damages or the port is obviously unsafe.

In terms of whether the port is deemed “unsafe”, it is necessary to ascertain whether a conflict at a named port / range of ports was already underway at the time the Charterparty was entered into and so whether shipowners were aware of the situation at the time. If so, shipowners could face problems if they disobey charterers’ lawful orders to proceed to the port. For a shipowner to be able to refuse such orders, it would be necessary to show that there has been a “significant increase” in the risk of reaching the nominated port. 

For those parties currently navigating through sea routes within the East China Sea, it may be necessary to assess whether the recent conflicts between Japan and China constitute a “significant increase” in the risk of reaching any nominated port within the area. Should the conflict continue to escalate, charterers may find themselves exposed to liabilities under safe port warranties.  

It is therefore advisable for shipowners and charterers entering into Charterparties where voyages include ports within the East China Sea to make the necessary enquiries before entering into future charters to ascertain whether the named ports are considered to be “safe”.

Conclusion

The above illustrates some of the many implications that may arise in the event that a vessel is ordered to continue to or through any port, place or zone exposed to “War Risks” as defined in the CONWARTIME 2004 clause. Where situations of conflict arise, such as those experienced in and around the Islands, shipowners and charterers will need to proceed with care and evaluate their rights under current and future Charterparties before proceeding.

 

With thanks to Amanda de Vaux (Associate) and Peter Jago (Partner) of MFB Solicitors for preparing this article.