Maritime Legal Issues arising out of trading to Ukraine/Crimea

July 2014

New EU Sanctions and Ukraine Directive – July 2014

Ship operators trading to Ukraine, and particularly to the ports in the newly annexed Crimea, now face a potential problem of falling foul of International/European law on the one hand and Ukrainian law on the other.

This article discusses the issues facing owners when considering whether or not to accept orders to load or discharge cargo at ports located in Crimea. Where we refer to the “Crimean Ports”, this means the ports recently declared by Ukraine as closed, namely Kerch, Feodosia, Sevastopol, Yalta and Yevpatorya. This is not intended to suggest that Crimea is not part of Ukraine.

The background – closed ports

Russia’s annexation of Crimea is not recognised by Ukraine, nor indeed by the majority of members of the United Nations, apart from Afghanistan, Cuba, Nicaragua, Syria, Russia and Venezuela. As a matter of international law, and notwithstanding the fact that Russia is in effective control, Crimea is part of Ukraine. Ukraine has now closed the Crimean Ports. As a matter of Ukrainian law, it is illegal for vessels to call there, although Russian-flagged vessels will no doubt continue to do so. That distinction may have importance as we discuss below. Ukraine says it cannot guarantee the ports’ safety. There is no universal concept of a free and open port and UNCLOS Article 25.2 gives any nation the right to decide which of its ports are open to international shipping. There are many examples of where this has been done, notably by Cyprus 40 years ago in relation to a similar annexation of North Cyprus by Turkey. Such an action is understandable. If the closing of ports were not possible, then a government could be exposed to the risk of claims against it where conditions demanded that access should be denied. There is nothing to suggest that the ports in question are physically unsafe, although if ships are sunk strategically to block the waterways (as we saw, albeit in a limited way, at the outset of the Ukraine crisis) then that could change very quickly.

The Russian Federation, on the other hand, has said that it can guarantee the ports’ safety and it is assumed that it will undertake its obligations under the Black Sea MOU, ISPS and SOLAS for example, as it would in respect of any other Russian port.

EU Regulation on importation of cargoes from Crimea into the EU

In addition, and as part of the rolling out of further sanctions, the EU has issued Regulation 692/2014 and, with some limited exceptions, has banned all goods that originate in Crimea from being imported into the EU.

The EU Regulation applies as follows:

>         within the territory of the EU;

>         on board any aircraft / vessel under the jurisdiction of an EU country;

>         to any EU national wherever located;

>         to any legal person, entity or body incorporated or constituted under the law of an EU country; and

>         to any legal person, entity or body in respect of any business done in whole or in part within the EU.

It will therefore include all ship managers based in the EU maritime hubs regardless of the flag of the vessel and the country of registration.

There are limited exemptions. For example, the Regulation permits the execution until 26 September 2014 of trade contracts concluded before 25 June 2014, or of ancillary contracts necessary for the execution of such contracts, provided that the legal person, entity or body seeking to perform the contract has notified the competent authority of the transaction at least 10 working days in advance (each EU country has a designated governmental department in this respect).

There is also a defence under the Regulation if the party in question “did not know, and had no reasonable cause to suspect that their actions would infringe the measures set out in the Regulation”. As such, if a party genuinely did not know that the cargo originated in Crimea and had no reasonable cause to suspect that shipping it would be a breach, that party may be able to rely on the defence. Such a defence may work if cargo is loaded at an intermediate port, but turning a blind eye will not be enough. Further, as the Regulation also applies to insurers of vessels, cover will not be available where there has been a breach of the Regulation.

There are a number of legal issues arising, including the following:

1.     Can an owner refuse an order to go to the “closed” Crimean ports?

The starting point must be the underlying contract and the terms of the charterparty. The safe port warranties vary and some, like the Shelltime form, only impose a duty of due diligence on charterers. There is English law authority Ogden v Graham (1861) 1 B&S 773 to the effect that an order to a port that exposes a ship to arrest potentially renders the port politically unsafe. In that case, a similar event arose where Chile closed port A and a vessel was arrested in another Chilean port B after it was clear that the vessel intended to sail to port A in contravention of local law. It is likely that a vessel calling at one of the closed Crimean Ports will expose the vessel to the risk of arrest in Ukraine at some time in the future. In addition, a vessel calling in Ukraine with the stated intention of going to a Crimean Port may also find itself detained. Therefore, if a Crimean port is nominated and is unsafe or prospectively unsafe, then charterers may find that they are asked for alternative orders.

The situation is slightly more nuanced in that Russian-flagged vessels will no doubt readily call at these ports and may be unlikely to call in Ukraine in any event because of the present political problems. This raises an interesting issue where there are existing Contracts Of Affreightment that are part completed. In those instances, a cargo (not destined for the EU for the reasons given below) could be nominated for loading in a Crimean Port and the contracting counter-party remains under an obligation to nominate a vessel. Faced with a blanket refusal to call at a Crimean port, that party may not be able to rely on a force majeure type clause on the basis that it could in theory nominate a Russian vessel to do the trade.

2.     Can owners refuse to load a cargo originating in the Crimea for discharge in the EU?

Subject to our point above in respect of the port’s safety, the next issue is whether a potential order to load a cargo for discharge in the EU would in itself be unlawful. However, this is not just applicable to cargoes loaded in the Crimean Ports but would also apply to cargoes in intermediary ports where it was known that the cargo originated in Crimea.

This has its basis in the new EU Regulation 692/2014, which, as mentioned above, applies to all EU nationals and all entities incorporated or constituted in the EU (which will include ship managers across the EU’s maritime hubs). As with previous such EU Regulations, the Regulation prohibits insurers (and reinsurers) from providing cover for such voyages and that would again include most P&I Club managers. In fact, the International Group has flagged this up along with the individual Clubs themselves. As stated above, the limited exceptions to the restrictions in respect of trade contracts will expire on 26 September 2014 after which the ban will take full effect. Should an owner find themselves in breach of the EU sanctions, the only real defence under the legislation will be that they “did not know, and had no reasonable cause to suspect that their actions would infringe the measures set out in the Regulation.” Owners will need to keep good records of the steps taken to exercise due diligence, particularly in neighbouring non-EU ports where there may be grounds to suspect that cargoes had originated in Crimea.

It is likely that in this respect, owners will introduce clauses (in so far as they are not covered by existing Sanctions Clauses) seeking appropriate warranties and indemnities from charterers.

However, where owners are faced with such orders, the issue will be whether the orders can be refused on the grounds of illegality. This will depend on a consideration of, among other things, the governing law of the contract and the law of the place of performance. A London tribunal or English court is unlikely to compel an illegal contract or force an owner into an illegal act. In the absence of an express charterparty clause covering such a situation, such a clause is likely to be implied into the contract.

The overriding advice from all quarters is for all EU nationals to approach any call to the region with absolute caution. There is every reason to believe that the situation may deteriorate further in the coming weeks.

3.     Are the Crimean ports “dangerous”?

The situation has escalated and, after the recent loss of the Malaysian plane over East Ukraine involving such terrible loss of life, the international community’s response is still being formulated. The situation needs to be monitored and the question may arise as to whether owners are entitled to rely on a War Risks clause, such as the standard CONWARTIME 2013, in the charterparty as a basis for refusing charterer’s orders to proceed to an occupied port. In the context of the Ukraine Crisis, War Risks include:

“act of war, civil war or hostilities;... warlike operations;... blockades (whether imposed against all vessels or imposed selectively against vessels of certain flags or ownership, or against certain cargoes...) by any person... or the government of any states...”

Under CONWARTIME 2013, a vessel is not obliged to proceed to any port or area, where any such War Risks exist which, “in the reasonable judgement of the Master and/or the Owners, may be dangerous or are likely to become dangerous to the Vessel, her cargo, crew, or other persons on board the Vessel.” That was the relevant test as stated in the Triton Lark [2012] EWHC 70, in which the court clarified that, when assessing whether a risk is dangerous”, Masters and Owners must take into account both quantitative factors (the degree of likelihood that a particular peril may occur) and qualitative factors (the seriousness of the consequences of that given peril to the vessel and her crew). This latter requirement will only be satisfied if the threatened harm is of a serious or important type.

Final thoughts

Anyone considering trade to or from Crimea and Ukraine should closely monitor the political developments in this area; keep their contracts under review, and seek legal advice as necessary. Further sanctions and restrictions are likely to be implemented by the US and EU over the coming weeks.

 

We are grateful to Stephen Askins and Michelle Linderman of Ince & Co for this article.