Iraq - Legal Implications Of War

March 2003

Richards Butler Client Alert, March 2003: 

Introduction 

It is now clear that there will not be another UN resolution expressly sanctioning the use of force against Iraq and that military action against Iraq is imminent. 

One point of view is that the use of military force is already sanctioned by the previous UN resolution 1441 of 8th November 2002 by stating that Iraq will face "serious consequences" for failing to comply with the access to and destruction of its weapons as demanded by the UN. A number of governments however have made it clear that they do not subscribe to this view and opposed the idea of a further UN resolution expressly to sanction the use of military at this stage. 

Without a further UN resolution it may therefore be debated whether or not in all the circumstances such military action is justified and permitted by international law. This debate however becomes an academic exercise if military conflict is inevitable. Practical effects are already manifesting themselves: the Chinese government, for example, recently ordered all Chinese Shipping to leave the Gulf. These notes address the legal issues that are likely to face the shipping and trading communities in the coming weeks or months. 

Much has been written about the present situation based on experience and precedents set by matters arising out of the Gulf War and the Iran-Iraq conflict. These notes are intended to summarise and update the issues. For further detailed advise on any particular set of circumstances speak to your usual contact at Richards Butler. Part I addresses Shipping matters ie those relevant to chartering and carriage contracts and also to a certain extent marine insurance. Part II covers the international trade aspects. At all times an English law perspective is assumed.

PART I - SHIPPING ISSUES 

The legal issues arising that concern shipping and carriage contracts fall mainly into five categories: (1) The legal meaning and definition of "war", (2) rights of cancellation, (3) frustration, (4) port safety, and (5) payment of additional insurance premiums. 

1 Meaning and Definition of War 

In any contract for carriage or insurance where an event of "war" triggers certain consequences, the exact meaning of the word "war" will depend on what is presumed to be the intention of the parties to that contract. The guiding factors as to whether a state of war exists were set out in Spinney v Royal Insurance Co (1980); these are: (1) whether one can identify a conflict between opposing "sides"; (2) the existence of objectives of the "sides", and means of pursuing them (it can be enough if the aim is to force changes in any way in which power is exercised without fundamentally changing the existing political structure) and (3) the scale of the conflict, and its effect on public order and the life of the inhabitants. This last can include the number of combatants, the amount of territory occupied, the scale of the casualties and the duration. Considering the amount of military hardware and forces positioned in the Gulf, there can be little doubt that military attacks on Iraq with the aim of removing Saddam Hussein's regime would fulfill these criteria. 

It should be noted that there are a number of legal authorities on the precise meaning of other words often used in clauses along with the word "war". The standard "war risks" cover under the Lloyds Institute War and Strikes Clauses introduced in 1983 extends to "civil war", "revolution", "rebellion", "insurrection", "hostile acts by a belligerent power", and "terrorism" (ie mirroring the express exclusions under the standard Lloyds ITC-Hulls policy). Suffice to say that each of these concepts has a distinct meaning. The term "warlike operations" (which appeared in the precursor to the 1983 Clauses) gave rise to conflicting authorities. While the meaning of "warlike operations" is obviously wider than "war", it required a consideration of the predominant cause of the event giving rise to the claim. 

2 Cancellation due to war 

A contract can be cancelled or automatically terminated by the outbreak of a war if the parties have expressly stipulated that it should be. A number of charterparty forms use standard war clauses, which may or may not entitle a party to cancel on the happening of a defined event or set of circumstances. One has to consider the particular cancellation clause to see if it is applicable. Most war cancellation clauses operate by reference to (a) war involving the flag state (b) war between any two or more specified countries or (c) war breaking out at the destination or other location. 

(a) War involving the flag state 

The Court of Appeal has recently refused permission to appeal an arbitration decision concerning an attempt to cancel under a standard charterparty clause owing to Germany (as the flag state) being involved in military operation in Kosovo. Four vessels were chartered on the NYPE form which included a provision in clause 31 that: 

"... in the event of the nation under whose flag the vessel sails becoming involved in war (whether there be a declaration of war or not) either the owners or charterers may cancel this charter …"

The Charterers purported to cancel on account of Germany's participation as a member of NATO in deploying fighter planes against the Milosovic regime operating in Kosovo. There is nothing in the report to suggest that military operations in Kosovo had any actual impact whatsoever on performance of the charters, so one may suppose that the charterer's were motivated to cancel for other commercial reasons. Opportunist though the Charterer's position may seem, it appears that the arbitrators decided against them (by a majority) to find the cancellation invalid on the basis that the operation in Kosovo was not a war, and even if it was then Germany was not involved. The arbitrators also ruled that the charterers were out of time in purporting to exercise the right of cancellation, as over one month had passed since the alleged events giving rise to the right. 

A similar situation did arise around the time of the 1991 Gulf War showing the other side of the coin. Two Italian warships were moved from the central Mediterranean eastwards in apparent, albeit tentative, support of the military forces gathering in the Persian Gulf. Again, opportunistic charterers of two tankers sought to cancel on the basis that this was a "warlike operation" by the flag state of the tankers, Italy. The cancellation was upheld by a tribunal. 

These cases re-affirm the importance of carefully considering the facts of the military operation in question against the contractual clause before concluding whether or not the Clause may be validly invoked. In the case of charters concluded in the future it may be relevant to consider whether the events in question already existed at the date the charter was fixed. 

(b) War between any two specified states 

Any contract may expressly provide for cancellation on the outbreak of war between specified states. Such a clause would operate in a similar way to point (a) above if the states were in fact at war with each other. An example is clause 5.2 of the Institute War Strikes Clauses whereby all war risks insurance is automatically terminated if war breaks out (whether declared or not) between any of the UK, USA, France, Russia or China. This provision (thankfully) needs no further consideration here. 

(c) War at the destination or other location 

This kind of provision inevitably arises for consideration alongside the issue of port safety. The war clause will invariably provide that the vessel is not to proceed to a place in which there is a state of war, hostilities, blockade where it is at of risk of capture. The clause may require the place to be dangerous. Sometimes the requirement is dependent upon how, in his reasonable opinion, the master or owners perceive the events. In this case the discretion conferred must be exercised reasonably and in good faith and not arbitrarily or capriciously.

If such a clause is triggered, there is normally provision for discharge of cargo elsewhere or payment of additional insurance. 

One charterparty form provides for automatic termination if no cargo is loaded and no substitute orders are given by charterers. 

The commonly used war clauses give the vessel liberty to comply with the orders or directions of various authorities or bodies, for example the flag state, war risk underwriters, any other government or the Security Council of the United Nations or directives of the European Community. 

3 Frustration of contracts due to war 

If there is no provision in the charter for war the parties can still be discharged from further performance if the effects of war frustrate the contract by creating a fundamentally different situation or rendering performance as intended by the parties impossible. There is a distinction to be drawn between performance which becomes "wholly different to that intended", as opposed to situations where one party's obligations simply becomes more onerous; the latter does not frustrate the contract. It is to be noted that it is not the mere existence of a war that potentially frustrates a contract; it is the actual impact of the acts done in furtherance of the war on performance of the contract that may frustrate it. 

When considering the possibility of frustration, one must first consider what the charter provides and whether its terms are wide enough to apply to the new situation. But the mere existence of a war clause apportioning the risk of delay and extra expense between the parties, does not necessarily preclude the operation of frustration.

Again, just because the parties are aware of the risk of war and hostilities and conclude a charter for a voyage to an area which could be affected, which must apply to much recently fixed business, does not necessarily mean that the operation of frustration cannot arise. It may be relevant to enquire whether the consequences of war which followed had been in the minds of the parties. 

If the effect on the charter caused by the war is delay, whether the delay is frustrating may depend upon a number of factors, such as whether the cargo is perishable, whether delivery is urgent and the length of the actual or anticipated delay compared with the duration of the voyage contemplated at the time of fixing. 

In relation to contracts of affreightment it may be that shipment in a particular period might be frustrated without discharging the whole contract. 

It is important to remember that the assessment as to whether the relevant events frustrate the charter should be made as at the time frustration is claimed, regardless of how events unfold thereafter. 

4 Prospective unsafety of ports due to war 

A charterparty requirement that the Charterer shall not order the vessel to an unsafe port encompasses the concept that a nominated port could be dangerous if a state of war exists that puts the vessel at risk of loss or damage. The classic test as to safety of a port is whether, if in the relevant period of time, the particular ship can reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to unavoidable danger. The requirement of safety can be spelt out in the charter or it can be implied, for example where the charterer is given a choice to nominate any port within a range. The rationale is that a warranty of safety on the part of the charterer is necessary where the ports are not specifically identified and the owner cannot therefore make his own enquiries. 

The warranty on the part of the charterer is prospective i.e. that, when nominated, the port will be safe to approach, use and depart from. There would be no breach of warranty by the charterer if the unsafety arose from causes which could not be anticipated at the time of nomination. The prospective safety of a port is to be measured at the time of nomination by the Charterer, but if events subsequently occur while the vessel is on the way to the port which renders it unsafe, the Owners may refuse to go there. 

If the Charterer nominates a port that is known to be unsafe, the owner would be within his rights to refuse to go there and ask the Charterer to nominate a safe alternative. An Owner is entitled to a reasonable opportunity to evaluate a nomination, and if the vessel proceeds to an unsafe port despite the Owner's misgivings, then in the absence of an express reservation, the right to reject the unlawful nomination would be waived. However, the Charterer could still be liable in damages for breach of the warranty of safety in respect of loss actually sustained by the Owner owing to the danger. 

It should be remembered, however, that where there is an applicable war clause in the charter, the wording of this clause could displace the general warranty of safety and the owner would need to look to the war clause to see what his rights were. The war clause should therefore be checked carefully. 

5 Liability to pay increased Additional War Risks Premia 

Charters normally assume or expressly allocate the cost of normal insurances to owners, but to allocate any additional premia to charterers the contract must contain a specific clause allowing the owner to recover the extra insurance expenses from the charterer. At present it seems that charterers wishing to trade to the Arabian Gulf are accepting that they must pay the extra insurance costs. 

If an event such as war occurs that significantly alters the assessment of risk, most policies allow the insurer to cancel the insurance on notice, subject to reinstatement within the notice period at a new (invariably higher) rate. It is understood that currently most war risks underwriters will only provide quotes for cover in the Arabian Gulf north of the 24th parallel valid for 48 hours, and the period of cover is limited to seven or fourteen days. 

PART II - INTERNATIONAL TRADE ISSUES 

6 Frustration 

For a trader, the main question will be whether the contract is "frustrated" (if the contract is silent on these issues i.e. no force majeure or prohibition clause). Will the war or warlike operations or inability to ship goods as intended under the contract or a prohibition on trade with Iraq constitute a "frustrating" event? If so, a performing party may be excused performance. The party seeking to avoid performance will be expected to prove (a) the fact of the frustrating event (b) the fact that the event prevented performance and was beyond his control and (c) that no reasonable steps could have been taken to mitigate the consequences. These are onerous conditions. 

If goods are sold as specific goods or specifically identified goods and they are destroyed as a result of war then that would amount to "frustration". However where goods traded under a CIF contract have not been specifically identified or appropriated at the time of destruction then their destruction would not be enough to frustrate the contract; the CIF seller would be obliged to find and deliver alternative goods that match the contractual description. 

The location of the goods can sometimes "identify" them. If goods are traded on the basis that they will be supplied from a particular port, or tank installation and that port or installation is put out of operation because of hostilities then the contract may be frustrated. Conversely, if oil fails to materialise in the storage tanks at your loadport in Iraq because of hostilities then you will not be able to claim frustration if you could have contractually supplied oil from a different tank, or port, or country. 

In summary, for a CIF seller, there is almost always an obligation to try to buy in alternative goods from elsewhere or afloat to supply the CIF sale; equally a CIF buyer usually has the option of diverting the vessel and taking goods elsewhere. Consequently, there will be very few circumstances in which a CIF contract is frustrated unless performance is very specifically linked to the identity of the goods themselves or the area affected by the frustrating event. There is also extensive case law on the area of, in particular two cases called the Congimex and Sucden v Beximco which are worth having a look at. 

Frustration can also operate in respect of modes of transportation. If the only stipulated method of performing the contract is not possible then the contract is frustrated. However, in a situation where a Seller is intending to perform his voyage through the Suez Canal (for example) and the Suez Canal is closed that doesn't mean that the contract is frustrated because there is another (albeit more expensive) way of getting the destination. An additional cost to one party is almost never on its own enough to frustrate a contract. 

7 Force majeure / prohibition 

Rather contrary to expectations, a prohibition on exports or imports may not amount to a "frustrating" event. Many standard form contracts (particularly in the grain trade) contain detailed prohibition clauses which do ultimately give a party the right to cancel the contract subject to the exact terms of the clause. Most contracts will at least have a "force majeure" clause. "Force majeure" clauses tend to be rather narrow in application - for example they usually only protect the Seller, and often require the Seller to demonstrate that performance was prevented. Again this is onerous. In addition a party relying on a "force majeure" or prohibition clause must comply strictly with time limits, notices to be given and the form of notices, etc. 

The principles set out above in relation to frustration will also still apply; therefore, a Seller of unidentified, unascertained goods will be obliged to supply goods from an alternative contractual source if his chosen source is subject to an export prohibition or "force majeure" event. As a result, Traders should consider their specific needs for particular trades - should there be a cancellation clause, extension of shipment or wider force majeure clause? 

It is also worth noting that the unavailability of insurance will not necessarily "frustrate" a CIF contract; certainly the fact that the cost of insurance goes up, even astronomically, will not "frustrate" it. Insurance is dealt with below. 

8 Cargo insurance 

War risks are not automatically included in most standard cargo policies. Where "war risks" are included in the cover they are usually accompanied by a cancellation clause which gives the underwriter the right to cancel the policy at short notice if/when war breaks out. If underwriters do cancel they will usually re-offer the cover at a high rate having obtained increased cover themselves. 

One way to deal with this risk would be to include a reference to insurance in your "force majeure" clause such that the party who has to insure has the right to cancel in certain circumstances. 

9 Is the contract legal? 

Any business which flouts UN imposed sanctions is "illegal". An embargo on trade with Iraq is already in place for which the only exceptions are goods traded under the "Food for Oil" programme ("FFO" see below). If hostilities between the United Nations and Iraq increase then the FFO programme may be suspended, preventing any trade to take place legally with Iraq at all. 

Additionally under old English law it is a criminal offence to deal with an "Enemy" subsequent to a declaration of war. The effect of a contract being illegal is that it will be completely unenforceable; disastrous if your counterparty defaults! 

Because of recent anti-terrorism legislation it is now not just illegal to trade with certain countries, but with certain individuals and organisations. It is therefore imperative that traders look closely at the identity of their counterparties. The list of individuals and organisations which banned from trading is available on the internet; for example on the Bank of England website and on the American OFAC website. Now that the legislation is in place, the UN can in theory put a financial squeeze on any country by adding names to that list; therefore groups or individuals from countries such as Iraq and Indonesia may be put "out of bounds" if the groups/individuals are thought to support terrorist interests. 

10 Costs 

As well as allocation of risk, Traders should consider allocation of costs - freight and insurance may increase in case of military action. Who will bear these costs? Traders should not trust the law to reach a "fair" result once the problem occurs: in general the law will assume the contract must be performed according to its terms and will not fairly reallocate the losses or increased costs if war interrupts. 

11 Food for Oil 

The Food-for-Oil programme is now in phase XIII which ends on 3rd June 2003. The programme bank account in New York is still suffering a cash shortfall to pay for Iraq's food and other imports; this despite a streamlining of approval procedures in May 2002 allowing Iraq to import non-contentious goods with less fuss and a significant increase in oil exports in the last few months. 

If war breaks out then Saddam Hussein will almost certainly suspend oil sales. In any event, both imports into and exports out of Iraq may simply become practically impossible due to the military action. The Food-for-Oil programme does not itself deal with the contingency that the programme may be suddenly curtailed. If the programme is withdrawn or cannot operate, provision will need to be made for part - executed shipments, e.g. (1) contracts that have been approved for shipment and (2) shipments that are already underway. Traders who are involved in the programme should, therefore, now consider and minimise their exposure.

 

Reproduced with kind permission of Richards Butler.

Disclaimer 

This does not purport to be comprehensive or to give specific legal advice. Before action is taken on matters covered by this article, reference should be made to the appropriate adviser. 

Should you have any queries on any Shipping issues mentioned in this Alert please get in touch with Stephen Kirkpatrick at [email protected] or Dominic Buckwell at [email protected] or your usual contact at Richards Butler. 

Should you have any queries on any trade issues mentioned in this Alert, please get in touch with Diane Galloway at [email protected] or Annabelle Panesar at [email protected] or your usual contact at Richards Butler.