The current tragic events in Ukraine are a concern for Owners and Charterers alike. The situation is highly fluid and factual reports from the region may not all be reliable. As a result decision making for both Owners and Charterers is complicated.
The Club is receiving numerous enquiries from its Members'. The purpose of this note is to outline some of the charterparty considerations albeit:
- The contractual issues are highly fact sensitive;
- Events are liable to rapid change; and
- Charterparty terms and conditions can vary considerably.
Members' should, therefore, continue to address questions to their usual Club contacts.
1. What is a war?
Spinney’s Case [1980] is generally regarded as the leading English authority on war. Not every armed conflict will be a war. The main characteristics of war involve:
- conflict between opposing sides with territorial, political or other identifiable objectives of dominion; and
- the scale of the conflict.
In Kawasaki v Bantham Steamship [1939], the charterparty gave both parties the “liberty of cancelling this charterparty if war breaks out involving Japan”. When the Sino-Japanese War broke out Kawasaki claimed Owner’s cancellation was wrongful and commenced arbitration proceedings. Diplomatic relations between the two countries were not severed and neither side declared war, but there was extensive fighting between large numbers of Chinese and Japanese troops with large casualties on both sides.
The dispute reached the Court of Appeal. Lord Greene MR said:
(i) “… to say the English law recognises some technical and ascertainable description of what is meant by ‘war’ appears to me to be an impossible proposition”; and
(ii) “ … in the particular context in which the word ‘war’ is found in this charterparty, that word must be construed, having regard to the general tenor and purpose of the document, in what may be called a commonsense way”.
It was held there was a war.
In The Northern Pioneer [2003] the majority decision of the Tribunal was there was not a war. The charterers had purported to cancel the charters of four German flagged Vessels chartered on Asbatime form charters (see cancellation clauses below) on the ground that Germany had become involved in war with Kosovo and Yugoslavia.
As a Member of NATO, Germany had deployed 14 aircraft to support operations to suppress air defences and reconnaissance during the Kosovo fighting.
The majority decision was that:
- “war” was to be construed in a common sense way (following Kawasaki v Bantham Steamship);
- “war” meant a war between nation states;
- a businessman applying common sense in the context of the war cancellation clause would not regard the NATO operation in Kosovo as a war;
- Members of NATO participating in a NATO operation are not “involved in the operation” as a nation”.
The dissenting Arbitrator’s view was that if a businessman had been asked whether there was a war in Kosovo, the answer would have been “yes” and that Germany was “involved”.
The issue before the Court of Appeal was whether leave to appeal against the arbitrators’ award had been properly refused. Whilst there are indications the Court may have been prepared to reach a different conclusion as to whether the events in Kosovo constituted a “war” for the purposes of the relevant cancellation clause it was not, however, necessary to address this question.
Whether in fact a state of war exists may not, therefore, be as straightforward a question as might be expected. A common sense approach is needed. The scale of the conflict in the Ukraine might suggest it is a war; indeed, and whilst not determinative, as the dissenting arbitrator thought in The Northern Pioneer, if asked the question a reasonable businessman might hold such a view. If so, as the above cases demonstrate, whether under a charterparty that would give either or both Owners or Charterers a right to cancel or refuse orders to proceed or … will depend on the particular charterparty.
2. Refusing orders to proceed to ……
Typically whether or not a charterer’s order to proceed to a port on the Black Sea can be rejected will depend on establishing that it is dangerous to do so.
The 2013 version of CONWARTIME wording provides at Clause (b):
“The Vessel shall not be obliged to proceed or required to continue to or through, any port, place, area or zone, or any waterway or canal (hereinafter “Area”), where it appears that the Vessel, 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 whether such risk existed at the time of entering into this Charterparty or occurred thereafter. Should the Vessel be within any such place as aforesaid, which only becomes dangerous, or may become dangerous, after entry into it, the Vessel shall be at liberty to leave it.”
War Risks are defined as including any actual, threatened or reported:
“war, act of war, civil war or hostilities; revolution; rebellion; civil commotion; warlike operations; laying of mines; acts of piracy and/or violent robbery and/or capture/seizure (hereinafter “Piracy”); acts of terrorists; acts of hostility or malicious damage; blockades (whether imposed against all vessels or imposed selectively against vessels of certain flags or ownership, or against certain cargoes or crews or otherwise howsoever), by any person, body, terrorist or political group, or the government of any state or territory whether recognised or not, which, in the reasonable judgement of the Master and/or the Owners, may be dangerous or may become dangerous to the Vessel, cargo, crew or other persons on board the Vessel.”
An Owner will be allowed a reasonable time to make enquiries and to consider specific orders before complying or rejecting them. The test for determining is whether, in the ‘reasonable judgement of the Master and/or the Owners’ an area is dangerous to the Vessel, cargo, crew or any other persons on board the Vessel due to a War Risk. In the ”Triton Lark” (a piracy case), the Judge said:
‘the Owners must make a judgement. It must be made in good faith; otherwise it would not be a judgement but a device to obtain a financial gain. Further, the judgement reached must be objectively reasonable. An Owner who wishes to ensure that his judgment is objectively reasonable will make all necessary enquiries. If he makes no enquiries at all it may be concluded that he did not reach a judgment in good faith. But if he makes those enquiries which he considers sufficient but fails to make all necessary enquiries before reaching his judgment, I do not consider that his judgment will on that account be judged unreasonable if in fact it was an objectively reasonable judgement and would have been shown to be so had all necessary enquiries been made.”
An Owner has to establish that it formed a reasonable judgement that there was a “real likelihood” that the vessel would be exposed to war risks. “Real” means that there must be some evidence, not for example mere speculation. The Judge in the "Triton Lark" also held that “likelihood” did not mean more likely than not: it could include an event which had a less than evens chance of happening but it required a degree of probability greater than a bare possibility.
In a further judgment in the same case in January 2012 the Judge observed that what is dangerous in the context of exposure to war risks will depend on the facts of the case and will include the degree of likelihood that a particular peril might occur and the gravity or other consequence should that event occur.
Other clauses in a charterparty may also allow an Owner to refuse a charters orders applying the same or similar tests. For example:
- “that the Vessel is not to trade to: (i) any war or warlike areas; (ii) unsafe or dangerous zones; (iii) any zones, countries and/or areas banned, boycotted or sanctioned by …..…”;
- BIMCO’s Sanctions clause for time charters “Charterers shall not give any orders for the employment of the Vessel which involves a Sanctioned Party or a Sanctioned Activity.”.
3. Cancellation, Frustration and Force Majeure
(a) Cancellation
War clauses normally give a right to either party to a charterparty to cancel if a state of war exists. If so an option to cancel must be exercised within a reasonable time - often defined by a war clause, failing which the right to cancel may be waived. As with any clause the war clause (and charterparty as a whole) will need careful consideration.
(i) Time charters
For example, Shelltime 4:
“If war or hostilities break out between any two or more of the following countries: U.S.A., the countries or republics having been part of the former U.S.S.R (except that declaration of war or hostilities solely between any two or more of the countries or republics having been part of the former USSR shall be exempted), P.R.C., U.K., Netherlands, then both Owners and Charterers shall have the right to cancel this charter.”
Similarly, NYPE 1993:
“In the event of the outbreak of war (whether there be a declaration of war or not) between any two or more of the following countries: .............................................................................................. either the Owners or the Charterers may cancel this Charterparty.”
(This was the wording of the clause in The Northern Pioneer but in addition to the list of countries the clause also provided “or in the event of the nation under whose flag the vessel sails becoming involved in war”).
There must, therefore, be a war between the countries named in the clause before the right to cancel arises. In this respect, the Shelltime 4 exclusion of war between “countries or republics having been part of the former USSR" would prevent cancellation in the current circumstances unless, which for obvious reasons it is hoped will not happen, other countries become involved. But even then, and as discussed above, any such involvement may not constitute war. In addition, it is not unusual that a condition to the right to cancel is a war between the countries named in the clause that “directly affects the performance of the Charter”.
(ii) Voyage Charters
Where they exist in voyage charters cancellation rights tend to be less restrictive and are similar in approach to Conwartime. For example, Gencon (1994) provides Owners with an express right of cancellation before commencement of loading if in the reasonable judgement of the Master and/or Owners it appears that “performance of the contract of carriage, or any part of it, may expose, or is likely to expose, the Vessel, her cargo, crew …. to War Risks”, which are defined as:
“..any war (whether actual or threatened), act of war, … hostilities, … war like operations, …”
Moreover, and applying the same “reasonable judgement” test, an Owner will not be required “to continue to load …. , or to sign bills of lading ……. , or to proceed or continue on a voyage”, where it appears “the Vessel, her cargo, crew …. may be, or are likely to be, exposed to War Risks”. In those circumstances Owners can ask Charterers to nominate a safe port for the discharge of the cargo, and if no such nomination is received within 48 hours Owners may discharge the cargo at any safe port of their choice.
In contrast the Norgrain charter form does not give an express right to cancel. Instead, if (“at his or their discretion”) the Master or Owner consider it dangerous to reach or enter any port to load or discharge, the Charterers have the right to order the Vessel to an alternative safe port in the charterparty range.
(b) Frustration
In the absence of an express right of cancellation a charterparty might be frustrated.
Frustration is a common law doctrine and, therefore, available even when not expressly referred to in a contract. Reliance on frustration is not straightforward. It requires an intervening event that has not been caused by the actions of either party and that renders performance impossible, or illegal, or radically different from that contemplated at the time of entering into a contract.Delay, for example, because vessels are exposed to the risk of port closures preventing loading or discharging cargoes, might amount to frustration.
The delay must be of such magnitude as to render performance radically different. In the case of time charters this involves a comparison of the period of delay with the remaining duration of the charter. Voyage charters require a comparison between the voyage after the change in circumstances and the time that it would have taken to perform had there been no change in circumstances.
If frustrated the parties to the contract are released from future performance of obligations that would otherwise fall due. A charterparty will not, however, be frustrated if specific provision is made in that charterparty for a particular event. In that case – for example, war or trading limit clauses, or possibly a force majeure clause, that clause will determine the Owner's and/or Charterer's rights.
(c) Force majeure [What is Force Majeure?]
In contrast to frustration, English law does not recognise force majeure as a freestanding concept existing outside the terms of a contract. An Owner or Charterer will only be able to rely upon force majeure if the charterparty contains a clause defining the events that will constitute a force majeure event and, depending on the wording of the clause, a defined event prevents, or hinders, or delays performance. The defined events are often extraordinary events - wars, strikes, earthquakes, and must usually be outside either party’s control - ”circumstances independent of the will of man, and which it is not in his power to control” (Lebeaupin v Crispin [1920]).
The circumstances in which a force majeure clause can be invoked, and the consequences, require careful consideration of the clause. If triggered such clauses commonly suspend performance until the event ceases, sometimes with a right to terminate after a specified period of time, but can also give a right to cancel on the happening of the event.
4. Unsafety
With the closure of Ukrainian ports the issue at the current time is the safety of other ports in the region. A safe port warranty, whereby the Charterer warrants at the time of nominating a port that it will be safe during the Vessel’s approach, call, and departure without being exposed to danger in the absence of an abnormal occurrence, is limited to those parts of the approach to the port which are characteristics of that port, not all those in a region. The further the danger from the port, the less likely it is to interfere with the safety of the voyage.
However, a Charterer could be in breach of an obligation, such as that in CONWARTIME 2013, not to order the Vessel to or through an area or zone reasonably considered to be dangerous. Accordingly, where, for example, if an Owner has stated its position that it was unsafe to proceed and a Charterer affirmed its orders or, with knowledge of the situation, did nothing to prevent the Vessel from continuing, the Charterer may be in breach and held liable in damages to the Owner.
