CORONAVIRUS – COVID 19 – Legal impact on international shipping

05.03.2020

Shipping accounts for 90% of the global trade. The Coronavirus disrupts this trade.

Headlines like “Coronavirus leads to worst week for markets since financial crisis. More than $5tn wiped off global stocks with travel, retail and manufacturing all hit”  (https://www.theguardian.com/business/2020/feb/28/coronavirus-leads-to-worst-week-for-markets-since-financial-crisis are daily news.

Carriers have blanked 21 sailings on the US-Asia Pacific trade route with the primary reason being weak demand in China. The cancellations are in addition to 66 cancellations that took place during the Lunar New Year resulting in 199,000 20 ft. equivalent (TEU) units of reduced capacity. On the Asia-Europe trade route, a total of 61 cancelled sailings have been announced, representing a 151,000 TEU capacity reduction.

The big three cruise companies Carnival Corp, Royal Caribbean Cruises and Norwegian Cruise Line Holdings warned that Covid 19 may wipe more than USD 500 m off their combined earnings in 2020 (source: Trade Winds, 21.02.2020)

The International Chamber of Shipping (ICS) stated that by implementing certain preventive measures for coronavirus, ports and global shipping can continue to operate and avoid the closure of any port. The ICS recommenced exit screening at all ports in the affected areas to isolate passengers displaying symptoms of the disease and curb its spread to other countries.

All major ports across the world have adopted a 14-day quarantine period for vessels arriving from or transiting through China. https://www.maritime-executive.com/editorials/shipping-and-cruise-sectors-struggle-with-the-fear-of-coronavirus

The impact of the outbreak of the coronavirus is estimated to be costing the shipping industry USD 350 million a week in lost revenues, according to the International Chamber of Shipping (ICS). https://worldmaritimenews.com/archives/291622/ics-coronavirus-costing-shipping-industry-usd-350-mln-a-week/

Urgent Questions

  • What is your legal position as a maritime service provider when your services are disrupted due to the Corona Virus, supply chains break down and you are faced with losses and claims?
  • Can you rely on Force Majeure or other risk allocation clauses as an excuse for contractual non-performance or justification for the cancellation of a contract?
  • What are the effects of the Corona Virus on the rights and obligations in Charterparties/CoA?

 

Your rights and liabilities depend on the particular law applicable to your legal relationships. In the maritime industry this will be predominantly English law which we will be referring to. A note is added where German law –if applicable –  differs.

  

FORCE MAJEURE

Force majeure as an excuse must be agreed in the contract as a contractual term. Force majeure will not be implied.

The clause

The clause might provide a specific list of Force Majeure events and events that are beyond the parties‘ control. Unless agreed otherwise, there is no requirement that a force majeure event must be unforeseeable.

The party seeking to invoke a force majeure provision to excuse it from non-performance bears the burden of proving on the balance of probabilities that:

  • the performance was “prevented“ entirely, not just made it more difficult or costly or was significantly more onerous, when “hindered” or “delayed” be the only effective cause of default;
  • That it was beyond the parties‘ control;
  • It was the only effective cause of default;
  • There was nothing it could reasonably have done to avoid the Force Majeure Event or mitigate its effects.

In the absence of specific charterparty/contract provisions a party has no right under English law to claim termination on the basis of force majeure. This applies even if there are valid force majeure declarations elsewhere within the contractual chain, for example, a voyage charterer is able to terminate but absent provisions in the time charter the disponent owners will remain bound to their obligations to head owners. Parties should, therefore, ensure that in future they are protected against Force Majeure knock-on effects. https://www.steamshipmutual.com/publications/Articles/forcemajeureharveyirma.htm

Whether the delay and disruption resulting from the CORONA VIRUS is a Force Majeure Event depends exclusively on the terms of the clause. Where there is no specific reference to disease, epidemic or quarantine, they may be covered by terms such as “Restraints of Government” or “Act of God” or “other circumstances beyond the parties’ control”.

 

The effects of the Force Majeure Event

Usually, the clause will specify

  • That neither party is liable for a failure to perform its contractual obligations where that failure is caused by the force majeure event;
  • Suspension of obligations to perform the contract for the duration of the event;
  • ability to terminate the contract after a specified period.

 

Duty to notify

Ensure that any notification procedure is fully complied with, especially in a contract chain.

The position under German law regarding contractually agreed Force Majeure is similar. Note, German statute (section 275 BGB – German Civil Code) provides that – provided the party is innocent –  a claim for performance is excluded to the extent that performance is rendered absolutely impossible or relatively impossible if the performance requires expenditure which is manifestly disproportionate to the other party’s interest in performance.

FRUSTRATION

In the absence of a Force Majeure Clause, parties may rely on the doctrine of frustration in respect of the Corona Virus outbreak. Proving frustration, however, is much more difficult than Force Majeure. Essentially, a contract is frustrated when due to an event it is physically or commercially impossible to fulfil that contract. The test is complex involving inter alia the terms and factual basis of the contract and the reasonable foreseeability of the event at the time of the conclusion of the contract. If frustration is confirmed the contract comes to an end.

German law recognises a similar concept, the so called “Wegfall der Geschäftsgrundlage”, the change or “collapse of the foundation of the transaction” According to this doctrine an uncontrollable change in the circumstances surrounding the contract that leads to a significant undue hardship, may justify an adaptation or termination of the contract, if upholding the contract would be unreasonable. The difference in the doctrines is basically, that under German law an adaptation is possible.

MATERIAL ADVERSE CHANGE or EFFECT

It is possible to contractually allocate risk among the parties if events occur that could reasonably be expected to result in a material adverse change (MAC) or material adverse effect (MAE). The occurrence of such an event may entitle a party to avoid performance or terminate the contract.

WRONG ASSERTION OF RISK ALLOCATION CLAUSES

Incorrectly claiming to be entitled to invoke a risk allocation clause may constitute a breach of contract and entitle the other party to terminate and claim damages. Risk Allocation Clauses do not excuse your own fault.

EFFECTS in CHARTERPARTIES

Carriage of goods

In the event that a vessel or cargo is quarantined, the restraint of princes exemption of articles IV rule 2(g) and (h) of the Hague or Hague Visby Rules may apply.

Safe port warranties

A port may be unsafe due to the Corona Virus is the vessel cannot call and return from the port and Owners may be entitled to refuse Charterers orders.

Seaworthiness

A vessel may become unfit to receive and carry the cargo if it is chartered for after calling at an infected area.

 

Off-hire

Infected crew and/or quarantine/deviation due to quarantine may constitute an off-hire event

NOR and Free Pratique

A valid Notice of Readiness (NOR) is required for the commencement of laytime. For owners to tender the notice, the vessel requires free pratique. On cases of an outbreak, special measures may cause delays at Owner’s risk unless the charterparty provides otherwise.

Crew

It is the responsibility of the employer to take full precautions to protect their crew by overseeing hygiene, reporting any symptoms and limiting crew’s exposure to the virus.

 

Effects on cruise lines

Cruise liners are generally not required to pay damages to passengers who fall ill on their ship except in cases where negligence can be proven. Cruise Lines should be aware of the EU Package Travel Regulations and its specific cancellation, re-imbursement provisions. Passengers may be entitled to price reductions due to itinerary changes necessitated by the Corona Virus based on the tour operator’s strict liability. Please note the line may also have acted as tour operator

 

WHAT YOU SHOULD DO (non exhaustive)

  • Implement preventive and mitigating measures (WHO, IMO guidelines) on board to protect passengers and crew.
  • Review your contracts for risk allocation clauses;
  • Obtain information and evidence regarding the risk event;
  • Before making or when receiving a Force Majeure Notice, clarify if the delay has been caused by the Force Majeure Event , or whether it is a consequence of force majeure being declared elsewhere (as may be agreed);
  • Declaring or receiving Force Majeure notifications may affect your insurance arrangements.
  • Review the Charterparty as to then impact on your rights obligations as Owners/Charterer;
  • Review the B/L terms as cargo interest
  • Review your passenger ticket conditions, concession and tour operator/wholesaler agreements for cancellation and compensation clauses
  • Consider taking legal advice

 

Further questions please contact:

Dr. Jan Dreyer or Esther Mallach

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