Novel Coronavirus from a Ship Owners Point of View

10 min read

Global shipping industry will inevitably be affected as the virus spreads globally at alarming speed. The World Health Organisation has now declared the outbreak a Public Health Emergency of International Concern. The outbreak of virulent diseases can have significant implications for ship owners and operators. This might include quarantine of a vessel and crew in an area where the disease is prevalent as well as the imposition of restrictions, possibly weeks or months later, in ports remote from the infected region as a precaution against the disease spreading further.

The potential impacts of Corona Virus spread for a ship owner is in the following areas.

Delays beyond Control
Delays and breaches of contract of carriage due to quarantine regulations and port closures.
Insurance implications
Shipbuilding Contracts

Contracts of carriage such as Bills of Lading and Charter Parties usually do not contain a “force majeure” clause.

Although many contracts for the carriage of goods do not contain specific force majeure clauses, it is important to remember that there are exceptions to liability set out in the Hague and Hague-Visby Rules which may apply.

Chartering

In the context of chartering, whether time or voyage charters, there are a number of ways in which novel coronavirus may affect contractual obligations:

Seaworthiness

A vessel may become unfit to receive and carry the cargo it is chartered for after calling at an infected area due to quarantine and port regulations. In some cases cargo may require fumigation and which may cause damage to cargo. Similarly, if a vessel is delayed due to quarantine regulations which in turn cause damage to cargo, the vessel may be considered unseaworthy.

Safe port warranties

Charter parties often contain warranties which are either express or implied or a due diligence provision, given by charterers to order vessels to ports that are safe. A port will not be safe unless 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 danger which cannot be avoided by good navigation and seamanship. If a particular port is not safe, then owners may be able to refuse to comply with the charterers’ order. Whether a port is safe is a question of fact. The factors which may be considered are the likelihood of the crew being exposed to the coronavirus and the fatality rate.

Off-hire

Depending on the wording of the time charter, delays or deviations caused by quarantine may place the vessel off-hire. This will often happen when the vessel is exposed to a situation that prevents the full working of a vessel, e.g. fumigation required by a port health authority or some crew members on board are suspected to be infected with virus or entire crew is effected which prevent the efficient working of vessel. In this instances the charterers may argue that quarantine required as a result of a large number of infected crew members is a “deficiency of men” and thus an off-hire event. Owners may have a counter argument that the delay is a natural and inevitable result of complying with charterers’ order and the vessel should remain on-hire.

Laytime

In the context of voyage charter, some charters contain express quarantine clauses. This may be in the effect that once charterers had issued voyage orders they are excluded from the liability caused by delay resulting from quarantine declared and in effect the owners will not be entitled to demurrage in respect of such delay.

Some charter parties require the vessel to be in “free pratique” before laytime can commence. Owners will then not be able to tender a notice of readiness until free pratique is obtained. As a result, owners will be bound to bear the costs of obtaining for the vessel a free pratique if the vessel has called at an infected area, or if certain crew members are suspected of infection, so that the notice of readiness can validly be tendered.

Crew

Ship’s crew may be effected with Corona Virus. This will inevitably cause delays. Crew sign on and sign off may be effected.

Generally speaking, P&I cover will indemnify owners for losses arising from crew death or illness, crew repatriation and substitution, quarantine fines and cargo losses. However, it will not usually cover commercial losses arising from deviation or lost time or lost hire.

Carriage of goods

In the event that a vessel or cargo is quarantined, articles IV rule 2(g) and (h) of the Hague Visby Rules may apply. These provisions operate to exempt carriers from any loss or damage arising or resulting from “restraint of princes” and quarantine restrictions.

If it becomes necessary to deviate, say, to avoid confiscation or to repatriate crew members that have fallen ill, owners may also seek to rely on article IV rule 4 of the Hague or Hague Visby Rules. Many Bills of Lading and Charter Parties provide a liberty to the owners for a lawful deviation. The deviation should be reasonable and is at the owners’ own expense.

No delivery of cargo will effect the carriers and they may become legally liable to cargo owners. Carriers will need to assess their obligations to deliver cargo, and their exposure to claims, by reference to their contracts of carriage. They may need to amend the contracts of carriage to protect them from future liability. BIMCO Infectious or Contagious Diseases Clause for Voyage and Time Charter Parties will be a helpful clause to vessel owners and carriers in this regard. It is important to note that the clauses have been developed for use in response to any virulent disease and therefore drafted in general terms without reference to specific conditions. The provisions are intended for application only in the most severe cases. A high threshold has therefore been inserted so that the triggering mechanism will take effect only in

instances of extreme illness and cannot be misused for commercial purposes in relation to more commonly encountered or widespread viruses.

Under the time charter party clause, and recognising charterers’ commercial control over the vessel, charterers’ obligations are expressly stated to include post contractual costs such as cleaning, quarantine or fumigation arising from the vessel’s previous trading pattern. In this respect and in order to secure their interests, owners will need to consider the most effective means of obtaining appropriate financial guarantees either at the time of fixing or when agreeing to allow the vessel to proceed to an area considered to be at risk.

The voyage charter version expressly limits application of the clause to situations arising after the date of the charter party. This is because parties should know about events that arise prior to or during negotiations and make appropriate arrangements accordingly. Events arising post-fixture may be more problematic and so the clause sets out a regime to address such changed circumstances.

The provisions in the clauses might result in contractual or geographic deviation. Accordingly, when considering incorporating the clause, owners and charterers should consult their respective P&I Club to ensure that inclusion will be compatible with their cover and also to discuss any special considerations or requirements that might be applied. Both Time and Voyage charter clauses are reproduced below.

BIMCO Infectious or Contagious Diseases Clause for Time Charter Parties

(a) For the purpose of this Clause, the words:

“Disease” means a highly infectious or contagious disease that is seriously harmful to humans.

“Affected Area” means any port or place where there is a risk of exposure to the Vessel, crew or other persons on board to the Disease and/or to a risk of quarantine or other restrictions being imposed in connection with the Disease.

(b) The Vessel shall not be obliged to proceed to or continue to or remain at any place which, in the reasonable judgement of the Master/Owners, is an Affected Area.

(c) If the Owners decide in accordance with Sub-clause (b) that the Vessel shall not proceed or continue to an Affected Area they shall immediately notify the Charterers.

(d) If the Vessel is at any place which the Master in his reasonable judgement considers to have become an Affected Area, the Vessel may leave immediately, with or without cargo on board, after notifying the Charterers.

(e) In the event of Sub-clause (c) or (d) the Charterers shall be obliged, notwithstanding any other terms of this Charter Party, to issue alternative voyage orders. If the Charterers do not issue such alternative voyage orders within fortyeight (48) hours of receipt of the Owners’ notification, the Owners may discharge any cargo already on board at any port or place. The Vessel shall remain on hire throughout and the Charterers shall be responsible for all additional costs, expenses and liabilities incurred in connection with such orders/delivery of cargo.

(f) In any event, the Owners shall not be obliged to load cargo or to sign, and the Charterers shall not allow or authorise the issue on the Owners’ behalf of, bills of lading, waybills or other documents evidencing contracts of carriage for any Affected Area.

(g) The Charterers shall indemnify the Owners for any costs, expenses or liabilities incurred by the Owners, including claims from holders of bills of lading, as a consequence of the Vessel waiting for and/or complying with the alternative voyage orders.

(h) If, notwithstanding Sub-clauses (b) to (f), the Vessel does proceed to or continue to or remain at an Affected Area:

(i) The Owners shall notify the Charterers of their decision but the Owners shall not be deemed to have waived any of their rights under this Charter Party.

(ii) The Owners shall endeavour to take such reasonable measures in relation to the Disease as may from time to time be recommended by the World Health Organisation.

(iii) Any additional costs, expenses or liabilities whatsoever arising out of the Vessel visiting or having visited an Affected Area, including but not limited to screening, cleaning, fumigating and/or quarantining the Vessel and its crew, shall be for the Charterers' account and the Vessel shall remain on hire throughout.

(i) The Vessel shall have liberty to comply with all orders, directions, recommendations or advice of competent authorities and/or the Flag State of the Vessel in respect of arrival, routes, ports of call, destinations, discharge of cargo, delivery or in any other respect whatsoever relating to issues arising as a result of the Vessel being or having been ordered to an Affected Area.

(j) If in compliance with this Clause anything is done or not done, such shall not be deemed a deviation, nor shall it be or give rise to an off-hire event, but shall be considered as due fulfilment of this Charter Party. In the event of a conflict between the provisions of this Clause and any implied or express provision of this Charter Party, this Clause shall prevail to the extent of such conflict, but no further.

(k) The Charterers shall indemnify the Owners if after the currency of this Charter Party any delays, costs, expenses or liabilities whatsoever are incurred as a result of the Vessel having visited an Affected Area during the currency of this Charter Party.

(l) The Charterers shall procure that this Clause shall be incorporated into all subcharters and bills of lading, waybills or other documents evidencing contracts of carriage issued pursuant to this Charter Party.

BIMCO Infectious or Contagious Diseases Clause for Voyage Charter Parties

(a) For the purposes of this Clause, the words:

“Disease” means a highly infectious or contagious disease that is seriously harmful to humans.

(b) The Vessel shall not be obliged to proceed to or continue to or remain at any place which, in the reasonable judgement of the Master/Owners, becomes an Affected Area after the date of this Charter Party

(i) at any time before loading commences, the Owners may give notice to the Charterers cancelling this contract of carriage or may refuse to perform such part of it as will require the Vessel to enter or remain at an Affected Area;

(ii) if loading has commenced, the Owners may notify the Charterers that the Vessel will leave with or without cargo on board,

provided always that if the Charter Party provides that loading or discharging is to take place within a range of ports, the Owners shall first request the Charterers to nominate any other safe port which lies within the range for loading and discharging and may only cancel this Charter Party or leave the loading port if the Charterers fail to nominate such alternative safe port within forty-eight (48) hours of receipt of notice of such request. If part cargo has been loaded, the Vessel may complete with cargo for the Owners’ account at any other port or ports whether or not on the customary route for the chartered voyage.

(d) If prior to or after arrival and in accordance with Sub-clause (b) the discharging port is determined to be in an Affected Area, the Owners may request the Charterers to nominate an alternative safe port which lies within the Charter Party range. If the Charterers fail to make such nomination within forty-eight (48) hours of receipt of the Owners’ request, the Owners may discharge the cargo, or such cargo remaining on board if discharging has not been completed, at any safe port of their choice (including the port of loading) in complete fulfilment of the contract of carriage. If discharge takes place at any port other than the loading port or at a port that lies outside the range of ports in the Charter Party, the Owners shall be entitled to recover from the Charterers the extra expenses of such discharge, to receive full freight as if the cargo had been carried to the discharging port and, if the extra distance exceeds 100 miles, to additional freight which shall be the same percentage of the freight contracted for as the percentage which the extra distance represents to the distance of the normal and customary route. The Owners shall have a lien on the cargo for such extra expenses and freight.

(e) The Owners shall not be obliged to sign, and the Charterers shall not allow or authorise the signing of, bills of lading, waybills or other documents evidencing contracts of carriage for any Affected Area.

(f) If, notwithstanding Sub-clauses (b) to (e), the Vessel does proceed to or continue to or remain at an Affected Area:

(i) The Owners shall notify the Charterers of their decision but the Owners shall not be deemed to have waived any of their rights under this Charter Party.

(ii) The Owners shall endeavour to take such reasonable measures in relation to the Disease as may from time to time be recommended by the World Health Organisation.

(iii) Any additional costs, expenses or liabilities whatsoever arising out of the Vessel visiting or having visited an Affected Area, including but not limited to screening, cleaning, fumigating and/or quarantining the Vessel and its crew, shall be for the Charterers’ account and any time lost shall count as laytime or time on demurrage.

(g) The Vessel shall have liberty to comply with all orders, directions, recommendations or advice of competent authorities and/or the Flag State of the Vessel in respect of arrival, routes, ports of call, destinations, discharge of cargo, delivery or in any other respect whatsoever relating to issues arising as a result of the Vessel being or having been ordered to an Affected Area.

(h) If in compliance with this Clause anything is done or not done, such shall not be deemed a deviation but shall be considered as due fulfilment of this Charter Party. In the event of a conflict between the provisions of this Clause and any implied or express provision of this Charter Party, this Clause shall prevail to the extent of such conflict, but no further.

(i) The Charterers shall indemnify the Owners for claims arising out of the Vessel proceeding in accordance with any of the provisions of Sub-clauses (b) to (h) which are made under any bills of lading, waybills or other documents evidencing contracts of carriage.

(j) The Charterers shall procure that this Clause shall be incorporated into all bills of lading, waybills or other documents evidencing contracts of carriage issued pursuant to this Charter Party.

Shipbuilding Contracts

Most shipbuilding contracts contain provisions regarding force majeure. Careful examination of the force majeure clause is necessary to ensure that any notices are properly tendered, and can in fact validly be given in the circumstances. A careful examination is required to verify whether or not the situation properly fits within the scope of the force majeure provisions, and whether or not the resultant disruption of supply is sufficient to affect the progress of the building project. The purpose of these notices is to allow any delay to the project to be considered a “permissible delay” and thereby extend the delivery date.

Insurance

Usual P&I cover will cover a number of losses relevant to the novel coronavirus outbreak. The cover may extend to delay related to cargo loss which is associated with the exercise of a force majeure clause. In a situation involving quarantine or port closure issues, there is potential for charterparty disputes to arise – in such circumstances the legal costs of defending such claims may be covered by Defence insurance.

A Loss of Hire insurance to cover a lengthy off hire situation may not work well in the case of Corona Virus situation as the policy will only be triggered by physical loss or damage to property or equipment. This type of insurance will have a deductible of first 14 days and then with a maximum cap of a certain days like say 90 days. But the cover will answer only when there is an offhire due to some accident due to a covered peril in the policy and there by time is lost.

Freight insurances effected in accordance with the disbursements warranty of H & M clause will not be triggered only by the loss of subject matter insured which is freight due to the named perils in the policy as per ITC ( Freight ) Clauses. Also the Time Penalty Clause ( Clause 14 of ITC ) will prevent all claims which is based on delay. If there is frustration of the adventure or abandonment of the voyage then on that basis a claim may be successful.

A General Average situation exists if the vessel has to be diverted to a port of refuge due to the epidemic effecting the entire crew and rendering the vessel unable to proceed on the voyage. In this case the hull policy ( H & M) will cover ship proportion of general average. A GA adjustment will be prepared in due course with contributions claimable from cargo owners and the ship proportion will be reimbursed by H & M insurers.

Position of Cargo Owners under Cargo Insurance Policies

For a full understanding of the situation it will be beneficial to see the position of cargo owners under cargo insurance policies. Let us analyse the coverage and possible claims under Institute Cargo Clauses A (ICC(A)).

The ICC (A) clauses are on All Risks basis. However they cover only risks and not all losses. This cover is designed to indemnify the insured in the event that there is physical loss or damage to the cargo. As a general principle, unless there is physical loss or damage, a policy will not respond to a claim unless one of the supplementary clauses specifically allows for it.

In case of a General Average situation and the cargo owner is compelled to pay a contribution then that contribution is claimable from cargo insurers under ICC ( A) clauses.

The policy excludes underwriters’ liability to indemnify the insured in the event that the loss or damage is proximately caused by a delay as defined in clause 18 and clause 4.5.

The ICC clauses include a clause which requires underwriters to pay for the costs of forwarding cargo to its final destination if it is discharged at an earlier port ( Forced Discharge). This cover however only arises in the event that it is caused by a risk covered by the policy. The policy covers loss or damage to the cargo only. It does not cover consequential losses caused by the coronavirus outbreak and accordingly this extension would not wholly apply.

If cargo is insured under terms similar to the ICC(A) and the cargo is not delivered to final destination, cargo owners must immediately advise their insurers. This is because the insurance terminates at the place of delivery even if it is not the original place of delivery but gives cargo owners this option of asking insurers to extend the insurance for a further period either while they make other arrangements to deliver it or while it is in storage by utilizing the held covered provisions of the policy.