In December 2019, the coronavirus (COVID-19) was first reported as an emerging virus in China, and in the following weeks, the virus had spread globally. Earlier this month, the WHO declared the COVID-19 outbreak as a pandemic, thereby indicating that the virus will affect people across a huge geographical scale. Stock markets in most countries have suffered a slump in the last few weeks and a large number of businesses were potentially staring at a financial crunch.

Generally, most commercial contracts, under English laws and most common law jurisdiction have a force majeure clause. A party may rely on force majeure, only if the contract provides for it, and not otherwise.

What amounts to force majeure will be clearly set out in the contract between the parties. Therefore, if the specific incident is not identified as one, it cannot be a considered a force majeure.

To determine whether or not COVID-19 amounts to force majeure, particular consideration will need to be given to the cause of interruption.  A force majeure clause may not include ‘pandemic’ but non-performance may occur as a result of government closure or a lockdown. Eventually, this will be largely dependent on the wordings of the force majeure clause.

In the absence of a force majeure clause, a party may rely on the doctrine of frustration. Frustration occurs on the happening of an event which makes the contract impossible to perform. In such circumstances, the contract is deemed void. The doctrine of frustration applies where an event occurs after the execution of the contract and renders the performance of the contract impossible. However, frustration will usually require extremely considerable events that undermine the entire intention behind the contract.

As far as the maritime and the shipping sector is concerned, an epidemic may potentially have considerable ramifications as the shipping industry is responsible for the carriage of around 90% of world trade. As the global population has becomes less mobile, commodity trading and shipping will continue despite disruptions. Demands on producers, shippers, traders, shipowners and brokers will be fickle and activity will be inconsistent. There has been a considerable reduction for the demand of container and dry bulk shipping services. Other than severe global public health issues this epidemic has caused economic disruption and the threat of a global recession, logistical complexities, geopolitical considerations and security issues.

As BIMCO has also pointed out that not being aware of a ship’s crew composition, their travel history or how contracts deal with delays arising from infectious or contagious diseases, this outbreak could cause serious ramifications in terms of staggering expenses chalking up or causing disputes. The ramifications may range from quarantining vessels and crew, to imposition of travel restrictions by the concerned governments as a precaution.

For instance, in the UAE, with the intent to control the spreading of COVID-19, the Port of Fujairah, on 15 March 2020 issued a formal circular setting out certain guidelines on permissions to crew to disembark and shore leaves and subsequently, on 17 March 2020, crew changes have been suspended by DP World until further notice. DP World will not allow disembarkation of any crew and no shore leave will be permitted. No one will be allowed to enter or leave a vessel without an approval from the Port authority. Similarly, on 10 March 2020, the Abu Dhabi Ports had issued its guidelines on the same.

Indian Government decided to shut down 75 COVID-19 affected districts and essentially shutting down India’s main centers of government and finance. The Government of India has directed state governments to impose strict lockdowns across the country.

Determining if the occurrence of an event will frustrate a contract, will largely depend on the precise contractual terms, the circumstances, and the impact of these circumstances upon the parties’ obligations under the contract.

In respect of demurrage claims, the shipping industry is well conversant with the maxim “once on demurrage, always on demurrage”. However, the question which will arise now, is, whether a force majeure clause will imply that demurrage will cease to run, in light of the COVID-19 pandemic and if a charterer is permitted to rely on a force majeure clause as an exception to the maxim.  General charterparty exceptions clauses will not usually suspend the running of laytime

As most of the charterparties are governed by English laws, as a matter of principle, general exceptions clauses which were claimed to operate as exceptions clauses for laytime and demurrage had to be clearly expressed if they were to have that effect. It is an accepted general principle that an ambiguous clause is no protection applied to exceptions to laytime and demurrage, it must be a matter of construction whether there was under the clause in issue an exception from laytime or an exception from demurrage; the same degree of clarity must be required in each case, The Solon [2000] 1 Lloyd’s Rep 293, QB.

Therefore, for a clause to have such a clear intention requires language that leaves one in no doubt that this is what the parties intended. There are no exceptions to the maxim, and demurrage will continue to run, unless the parties have, in unequivocal terms, have expressed their intentions otherwise. In the absence of a specific clause, nothing will prevent laytime from running or demurrage from accruing even though it seems unfair. It is the responsibility of the charterer to protect himself and his interest against any misfortune with a simple clause.

If entering into a new contract, it is suggested that due care be taken to ensure that an appropriately worded force majeure clause is included to avoid subsequent difficulties. As regards new Charterparty agreements being executed, parties may choose to incorporate, in addition to an appropriately worded force majeure clause, the BIMCO Infectious or Contagious Disease Clause introduced in 2015 in response to the Ebola outbreak in Africa.

As per 2015 BIMCO Circular, the wordings of the clause are modelled on the BIMCO War and Piracy Clauses where, within limitations, owners may refuse to trade to an area or zone of danger. In the event that option is waived and the vessel proceeds, charterers would be liable for costs of preventative measures taken by owners to protect the vessel and crew. It is important to note that whether an area presents the degree of danger justifying a refusal to proceed is a subjective decision to be taken by owners in the light of available evidence and information.

The clause may be used for both, time and voyage charters.

Under the time charter clause, and recognizing 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, shipowners 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. In addition, parties may also include a “quarantine” clause on the lines that any time lost as a result of quarantine formalities or health concerns shall be (or shall not be) at the expense of the charterers.

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 execution of the charter may be more problematic and accordingly, the clause sets out a mechanism to address such changed circumstances.

The wordings may result in contractual or geographic deviation. Accordingly, BIMCO advises that when considering incorporating the clause, owners and charterers should consult their respective P&I Clubs to ensure that inclusion will be compatible with their cover and also to discuss any other considerations.

 In conclusion, it might be viewed that business analysts and experts cannot accurately predict the full impact of COVID-19 around the world. In the coming weeks and months, it is likely that there will be increased disruptions to businesses and their ability to continue normal operations. Therefore, it is strongly advised that in negotiating any new contractual arrangements, one should carefully consider the scope of the force majeure clause, and incorporate suitable clauses protecting their business needs.

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Impact of COVID-19 on Vessel Charters was last modified: March 24th, 2020 by Ravi P. Jawani