In light of the continuing state of affairs in the Strait of Hormuz, here are some legal issues which are likely to arise from this situation.
1. Cancellation of Contracts
Performance may be delayed or uncompleted. Defaulting parties may attempt to escape contractually-agreed performance by, for example, seeking to rely on force majeure clauses. Force majeure clauses can only be expressly incorporated into contracts, and may not be implied. Such clauses stipulate that upon the occurrence of certain named (unforeseeable and uncontrollable) events, the parties may be relieved from performing their contractual obligations.
Whether a party can successfully rely on such a clause depends on the scope, wording and interpretation of the relevant clause, as there are often other additional explicit requirements to be satisfied and there is no “one-size-fits-all” approach. As the CFA held in Goldlion Properties Ltd and Others v. Regent National Enterprises Ltd FACV No. 10 of 2008, it is “not for the courts to encourage or discourage such clauses” and it is instead up to the parties to freely negotiate on whether such clauses are to be included – clauses come in “many shapes and sizes”.
By contrast, in the absence of such express provisions, parties may seek to rely on the common law doctrine of frustration. Frustration occurs when an unforeseen event, arising through no fault of either party, makes a contract physically or commercially impossible to perform or radically alters the nature of the original contractual agreement. In such cases, both parties will be released from their future obligations because the circumstances have changed so significantly that enforcing the original terms would be unjust.
Apart from the physical threats of navigating the Strait of Hormuz, the surge in oil prices is another reason for parties seeking to invoke force majeure clauses or the doctrine of frustration. As approximately 20% of the world’s oil and LNG passes through the Strait, supply fears have pushed up prices. Many carriers have introduced emergency surcharges, triggering potential contractual disputes, where carriers seek to rely on “Force Majeure” clauses, by arguing that the blockade has made it physically impossible for them to perform the contract based on the agreed-upon contractual terms, while customers argue that contractual performance is not “impossible” because the carriers could change its shipping route and arrive at the ultimate destination.
2. Deviation of Contractual Route
Some charterers had no option but to deviate from their contractual route, which exposes them to potential liability.
Normally, a charterparty contains a liberty clause that allows the charterers to deviate from the contractual route if reasonable, such as to save life or property.
Even if such a clause is not expressly provided in the charterparty, Article 4(4) of the Hauge-Visby Rules provides that “[a]ny deviation in saving or attempting to save life or property at sea or any reasonable deviation shall not be deemed to be an infringement or breach of these Rules or of the contract of carriage, and the carrier shall not be liable for any loss or damage resulting therefrom”.
Ultimately, whether such deviation would constitute as “reasonable” (in an effort to “save life”, for example) is a question of fact and up to interpretation, as a charterer’s scope and proportionality of deviation will also be considered.
3. Demurrage Charges
As cargo owners, shippers and consignees now find it “impossible” to fulfill their shipping contracts, there are delays in the unloading of goods at the agreed-upon ports and return of empty containers within the agreed-upon timetable – such delays can lead to potential demurrage or detention charges.
Demurrage charges are liquidated damages to be paid if the cargo has exceeded the agreed-upon loading or discharging time. The triggering event, rates and the responsible payer ultimately depend on individual contractual clauses, but as reference, most large crude oil tankers transiting the Strait have demurrage rates currently exceeding USD100,000 per day.
Detention charges are payable due to delays incurred other than from loading or discharging the vessel. Generally, there are no liquidated damages stipulated for such detention charges in contracts.
Delays incurred due to the blockade of the Strait will likely lead to shipowners attempting to bill for demurrage / detention charges (whether shipowners should charge for either demurrage or detention charges is a potential issue in itself), while cargo owners will refuse to pay by arguing that acts of war / government authorities are force majeure events, so the contract should be cancelled.
4. War Risks Clauses & Insurance Coverage
An owner may be entitled to rely on certain War Risks Clauses, such as the BIMCO Conwartime 2025 clauses, to refuse orders that require the vessel to proceed to or remain in an area that is exposed to war risks.
Under the BIMCO Conwartime 2025 clauses, if the Vessel proceeds to or remains in an area exposed to war risks, the charterers shall reimburse insurance costs to the owners. If requested, the owners are to demonstrate that they have used reasonable endeavours to obtain appropriate cover and terms (including premium).
The issue of recoverable premiums is particularly pertinent because insurers have reportedly issued broad cancellations of war risks policies (i.e. Hull & Machinery policies) and required shipowners to pay higher premiums to reinstate the policies. Similarly, the International Group of Protection and Indemnity Clubs have also cancelled non-mutual war risks cover. Without Hull & Machinery and Protection & Indemnity insurance coverages, commercial vessels should be unable to sail. Accordingly, owners may be “forced” to agree to subscribe for ludicrously expensive insurance policies.
Our firm has extensive expertise and experience dealing with maritime and insurance matters. Please contact us if you require advice on navigating charter party disputes or contested insurance claims.
