Does the coronavirus constitute force majeure for shipping businesses

By Enrico Vergani, Counsel and Leader of Bonelli Erede’s Shipping and Transport Focus Team 

On 30 January, the World Health Organization declared the outbreak of the Coronavirus a Public Health Emergency of International Concern. Clearly, the Coronavirus is having an impact on business not only in China but also in the other Countries it has been detected in at the time of writing.

In Italy, the Ministry of Health issued a circular on 5 January wherein it stated that “pneumonia from unknown causes” (polmonite da eziologiasconosciuta) had been detected in certain areas of China and had the potential to have a widespread effect. The General Command of the Italian Coast Guard followed that up with two circulars on the infection and its seriousness.

The shipping and international trade industries must ready themselves for the possibility of disputes arising from the coronavirus. Indeed, its impact will not be limited to delays or contract breaches caused by quarantines or port closures – it will also affect sale and purchase agreements, trade finance arrangements, shipbuilding, offshore construction projects, ship financing and leasing, and insurance.

Force majeure

Enrico Vergani
Enrico Vergani

Naturally, force majeure is the first issue that comes to a business person mind – and whether this concept covers the consequences of the spread of the coronavirus.

The China Council for the Promotion of International Trade, accredited with China’s Ministry of Commerce, is now issuing force majeure certificates (upon request) to shipyards in China if their contracts with overseas partners have been affected by the coronavirus outbreak. And some Chinese shipyards have already declared their willingness to refer to force majeure and its exculpatory effects for delays/disruptions in the running of a shipbuilding project.

The clear suggestion here is to ask the right question. At first glance, the most obvious one is: Does the coronavirus constitute a force majeure event? Regretfully, this approach will not work for the vast majority of shipping contracts, which are subject to English law and jurisdiction.

Unlike civil law systems, common law has no general definition of force majeure – it is purely a contractual concept. Therefore, force majeure has only the meaning given to it by the contract governing the relationship between the parties in question. If the contract makes no specific mention of the event – or of one very similar to it – it cannot be invoked as a force majeure event. It is thus very important to adhere to the requirements of the contract in question when considering whether to invoke a force majeure event or what to do with a force majeure notice relating to the coronavirus. No ‘one-size-fits-all’ solution exists.

Thus, we strongly advise against adhering to general concepts of Italian or domestic continental law in the hope they can provide a defence – rather, you must carefully examine the terms and conditions of your contracts, with the support of professional advice.

Parties to contracts should also be aware that a force majeure event under one contract, such as an agreement for the sale of goods, is not necessarily a force majeure event under a connected or related contract, such as a shipping or finance contract. A misunderstanding of this nature could lead to an uneven allocation of loss in a chain of international trade contracts.

When considering whether Coronavirus constitutes a force majeure event, you must examine the cause of the delay or interruption in performance. For instance, a force majeure clause might not include “epidemics”. However, a governmental body might prevent performance of a contract (e.g., if a central government declares a port closure)which would constitute a force majeure event. Conversely, actions by private corporations such as banks – even if taken for the safety of employees – might not suffice to constitute a force majeure event. All of this will turn on the wording of the relevant force majeure or exceptions clause.

Based on the above, some main features of the shipping business that could be affected by the Coronavirus can be summarized as follows.

Shipbuilding

Most shipbuilding/offshore construction contracts contain force majeure clauses. As mentioned above, some Chinese shipyards are already issuing force majeure notices to buyers. Force majeure clauses must be carefully examined to ensure that these notices are properly tendered and to check whether they can even be validly given under the circumstances.

Some issues to consider are whether the situation properly falls within the scope of the force majeure clause in question, and whether the consequent disruption of supply is enough to affect the critical path of the building or construction project. The purpose of force majeure notices is to allow any delay in an affected project to be considered a “permissible delay” and thereby extend the delivery date.

Clause 34(a)(i) of NEWBUILDCON states that “government interference” and “epidemics” constitute force majeure events. If the authorities intervene in the progress of a shipbuilding project in an attempt to limit the spread of the Coronavirus, or if the workforce is depleted due to infection, further knock-on effects could result – these include the buyer potentially obtaining the right to terminate the contract under clause 39(a)(iii)(1).

Whether a party can rely on Chinese governmental certificates bearing a declaration of force majeure will depend on a careful analysis of the facts and the wording of the force majeure clause in question (as mentioned above). The crux of the matter is whether the party has truly and seriously been affected by the coronavirus outbreak – i.e., whether it is facing the possibility of halting its business operations or is unable to fulfil its contractual obligations due to the outbreak.

shipping businesses

Ship Finance 

Lenders and borrowers alike might be concerned about the coronavirus’ effect on the earning capacity of vessels. Indeed, if vessels are servicing long-term sales agreements affected by a force majeure event, the financial impact could be significant.

Lending and leasing arrangements that involve a bare-boat charter with a “hell or high water” payment clause require the borrowers/charterers to pay hire regardless of whether the ship is earning. Clearly, this could place the borrowers/charterers in financial difficulty. Although the effect of coronavirus might not be immediate, if the outbreak continues for significantly longer, borrowers could attempt to redeliver the vessel under the bare-boat charter or could even become insolvent. This could result in a lender becoming an operational shipowner and, thereby, being exposed to the general commercial shipping market – which includes the potential liabilities and complexities mentioned above.

As to arrangements currently under negotiation, they may include provisions to clarify uncertainties that have arisen because of the outbreak – especially given the large degree of uncertainty that continues to surround business operations in China. For example, it is impossible to predict when banks and financial institutions will return to being fully operational, which means matters such as payment terms and the definition of what constitutes a “banking day” under a given contract might need to be considered.

Frustration

If a contract or charter contains no force majeure clause, the general doctrine of frustration could come into play. Frustration occurs when, through no fault of either party, an event makes performance of the contract or charter in question either impossible or radically different. In these circumstances, the contract or charter is automatically terminated. Generally, frustration is less straightforward to establish and requires very serious, significant events in order to be triggered (e.g., a lengthy, indefinite delay).

If you are considering entering into a new contract or fixture, take great care to ensure that an appropriately worded force majeure clause is included.

BIMCO Infectious Or Contagious Disease Clause

Some charters might also include the BIMCO Infectious or Contagious Disease Clause. The clause was published in 2015 in response to the Ebola virus outbreak in West Africa and comes in time and voyage charter versions.

The clause helpfully clarifies the parties’ respective rights and obligations when a vessel encounters the outbreak or aftermath of a disease. It is thus important to check whether the charter in question contains this clause. Bear in mind, however, that the clause is intended to be triggered only in the most serious of cases. It thus sets out a high threshold: only upon the onset of extreme illness can it be triggered, and not in relation to more commonly encountered, widespread viruses.

If you are evaluating whether to enter into a new fixture, you should consider including the BIMCO Infectious or Contagious Disease Clause (in addition to an appropriately worded force majeure clause), as it clarifies some important matters and gives the parties additional options.

Marine Insurance

P&I will cover many losses relating to the Coronavirus outbreak. The cover could extend to cargo loss related to a delay if the delay is associated with the exercise of a force majeure clause. In quarantine or port closure situations, charter-party disputes could arise – in which case the legal costs of defending such claims could be covered by defence insurance.

That said, many insurance policies contain exclusions for global pandemics. This is mainly because insurers are unable to calculate the risks and costs of such an event.

Standard business interruption insurance cover is usually triggered only by physical damage to property or equipment –the fact that a virus has broken out does not necessarily mean physical damage will ensue. Some businesses might have contingent business interruption insurance, though this triggers only if the circumstances described in the policy are met. As with force majeure clauses, each policy’s wording warrants careful attention.

Many unknowns remain: How quickly will the coronavirus continue to spread? How far afield will it spread? How deadly is it?How will governments, shippers, charterers, traders, banks and port authorities respond? The anxiety surrounding these questions will, if it has not already, lead many stakeholders to take action to protect their position or to gain a commercial advantage. Extra diligence is required to protect contractual rights and to ensure that each party upholds its side of the deal.

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