Covid-19 and its impact on shipping #2
We have received numerous queries from our clients and have assisted in establishing management plans for situations ranging from chartering, to shipbuilding and sale and purchase through to notices to master and crew on board. We sum up and highlight some of the recurring issues we have advised on, this time with regards to charters and insurances.
Loss of Hire Insurance
The primary role of loss of hire (LOH) insurance is to cover loss of a vessel’s income as a direct consequence of loss of time and which usually relates to a damage covered under the hull and machinery (H&M) policy. Not all LOH are the same, and some appear to be very broad covers, however, as with «all risks» insurances, LOH policies are limited to cover only «named losses», amongst which COVID-19-like epidemics is not standard.
Depending on the particular terms of LOH cover, the following must be satisfied:
- The loss of time must be due to damage that is in principle covered under the relevant H&M policy, or that is one of the special circumstances mentioned in the relevant express terms or the terms referred to therein (for example, clause 16-1 of the Nordic Plan).
- The assured must show that the loss of time resulted in an actual loss of income.
LOH and H&M policy
With the LOH’s pre-requisite that the underlying damage is recoverable under the H&M cover, there are at times contradicting conditions between those two covers that may affect recoverability under the LOH (unless expressly cured under the LoH cover).
Extended LOH – covers COVID-19?
Extended Loss of Hire (X-LOH) is also available in the market. Some of these provide against losses of income as a direct result of the vessel being detained or otherwise delayed in connection with quarantine orders or disinfection of the vessel or the officers or crew on board the vessel on account of infectious diseases on board. There are requirements to be met, such as that the quarantine order is issued by authorities recognised as such by the terms of cover, and that the owner did not know nor could have anticipated that the vessel would be quarantined at such port.
Loss of use – covers charterer against COVID-19?
Loss of use cover is available by certain P&I Clubs to their charterer-members and responds to a charterer’s liability to pay hire to the shipowner when a vessel is delayed, detained or arrested.
Such cover includes liabilities to pay hire arising from external circumstances beyond the charterer’s control, including amongst other denial of access to a place of refuge, or imposed quarantine restrictions, etc.
Off-hire – quarantines and delays on account of COVID-19
How exactly a delay on account of COVID-19 quarantines will be treated depends on the wording of the relevant charter clauses, which in some cases might include delays caused by quarantine restrictions. Under time charters, it is common to find clauses that place the vessel off-hire for deviations due to crew health reasons, or delays due to quarantine. However, where the deviation or delay is a consequence of the charterers’ instructions, the vessel will remain on-hire.
Additionally, if the Hague or Hague-Visby Rules apply, Article IV r 2(h) exonerates the carrier and the vessel for loss or damage arising or resulting from quarantine restrictions.
«Safe port» – safe against COVID-19?
Starting from the well-known principle: charterers are obliged to nominate a port (or berth) which, when the order is given, is prospectively safe. These days, operators will have to consider whether a port affected by the COVID-19 is a «safe port». The English courts’ classic definition of a safe port was laid down in The Eastern City (1958) and was approved in The Ocean Victory (2017): «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 seamanship and navigation».
In a much older judgement of 1915 Ciampa v British India Steam Navigation, a vessel was found unseaworthy having sailed from a plague-ridden port, and necessitating fumigation at next port of call. It could be argued that sailing from a port infected by COVID-19 is tantamount to causing actual damage to a vessel, if it risks obtaining free pratique* at a future port, rendering the vessel unseaworthy; providing of course that no alternative could be pursued or nominated. (* free pratique refers to the licence given to a ship to enter a port on the assurance that she is free from contagious diseases).
Charterers’ responsibilities for safe port
The charterers have a secondary obligation in relation to «safe port»: to cancel the original port-nomination that is unsafe, and to nominate another port that is safe. We sometimes see charters that displace the absolute obligation of «safe port» nomination, and replacing it with a less strict one. For example, under the ShellLNGTime and Shelltime 4 (clause 4(c) in both), it states:
«Charterers shall use due diligence to ensure that the vessel is only employed between and at safe places […] where she can safely lie always afloat. …»
The effect of this clause is to displace the absolute obligation with the mere exercise of due diligence. Under such clauses, there will only be a breach by the charterers if they fail to apply due diligence and establish that the port is safe.
Certain charterparties contain epidemics’ clauses, which, depending on their wording, might afford the shipowner the right to resist orders to proceed to places affected by COVID-19.
Given that the COVID-19 risk is known to all, owners should from now on incorporate COVID-19 epidemics’ clauses in their charters, in the not-unlikely event that this spreads further. It is prudent to address also in such clauses allocation of costs (cleaning, fumigation and quarantine), while owners can also require their time charterer to provide financial guarantees before allowing their vessels to trade to areas affected by COVID-19.
Laytime, Notices of Readiness and free pratique
Laytime under a voyage charter commences as soon as a vessel has tendered a valid notice of readiness (NOR). For some time now, obtaining free pratique has been nothing more than a formality. Since COVID-19, free pratique can no longer be taken for granted. A large number of countries have implemented mandatory screening of crew and passengers before they are allowed to disembark and a strict declaration of anyone on board who is suspected to have contracted the coronavirus disease.
If NORs cannot then be validly tendered until free pratique has been granted at the berth, there is the potential for delay, which, absent contrary wording in the charterparty, rests with the shipowner.
Force majeure agreed? Is Frustration applicable?
The term «force majeure» is not a doctrine (like for example «frustration») nor does it have any established meaning in English law. You will either find it in the contract, or it will be irrelevant. If it is found in a contract, one would have to review the precise contractual clause, in its own merits and wording as to what what events it covers and what effect it has.
In the absence of an applicable force majeure clause, shipowners and charterers may consider invoking the general doctrine of frustration if the COVID-19 prevents them from performing their contractual obligations. Once a contract is frustrated, the parties’ contractual obligations are discharged.
As we touched upon in our previous article in the matter, frustration is historically intricate to argue as a matter of English law.
All who have an economic interest in a vessel and her trade should take the time to establish management plans on how to handle the situation in order to pre-empt or at least mitigate any losses, and avoid oversight of any insurance requirements and conditions. That includes revisiting charters and insurances, ensuring timely and due communications to their counterparties, and maintaining a dialogue with all stakeholders, including master and crew.
You will find our previous Shipping COVID-19 article here.