The Association has helped Members with some charterparty disputes with regard to the coronavirus in the last few months. Members have also approached the Association for some commonly seen carriage contract disputes regarding stranded cargos, ice conditions at ports and bunker prices. This article puts together some frequently asked questions by owners to help prevent problems in entering into or execution of contracts.

I.        Australian goods stuck off Chinese ports

A large number of bulk carriers carrying Australian imports have been awaiting clearance at Chinese ports since mid-year 2020, and some were even stranded for over six months. The imports include coal, ores and wood. Legal disputes arose in the entire shipping and freight chain as the result of the severe delay.

1.      Frustration of the charter

In the case that the goods cannot be sold in time in other countries and with the possibility of the ship being held as a temporary warehouse for an indefinite period, the charterer will be put under great financial pressures to pay the hire as agreed in the time charterparty without knowing when exactly the cargo can be unloaded. Also, owners are subject to profit losses for not being able to conclude another contract in a blooming market (just figuratively, whether the hire for a certain type of ship rises depends on the actual situation). The shipowner is also unable to put the ship into the next charter party in order to charge higher rent or freight, which in turn also brings loss of income. Therefore, the Association has seen most frequently the question on whether the charter has been frustrated to allow a mutual termination of the original contract.

Request to rely on the doctrine of frustration came from both charterers and owners as they represent different interests. The owners, in the case of a rising market, seek to terminate the contract for they expect a reasonable renumeration from the charterer for overtime service of the ship, normally on legal basis of implied contract, unjust enrichment, or the employment and indemnity clause, or quantum meruit. Charterers claim so normally because they would suffer great loss for not being unable to claim full amount of demurrage under the sub-charter.

The English law principle of frustration occurs “whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract”. That is, what the contract requires of both parties may not be what they promised in the first place, and this means the burden of proof for invoking the doctrine of frustration is high. In most cases, frustration by delay constitutes when a particular voyage is delayed for an excessive period without any sign of ending, rendering an unexpected performance of the charterparty.

From our experience to date regarding frustration of contract, it is worth noting that either party may be precluded from relying on the doctrine of frustration if the parties are aware of the possible delay and consequence before entering into the contract. Also, frustration may not be applicable provided that the charterparty has made sufficient provisions for such events, for example when the contract sets out rules for paying the market rate of hire during the period concerned.

2.      Exception clause for demurrage

Most charters contain an exceptions clause, but it has been accepted that such a general clause is no protection applied to exceptions to laytime and demurrage (The Solon [2000] 1 Lloyd’s Rep 292), unless the contract explicitly provides so.

In practice, a charterer who seeks to rely on demurrage exceptions is faced with the burden of proof of showing the existence of the exception and that he has fulfilled the duty to mitigate the loss. However, what makes it challenging is that sometimes cargos and ships are detained for unidentifiable reasons.

3.      Cargo damage disputes

Cargos are likely to be damaged if the ship has been detained for a long period of time, which can be related to the owner’s obligation to take care of the goods under the bill of lading. Whether the owner can recover loss by arguing that the cargo claim arose out of the act or neglect of the charterer based on Clause 8(d) of ICA 2011 remains a problem.

In addition, since the period of waiting to dock off is unclear, some charterers may arrange to have the cargos shipped to other countries like South Korea, Malaysia, or India. A new bill of lading will need to be issued, with the condition of the cargo and the ship annotated.

II.         Bohai Sea ice conditions

The continuous low temperature in Northern China since the winter of 2020 has led to severe ice condition in Bohai sea area that threatens safe navigation (refer to LP 01/2021 for detailed safety recommendations). For advices on legal issues, the following charterparty clauses may be relevant:

(a)   Charterers to provide and pay for, as listed in clause 2 of NYPE 46 form, clause 7 of NYPE 93 form or clause 7 of Shelltime 4;

(b)   Trading Exclusions and Safety of the Port, as listed in line 27-34 and clause 25 of NYPE 46 form, clause 5 and 33 of NYPE 93, or clause 4 of Shelltime 4;

(c)   Clauses regarding the tendering of NOR, laytime and demurrage;

(d)   Clauses specifically referring to risk when navigating in ice, like the BIMCO Ice Clause for Time Charter Parties;

(e)   Clauses regarding the nearest alternative port.

1.      Icebreaking service fees

Ice operations may need to be arranged for vessels to access ice-bound ports in severe weather. When the icebreaking service fee is not specifically provided in time charters, the author tends to believe that it should be classified as “all other usual expenses” and borne by the charterer like port charge or tugboat fees. Also, owners may argue that such expenses are incurred following the charterer’s order.

2.      Safe port warranty

Owners who worry about the safety of the ship (especially damage to the hull and the propellor) may refuse to call at ports with severe ice conditions, in most cases based on unsafe port provisions or ice clauses. In terms of wording of the contract, the following points shall be noted.

(a)   It is always provided in the charter that “the vessel shall not be ordered to enter any ice-bound port”, but a port is not deemed ice-bound if it is kept open the whole winter by icebreakers (Limerick v. Stott).

(b)   Some charters may provide that the vessel shall not be required to follow icebreakers.

(c)   Owners who assert that the destination port is unsafe based on the safe port warranty or provisions like “in the master’s judgment, there is a risk that, on account of ice the vessel will not be able to safely enter” should be aware that the burden of proof is on them to show that the ship is endangered by the ice condition, which can be hard in practice without direct evidence.

Further, the Association has seen cases where ships are damaged after entering the port. There have been rear-end collisions where a ship proceeds at a distance too close to the icebreakers, and there have been groundings where the ship is forced to take a turn to avoid collision. Some ships suffered damages to the hull and propellor due to inadequate size of the icebreaker. In such cases, owners may argue that the port is unsafe, not because of the ice, but the defected mechanism at the port for ship operations.

3.      Off-hire issues

Even if ships manage to enter ports with assistance of icebreakers, there might be delays and losses of time due to the ice condition – the time needed for the icebreaker fleet to respond and the time for the crew to remove ice from deck equipment while at the anchorage… Loss of time on such occasions, in the author’s opinion, is not caused by the owner’s fault and thereby the vessel should not be off-hire. The owner is simply executing the charterer’s order and the ship is performing the service required of her (The Berge Sund [1992] 1 Lloyd’s Rep. 460).

4.      Validity of NOR

When sailing in cold winter against winds and waves, spray flies over and will freeze on the deck. There might also be icing on deck and ship equipment when a ship waits for too long a period at the anchorage. Then, a day or two will be needed for ice removal to be arranged before berthing, giving rise to the issue of whether the NOR tendered after arrival at ports is valid.

For time charterparties, the owner must follow the charterer’s instruction in terms of when and where to tender the NOR, or the charterer may seek to claim the loss incurred. For voyage charterparties, the validity of NOR will not be affected if it is tendered before icing since technically the ship is ready at that moment but know that the laytime and demurrage exception clauses may apply here. Whereas the NOR is tendered when there’s already icing on the ship, the validity of NOR can be a contentious problem. Owners are recommended to tender NOR once again upon the removal of ice.

III.      Fuel oil price

In the past 2020, the price of bunker fuel did not go up as expected but went through a drop – even a sharp drop at certain points. It has brought about some issues regarding settlement under the charter.

Charterers now would normally procure a large supply of bunker in advance under the condition of a lump sum contract at a fixed price. If the charterparty stipulates that the bunker price at the time of returning of the ship shall be subject to the invoice price for the most recent bunkering, then there will be a huge discrepancy between the two figures once the market has experienced significant fluctuation. In this case, either one of the two parties may suffer great financial losses and whoever hopes to avoid subsequent disputes may take it into account when entering into the contract.

IV.      Conclusions

The entire industry has been concerned over legal issues arising from the COVID-19 pandemic for the past year and the Association has issued 4 circulars to address these concerns. There are many other problems that should not be overlooked at the moment. This article puts together some focused issues with an emphasis on contractual considerations for Members to exercise prudence on wording of charters and settlement of disputes.

For further information, please feel free to contact the FD&D department.