The recent spate of tanker attacks in the Persian Gulf and the Gulf of Oman area has put new strains on the Middle East and made shipowners and charterers wondering whether they can rely on the contract to protect their respective rights. Following recent inquiries on war-related time charterparty clauses and based on LP 31/2019 More About War Risks Insurance: Listed Areas, Terms of Cover and Additional Premium, this article is prepared to help Members understand what to consider when drafting charterparties. But conditions vary from one contract to another, this article, serving as a reference, do not and cannot address any specific problem in practice.

I.    Background

On May 12, four commercial ships – two registered in Saudi Arabia, one in the UAE and another in Norway – were damaged in an explosion near the Port of Fujairah for reasons unknown, prompting the Joint War Committee (JWC) to update Hull War, Piracy, Terrorism and Related Perils Listed Areas (JWLA-024) on May 17, 2019.

On June 13, two oil tankers – one flagged to Panama and another to the Marshall Islands – were attacked in the Gulf of Oman and both caught fire.

On July 19, British-flagged oil tanker Stena Impero was impounded by Iran’s Islamic Revolutionary Guard Corps (IRGC) in the Strait of Hormuz, allegedly an equivalent response to the British capture of a tanker carrying Iranian crude oil on July 4.

On July 31, a foreign oil tanker was seized in the Gulf off Iranian coast on the grounds that it was smuggling fuel to some Arab countries in the region.

Tensions in the Gulf have been escalating since U.S. president Donald Trump abandoned the Iran nuclear agreement and imposed a new round of sanctions. Great concerns among the shipping community were sparked over war risks and regional security.

II.  Frequently asked questions

The Club has received many recent inquiries from Members, especially owners of oil tankers on the following questions:

1.      whether they have a right to reject the charterer’s orders to sail to/through the Gulf;

2.      whether the war risks clause in the charter is applicable;

3.      what insurance to arrange if the vessels are inevitably trading in the area;

4.      how to draft the contract in a way that offers owner adequate protection.

III.   Relevant charterparty clauses

The following clauses may be applicable in the event of a war risk:

1.      safe port clause – e.g. NYPE 46 form line 27 and Shelltime 4 clause 4;

2.      employment and indemnify clause;

3.      trading limits;

4.      war risks clause – e.g. BIMCO CONWARTIME and Shelltime 4 clause 35;

5.      other clauses – e.g. capture and seizure clause and cancelling clause.

IV.   Important considerations

Based on the inquiries that the Club has been dealing with, here are some key points that should be considered by the Members.

1.      Unsafe port

The classic definition of a “safe port” was given in the Eastern City as:

“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 navigation and seamanship…”

As it’s suggested in the Saga Cob, the risk of attack must also be a characteristic of the port. With the charter in the Shelltime 3 from, the vessel employed to carry petroleum products called at Massawa for about 20 times without any untoward consequences. But on Aug.28 1988 when the vessel was anchored at Massawa at the charterer’s order, it was severely damaged in an Eritrean guerillas attack. It turned out that there had been sporadic attacks in the region since April – an oil refinery was attacked by shells fired from a boat and later in May a vessel was attacked when sail in convoy. There was no further incident thereafter and since January 1990 the war risks underwriters began to require additional premiums in respect of vessels operating in the region. Eventually, the Court rejected the owner’s claims by concluding that the risk of such an attack was not a normal characteristic of the port; Massawa was therefore considered a safe port.

Whether a port is prospectively unsafe cannot be generally defined without taking into serious considerations numerous examples and charter clauses. Looking at the attacks in the Gulf, it’s hard to find a pattern in terms of locations and frequencies as well as the type of vessels that will be targeted. Also, the charterer’s obligation is diluted to one of due diligence as in the case of the Shelltime 4 form.

2.      Trading areas

Owners can refuse to proceed to areas of high risks if the charter expressly excluded these areas from the trading area. Where, however, the trading limit contradict the clauses permitting operation in war areas with additional premiums paid by the charterer, the owner may be left in a vulnerable position. With such cases frequently observed by the Club in practice, it’s advisable to have the trading limit clearly drafted without any contradictory clauses, or the owner may be held liable for breach of the charter upon refusing certain orders.

3.      War risks clauses

To answer those frequently asked questions about war risks clauses, let’s first look at the definition of war risks as provided in Conwartime 2013:

“War Risks shall include any actual, threatened or reported: war, act of war, civil war or hostilities; revolution; rebellion; civil commotion; warlike operations; laying of mines; acts of piracy and/or violent robbery and/or capture/seizure (hereinafter “Piracy”); acts of terrorists; acts of hostility or malicious damage; blockades (whether imposed against all vessels or imposed selectively against vessels of certain flags or ownership, or against certain cargoes or crews or otherwise howsoever), by any person, body, terrorist or political group, or the government of any state or territory whether recognized or not, which, in the reasonable judgement of the Master and/or the Owners, may be dangerous or may become dangerous to the Vessel, cargo, crew or other persons on board the Vessel.”

First, it’s advisable to keep the clause the way it is – deleting or altering certain words and phrases may cause an owner’s loss. Some may delete it assuming that only war-related risks are covered while, as a matter of fact, risks in relation to piracy and terrorism are also applicable. Owners shall be aware that words like “threatened or reported” and “maybe” are there for good reasons.

Second, as intended in the BIMCO clause, the master has a right to refuse an order when there’s a perceived high risk and an additional premium (AP) will be paid by the charterer if such order is obeyed. However, some has altered the clause to indicate that the master will have to obey an order if war risks are covered and all a charterer has to do is to pay the AP, which clearly is unfair to the owner.

Third, ensure the charter clearly sets out which party has the responsibility for arranging the relevant insurance apart from held cover, such as the Loss of Hire, Kidnap & Ransom, Blocking & Trapping insurance. Members are welcomed to reach out to the Club’s managers for more information about making such arrangements.

4.      Other considerations

Due to the complexity of the issue, many other problems have emerged – to list a few, whether the owner is entitled to terminate the contract in a TCT case or when the discharging port is identified, and whether protective provisions are applicable only when the actual dangers are greater than they were at the date of the charter (The Product Star (No.2); The Paiwan Wisdom).

V.  Advice to Members

Overall, for ships that may be exposed to various risks in the Gulf, owners will need to have the contract carefully drafted and thoroughly consider problems such as: a) whether and under what condition may the master refuse an order; b) whether to exclude certain areas or ports from the cover; c) how to arrange insurance and who to pay; d) whether modifying the standard clause will affect its entitled rights; e) under what condition may the charter be terminated, and etc. Owners will also need to consider factual circumstances and the existing clauses at the time they make new decisions. Rational negotiations on contract performance should be carried out if the level of risk is high enough to trigger certain clauses.

With the situation in the Gulf evolving on a daily basis – most recently the Saudi Arabia oil facilities attack on September 14, the Club could not possibly offer a strategy that addresses all problems once and for all. This particular article, based on recent cases and Member inquiries, is intended as merely a reference and for any updates or further information, please follow on the Club’s future issuance.