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15 April 2020
Force majeure as general legal principle
Notice of force majeure
Duty to mitigate
Practical situations as effects of COVID-19
Certificates expire and cannot be renewed
Insurance of rigs and vessels
The fast spread of COVID-19 worldwide and the actions taken by regulatory bodies have created challenges for the shipping industry in particular given its international character.
Much information is available, but it is fragmented. This article set outs several issues of importance and gives basic information to help parties handle the situation at hand in the best possible manner.
The COVID-19 outbreak in Norway and under Norwegian law must be described and recognised as a force majeure situation. The basic requirement under Norwegian law is that a force majeure situation must be something which the party invoking force majeure was not and could not have been aware of when the contract was entered into, and the party must take all reasonable measures to overcome the situation or effects (the hindrance) caused thereby. This is also stated in Article 79 of the United Nations Convention on Contracts for the International Sale of Goods.
However, a force majeure situation in itself is not a valid excuse for not performing obligations under a contract. A force majeure situation must cause hindrance or prevent a party from performing the obligations undertaken. The party invoking force majeure has the burden of proof both that there is a force majeure incident and that this has caused the hindrance or prevented the fulfilment of the party's obligations.
Under English law (common law), as opposed to Norwegian law, force majeure is not a legally accepted concept, and must be particularly agreed in the contract. Whether an event amounts to force majeure must under English law be decided based on the wording of the contract. Further, both under Norwegian and English law, the extent and effect of force majeure, must be decided on the basis of the provisions of the contract, thereby deciding the parties' rights and obligations.
Most contracts require that a party that wishes to invoke force majeure give notice in writing to the other party of the force majeure situation and the effect which this is assumed to have on the fulfilment of the contract. Such notice must be given within a short period (as set out in the contract). The requirements concerning such notice will differ. In international shipbuilding contracts, the period is usually 10 days after the "builder becomes aware or should have become aware of any cause of delay as aforesaid". If notice is not given, the effected party may not subsequently invoke force majeure as a valid hindrance and effect (eg, permissible delay).
Under the Norwegian Total Contract 2005 (NTK), notice must be given "as soon as possible". On the other hand, there is no specific provision in the NTK stating that a party will be prevented or barred from invoking force majeure if they fail to give such notice.
It is a generally accepted principle in international contract law that notice must be given and received by the other party "within reasonable time" after the party that invokes force majeure "knew or ought to have known of the impediment". Failure to give such notice will have two effects:
Such a notice may be of a general nature, as the effects of the force majeure will still not be fully known.
Companies that are aware or suspect that they will be affected by the COVID-19 pandemic are therefore well advised to send a general force majeure notice to their counterparts to secure their rights. Further notice should be given when the effects are clearer. However, such a general force majeure notice must be worded in accordance with the procedures set out in the relevant contract.
On the other hand, parties that receive force majeure notices must reply to the same as failure to reply may be seen as an acceptance of the force majeure situation and possible permissible delay. If a general notice has been received, parties are well advised not to just accept this when received, but review the wording of the relevant contract and request the other party to send further information or notices when further information concerning the actual delay is known, and in the meantime reserve all rights.
It follows both from general legal principles as well as from the wording in most standard contracts that a party invoking force majeure must mitigate the effects thereof versus its counterpart.
When force majeure has occurred, a party may be inclined to use (or rather abuse) this opportunity to gain as much extra time as possible, particularly if already delayed for other reasons. This, of course, is unacceptable behaviour and under a shipbuilding contract a party invoking force majeure must do its "utmost to avoid or minimise" the delay caused by the event in question.
Since COVID-19 is no longer an epidemic effecting one country, but a pandemic affecting countries worldwide, restrictions imposed by each autonomous authority will have effect. This may for example be suppliers in different countries down in the supply chain, where force majeure is not directly, but indirectly affecting a party and the performance of a contract.
Lack of intermediate products needed in manufacturing final products
In principle, the intermediate products needed may be available, but the production of manufacturers of the actual product needed may be delayed and stopped due to lack of workforce with the suppliers and manufacturers. Further, export restrictions may be imposed in order to secure vital products such as protection equipment for health personnel for each country.
For the operation of rigs and ships, classification and statutory certificates are mandatory. Failure to renew and maintain same will be a breach of the obligations under the relevant contract or charterparty. A ship may in principle be considered unsafe and the vessel subject to port state control and be detained for other reasons. Ports may be unsafe without being declared unsafe in the more traditional sense of the word. Again, the reason may be actual illness or quarantine denying ships to enter or allow passengers and crew ashore.
The International Maritime Organisation (IMO) has issued a circular letter addressing these issues, but all the IMO can do is to encourage cooperation and a pragmatic approach between flag and port states, as the IMO cannot issue a general exemption from the mandatory provisions of the relevant statutory conventions, nor delay implementation of mandatory regulations coming into force – not even in the current uncertain situation. Further, all the major classification societies (also acting as agents for national maritime authorities) have now advised their customers that they generally accept the COVID-19 situation as an exceptional circumstance in terms of granting postponement for surveys where such are impossible to perform based on class rules and statutory conventions, and invite customers to use already established remote survey schemes where possible. However, postponement must not exceed three months from the certificate expiry date.
It is clear that neither of the international conventions from the IMO or the International Labour Organisation have been worded to take into account the current situation. For statutory certificates issued by the national maritime authorities, each owner must find flexible solutions with the relevant flag state. For the Norwegian flag, certificates are automatically prolonged for three months without specific application.
Under insurances subject to Norwegian law, the certificates from class and national authorities are defined as "safety regulations". All certificates must at all times be valid. If not an expired certificate may qualify as a breach of safety regulations, and if a subsequent insurance event occurs that could have been avoided if the relevant certificate had been in place, the owners' right of cover under the relevant insurance may be in jeopardy. Since the insurer has a right to demand a survey of the vessel, it must however be assumed that a general prolongation of existing certificates by class or flag state will be binding on the insurer and has no negative effect on the owners' rights under the insurance.
Further issues will arise under loss of hire insurance, where the repair of the vessels may be delayed due to the COVID-19 pandemic. If such a delay is caused by COVID-19 (eg, personnel not being available, yards being partly closed or necessary parts are delayed), it may be questioned whether this delay will be covered by loss of hire insurance, since the delay may be said to have been caused by COVID-19, which may arguably be considered a peril not insured against.
In the day-to-day operation of ships, the implications for shipowners and operators due to such outbreaks are significant. Delays occur and costs arise not only when the ship is in an area where the risk of infection is high, but also at a later date when the ship calls at ports outside the region where restrictions were imposed to reduce the risk of the disease spreading. In this respect, no clause or short summarised advice can solve all of the problems that may arise due to countries more or less worldwide imposing restrictions or penalties on ships.
Most charter parties are today entered into on Baltic and International Maritime Council (BIMCO) recommended forms and often governed by English law. As stated above, COVID-19 is recognised as a pandemic. The BIMCO Infectious Disease Clause (BIDC) may thus be included in the relevant charter party and if so, the application thereof must be considered under the relevant governing law. This is the case for the BIMCO form Supplytime 2017. It should be accepted that the term 'affected area' as defined in the BIDC will include areas worldwide where there is a risk to expose the vessel or its crew to COVID-19.
Many charter parties used in offshore supply contain specific force majeure clauses (eg, Clause 35 of Supplytime 2017, which sets out a specified list of incidents being defined as force majeure). The effect of a force majeure situation is that:
neither party shall be liable for any loss, damage or delay due to any of the following force majeure events and/or conditions to the extent the party invoking force majeure is prevented or hindered from performing any or all of their obligations under this Charter Part, provided they have made all reasonable efforts to avoid, minimize or prevent the effect of such events and/or conditions.
There is no requirement that the event could not have been foreseen by either party; on the other hand, there is a clear requirement for causation and a firm duty to mitigate the effects of force majeure.
One of the measures that authorities are taking is to protect their ports and deny access to prevent spreading via ships entering. At the same time, it is vital to maintain worldwide trade to combat the virus and ensure that the world can still function. Owners will therefore experience strict restrictions in port, which may lead to congestion and delay. One question that remains open is whether an owner can refuse to call at a port where they are likely to have the ship delayed or detained due to the virus or precautions taken to combat the virus.
In time charters, the risk for loss of time is from the outset with the charterer. The issue for the owner is to protect its vessel and crew from being infected. Employment in Supplytime 2017 is restricted to "voyages between any good and safe port or place and any place or Offshore Units where the Vessel can safely lie always afloat with the area of operation". If a port is deemed unsafe, the owner can refuse to follow the orders of the charterer to sail or call at such a port.
Whether a port is deemed unsafe due to COVID-19 will have to be examined case by case based on the prevailing risk factors in the port, including whether measures have been put in place in the port to reduce or avoid the risk of infection, both to passengers and crew. The proximity of the vessel to the shore and the likelihood of the vessel's crew coming into contact with possible sources of infection are also relevant, as well as whether there would be a risk of quarantine or detention of the vessel if calling at the nominated port. An order to call at a port is from the outset valid and the owner must follow such orders. The owner has the burden of proof to show that there is an unacceptable high risk of infection or detention for a port to be deemed unsafe, both under Norwegian and English law.
If a vessel is unable to perform the work under the charter party and time is lost due to COVID-19-related issues, the question is whether the owner remains entitled to the charter hire or whether the vessel will be deemed off-hire. This must be decided on basis of the wording of the relevant charter party and the governing law.
In general, the starting point in a time charter is that hire must be paid unless there is a specific provision to the contrary. If a charterer wishes to invoke the off-hire provisions they will have the burden of proof. The same applies if the owner alleges that any exceptions apply. The relevant clauses are (as always) there to allocate the risk between the parties. The wording of the actual off-hire clauses are therefore very important and the wording differs within the various charter parties.
The condition for placing a vessel off-hire is that an off-hire event as set out in the charter party has occurred. In the present situation, the most practical event is "deficiency of Crew". If a sufficient number of crew are ill due to COVID-19 and as a consequence the vessel is unable to perform the services required, this should from the outset be considered as "a deficiency of Crew" and the vessel be off-hire. If, on the other hand, the remaining crew is healthy and able to perform the services without any loss of time, the vessel is not off-hire.
The off-hire clause in Supplytime 2017 exempts from this main rule if the reason preventing the vessel from working is "quarantine... unless caused by the crew having communication with the shore other vessel at any infected area not in connection with the employment of the Vessel", and other specific reasons including force majeure. This means that if a vessel is quarantined in the next port when coming from an affected area, or because a member of the crew is infected, it will remain on-hire. If a vessel is delayed in connection with a crew change where the incoming crew must remain in quarantine, the vessel will be off-hire, since providing crew is the owners risk.
The situation is today at best uncertain, and the relevant facts are changing rapidly, with new legislation coming into effect on a daily basis. It is clear that this is difficult to handle for any national or international business in the maritime sector.
In addition to the first priority for all businesses to fight the virus and try to contain its spread, management must seek to secure their business and bottom line in order to survive and get out of the situation as best as possible. This means that as far as possible it should be business as usual in the very unusual times.
What can and should be done is to consider the COVID-19 pandemic and try to hedge as best is possible for this, both for existing contracts (by analysing contractual rights and obligations and mitigation measures) and new contracts now being entered into. As the COVID-19 pandemic is now well-known worldwide, it cannot be relied upon as a force majeure situation and excuse going forward, as this today is something which the parties can foresee and therefore regulate the risk for in their new contracts. A tailor-made 'corona clause' should therefore be considered for all new contracts.
For further information on this topic please contact Christian James-Olsen, Gaute K Gjelsten, Øyvind Axe or Øystein Meland at Wikborg Rein by telephone (+47 22 82 75 00) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Wikborg Rein website can be accessed at www.wr.no.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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