What are the implications of trading to listed areas?

English

By: Rania Tadros, Managing Partner, Ince - Natalie Jensen, Managing Associate, Ince

On 17 May 2019, the Joint War Committee (“JWC”) added the Persian or Arabian Gulf and adjacent waters, including the Gulf of Oman west of Longitude 58E, and Oman and the UAE, to its Listed Areas for Hull War, Piracy, Terrorism and related perils. Since then, on 13 June 2019, two vessels were attacked in or around the Straits of Hormuz. In its regular update to its members and the market, and as reported in Seatrade Maritime, Gard has said: “While the cause of the incidents that took place in the Gulf of Oman on 13 June 2019 has not been confirmed, all vessels, and tankers in particular, are advised to operate with a heightened level of security in the Gulf of Oman/Strait of Hormuz/Persian Gulf region.”

The JWC of the London marine insurance market is comprised of underwriting representatives involved in writing marine hull war business from Lloyd’s and the International Underwriting Association. The JWC was established in order to provide a representative forum for the London war markets, represent the interests of the sector and review and update the Listed Areas.

What it means to be on the list?

Losses arising from war risks are normally covered by the war risks clauses, but if a country appears on the list, then vessels calling there that have their insurance placed on the London market have an obligation to inform their insurers, who may levy additional premium for the particular voyage/time in the relevant regions. Reports are that the premium being levied varies significantly from one insurer to another with quotes given by the insurers being valid for only 2 to 7 days and being open to fluctuation. The reports are that the approximate current war rates are 0.4% on the insured value of the vessel for transiting the Arabian Gulf, per transit not exceeding 7 days.

Whilst some parties are dismissing this additional cost to the vessel as equating to only adding $0.30 to the cost of a barrel (for a VLCC carrying 2,000,000 barrels) for a transit in and out of the Arabian Gulf plus the cost of cargo war insurance, issues are arising as to who is bound to pay this additional cost and whether it is a cost that can be passed down the charter chain. Inevitably, the position will vary as to whether there is an existing charterparty in place or whether there is still scope to negotiate who will bear these additional costs when entering new fixtures. As a matter of English law, the additional cost (which may diminish an owner’s return) is not generally sufficient to permit the owner not to perform the voyage or to claim frustration. There may, however, be specific contractual terms that the owner has inserted into its charters which can offer some protection.

War risks – not the first time

It is not the first time that shipowners are faced with difficult commercial decisions regarding their routing.  In a case heard by the English Court in 2011 and 2012, the Owners of the Triton Lark were instructed to load a cargo from Europe to China via the Suez Canal and the Gulf of Aden. The Charterparty incorporated the Conwartime 1993 clause. The relevant parts provided:

Code Name: ‘CONWARTIME 1993'

  1. For the purpose of this Clause, the words:

(a) “Owners” shall include the shipowners, bareboat charterers, disponent owners, managers or other operators who are charged with the management of the Vessel, and the Master; and

(b) "War Risks" shall include any war (whether actual or threatened), act of war, civil war, hostilities, revolution, rebellion, civil commotion, warlike operations, the laying of mines (whether actual or reported), acts of 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 whatsoever, which, in the reasonable judgement of the Master and/or the Owners, may be dangerous or are likely to be or to become dangerous to the Vessel, her cargo, crew or other persons on board the Vessel.

(2) The Vessel, unless the written consent of the Owners be first obtained, shall not be ordered to or required to continue to or through, any port, place, area or zone (whether of land or sea) or any waterway or canal, where it appears that the Vessel, her cargo, crew or other persons on board the Vessel, in the reasonable judgement of the Master and/or the Owners, may be, or are likely to be, exposed to War Risks. Should the Vessel be within any such place as aforesaid, which only becomes dangerous, or is likely to be or to become dangerous, after her entry into it, she shall be at liberty to leave it…

(8) If in compliance with any of the provisions of sub-clauses (2) to (7) of this Clause anything is done or not done, such shall not be deemed a deviation, but shall be considered as due fulfilment of this Charter Party.

The Owners refused to follow the orders to go through the Gulf of Aden and instead proceeded to China via the Cape of Good Hope. Their position was that there was too much of a risk of piracy if they were to follow the employment order to proceed via the Suez Canal and the Gulf of Aden.  As expected, additional costs were incurred for that routing.  An arbitral tribunal held that interpreting sub-clause 2 of the Conwartime 1993 form meant that these costs were to be borne by the Charterers.

The Charterers appealed and the Court held that the Owners were required to show a real likelihood of being exposed to war risks rather than solely speculation. Following a further hearing where the Court heard submissions regarding the phrase “exposed to War Risks” in sub-clause 2 of the Conwartime 1993, the judge held that these words properly referred to a situation that was “dangerous”. The Court therefore held that, when ordered to go to a place, the owners/master had to ask themselves whether there would be a real likelihood that the vessel would be exposed to acts of piracy in the sense that the place would be dangerous on account of acts of piracy. It was further held that what is dangerous will always depend on the facts of the particular case and the case was accordingly returned to the arbitrators to answer the questions of fact.

The decision in the Triton Lark has, as a matter of English Law, provided guidance to owners who have contracted on the Conwartime provisions when faced with orders to proceed through a region that they consider may expose the vessel to additional risk.  The case shows that, whilst in a time charter context an owner is under an obligation to follow employment orders, the master is in control of the safety of the vessel and an owner/master can refuse to go to an area where a war risk exists (or will exist at the time of the vessel's arrival there) and where there is a “real likelihood that the area will be dangerous for the vessel”, where “dangerous” is defined by reference both to the extent/prevalence of the risk and the nature/severity of the risk.

The Paiwan Wisdom ([2012] EWHC 1888 (Comm)) is English law authority for the proposition that where a charterparty provides for worldwide trading, the owners will be entitled to refuse an order if, in their reasonable opinion when the order is given, there is a real likelihood of exposure to war risks. This is the position even if there has not been a material increase in the risk since the date the charterparty was entered into.

Insurance

Whilst the position will vary depending on the charterparty terms, where the charterparty contains a Conwartime or similar clause, any additional insurance premium is for the charterer’s account.

Safety

Whilst there is an alternative route available in respect of crossings of the Suez, in the Gulf region, the majority of vessels enter the region to proceed to port. Depending on how the situation develops, issues may arise as to whether or not particular ports within the Listed Areas are safe and/or whether or not the owner may refuse to follow instructions.

As a matter of English law, a port or berth will not be unsafe 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 dangers that cannot be avoided by good navigation and seamanship. Whilst what makes a port unsafe is a question of fact, the criteria to be applied in determining whether a port is safe are a question of law. The master does not have to obey the charterer’s orders if he is in doubt as to the prospective safety of the port and he will be entitled to a reasonable time in which to make enquiries. The risk of attack during a vessel’s approach to the nominated port may render the port unsafe, however such risk of attack must be sufficiently real. The mere apprehension of risk is not enough. At the time an order to proceed to the area is received and, if after considering all of the relevant facts there is no sufficiently real threat of an attack, an order to proceed would generally have to be complied with. Owners must consider both the factual situation and the terms of the charterparty carefully in order to consider their liabilities and potential exposure. 

Conclusion

The impact of trading in Listed Areas is far-reaching. Whilst the world is continuing to watch the unfolding of developments in the area, it is prudent for owners and charterers to remind themselves of their rights, obligations and potential exposure under their current charterparties and to consider their position in negotiating future fixtures.

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