Page 1

IMPLICATIONS OF COVID-19 ON SHIPPING CONTRACTS:

TIME AND VOYAGE CHARTERPARTIES

From an outbreak to a global pandemic, Covid-19 has had volatilerepercussions on the global shipping industry. Ports around the world havebegun implementing heavier restrictions and safety measures as aprecaution against the further spread of the virus. This has cut a swathethrough the usual shipping practices. The Marine Department of Malaysia, for instance, has instructed that shipsthat have departed or transited from countries declared by the Minister ofHealth to be at risk within 14 days prior to arrival at any Malaysian port beplaced under quarantine, until cleared by the Port Health Office. Similarly,in Turkey, South Korea and Indonesia, quarantine inspections areconducted on vessels travelling from high-risk countries, and crew undergohealth screening. In Singapore, thermal screening is implemented by theMaritime and Port Authority of Singapore at all sea checkpoints. These measures inevitably cause delays and congestion at ports, anddisruption to the loading and discharge of cargo. Some vessels refuse tocall at certain ports, amid fear of Covid-19. This newsletter briefly highlightssome of the key legal issues that arise in the performance of Charterpartiesin circumstances of Covid-19. Some tough and urgent decisions may have to be made and optionsconsidered, including the need to re-nominate a port if the original port ofcall is unsafe; deviate from the scheduled voyage to save life and seekmedical aid; call an event of frustration if the commercial purpose of thecontract has been severely undermined; or to reserve the right to seekdamages at a later date. The knock-on effect of delays on contracts ofcarriage with cargo receivers complicates that situation further. The commencement of laytime and demurrage too may be called intoissue, arising from difficulties in securing free pratique (health clearance).Recourse to off-hire clauses may additionally need review. The ensuing discussion is a brief overview of a complex area of trade andlaw. It does not constitute legal advice. As each Charterparty and prevailingset of circumstances is unique, do seek independent legal assistance. Ourpartners shall be happy to render more specific guidance. As always, ourwish is that you stay well.

The Tommy Thomas Series on the Malaysian MCO, Part 3May 1, 2020

Page 2

LAYTIME & DEMURRAGE

May 1, 2020

the vessel has physically arrived at the destinationspecified in the Charterparty;

the vessel is ready and in a fit condition to receiveand / or discharge cargo; and

a notice of readiness (NOR) is tendered by theshipowner.

(1) Can laytime commence where the vesselhas physically arrived but has yet to obtainhealth clearance (free pratique)? For laytime to commence, the following requirementsmust be satisfied :-

A vessel must therefore, not only be physically but alsolegally ready to engage in cargo operations for laytimeto commence. This means that all the necessarydocuments, permits and consent must be in order,including free pratique. Where port authorities are implementing stringentscreening processes or compulsory quarantinemeasures, or where any of the vessel’s crew issuspected of being infected with Covid-19, free pratiquewill no longer be a mere formality. A vessel would only be legally ready, and a NOR validlytendered, once free pratique has been obtained. Onlythen will laytime commence.

(2) If the loading or discharge of cargo ishindered due to the Covid-19 outbreak, willlaytime continue to run? If the running of laytime has commenced, parties shouldreview the Charterparty to identify any applicable laytimeexceptions clause. This is to determine whether ahindrance caused by Covid-19 can interrupt the running oflaytime. While “pandemics” or “diseases” may not be specificallymentioned in a clause on laytime exceptions, a hindrancedue to Covid-19 outbreak may still be captured by thewords ‘‘any other cause beyond the control of charterers’’or a similar expression. In assessing whether a particular event is captured by alaytime exceptions clause, the following principles apply :- (i) If the causes of delay listed in the clause are of thesame type, the Courts will generally presume that onlycauses of delay of that type are excluded. (ii) If there is no commonality in the causes of delaylisted in the clause, then the words will be interpretedmore widely and may be given a literal meaning. (iii) Where the final words of exclusion in the clauseinclude the word ‘‘whatsoever’’, or something similar, thiswill tend to exclude the presumption stated in (i) above.The final words will normally be given a wide meaning. If a vessel is already on demurrage before the delayingevent, a laytime exceptions clause will not stop demurragefrom continuing to accrue. The primary principle “once ondemurrage, always on demurrage” will apply, unless theclause is explicitly worded to extend to the disruption notonly of laytime, but also to demurrage.

Page 3

LAYTIME & DEMURRAGE

May 1, 2020

(3) A charterer encounters difficulty in procuring the cargo in time forloading for reasons relating to the Covid-19 outbreak. Can thecharterer rely on laytime exceptions clauses to stop laytime fromrunning? Regardless of difficulties faced by the charterer in procuring the cargo and gettingit delivered to the loading point on time, the charterer’s duty to have cargo ready intime for loading is an absolute one. Save for extreme situations that render thecontract frustrated, or a suitably worded laytime exceptions clause, laytime willcontinue to run. Laytime exceptions would not, in the absence of clear words, extend to hindrancein the preliminary cargo operation of procurement. (4) Where demurrage is continuing to accrue due to events relating toCovid-19, what is the shipowner’s role under such circumstances? In some circumstances, such as when a shipowner exercises a lien over cargo,the shipowner may be required to take reasonable steps to ensure that the periodof detention of the vessel is not unnecessarily prolonged by any failure on its partto act reasonably. The shipowner is however, entitled to look first to his owninterest before considering the available measures that can mitigate the loss thatis to be passed on to the charterer. Where the shipowner does take steps beyond its legal obligations to lessen thetime the vessel stands on demurrage, it is entitled to recover costs reasonablyincurred in doing so.

Page 4

OFF-HIRE

May 1, 2020

Clause 17 of NYPE 1993 / 2015 Time Charter : “Inthe event of loss of time from deficiency…ofofficers…detention by Port State control or othercompetent authority for Vessel deficiencies…or byother similar cause preventing the full working of thevessel, the payment of hire…shall cease for the timethereby lost.”

BIMCO’s Baltime 1993 : “In the event of… necessarymeasures to maintain the efficiency of the Vessel,deficiency of men…either hindering or preventing theworking of the Vessel and continuing for more thantwenty-four consecutive hours, no hire shall bepaid…”

(5) Must a charterer pay hire when the vessel isdelayed due to Covid-19? A time charterer is bound to pay hire continuously inexchange for the use of the vessel. Hire may besuspended or deducted for the period of delay only if theCharterparty expressly provides for it, commonly underthe “off-hire” clause. An off-hire clause will normally set out the events thatput a vessel off-hire. Since the clause is for the sole-benefit of the charterer, the charterer must clearly showthat the delay is caused by one of the off-hire events.Any ambiguity in the clause will be read in theshipowner’s favour. Most standard off-hire clauses also set out how the off-hire events must affect the use of the vessel. Therefore,apart from identifying the off-hire event, the charterermust establish that the event has "prevented","hindered" or "reduced" the full working of the vessel.The "workings of a vessel" may be prevented byphysical as well as legal means. For instance, a vesselthat is physically functional may still be put off-hirebecause it is legally prevented by the port authoritiesfrom entering the port, on suspicion of Covid-19. The following are some examples of off-hire clauses:-

Shelltime4 : “On each and every occasion that thereis loss of time (whether by way of interruption in thevessel’s service or, from reduction in the vessel’sperformance, or in any other manner)... due to anydelay in quarantine arising from the master, officersor crew having had communication with the shore atany infected area without the written consent orinstructions of Charterers or their agents…the vesselshall be off-hire...”

(6) Does it matter who caused the delay in thearrival of the vessel? As far as the charterer is concerned, it does not matter ifthe delay is caused by the shipowner, port authorities orthird parties. In putting a vessel off-hire, the charterer isonly required to prove that the delay is caused by theprescribed events. The charterer need not attribute faultto the shipowner. However, if the delay is caused by the charterer, or is anatural result of complying with the charterer’s order, thecharterer is not eligible to place the vessel off-hire. Forinstance, if Italy is declared by the Malaysian Ministry ofHealth to be a country at risk, a vessel coming from Italywill be compulsorily quarantined in Malaysia. In thiscase, the charterer may not be able to put the vesseloff-hire during the quarantine if the charterer hadordered that the vessel travel first to Italy, and then toMalaysia, because the quarantine is a naturalconsequence of the charterer’s order. (7) What if the delay is not caused by theprescribed off-hire events? Some off-hire clauses, Clause 17 of NYPE for instance,includes a sweeping phrase “any other similar causes”.If such a phrase is present in the Charterparty, anyevent causing the delay that is similar or is within thegeneral context of the off-hire clause may enable theinvocation of the off-hire clause. Alternatively, charterers may seek to recover damagesin lieu of overpaid hire for time lost due to the delay. Butto do so, the charterer must establish a breach on thepart of the shipowner (for example, that the vessel wasunseaworthy, or the shipowner failed to fulfil itscontractual obligation in complying with health andsafety regulations at the port of call).

Page 5

SAFE PORT WARRANTY

May 1, 2020

(8) What is a safe port warranty? Safe port warranty refers to a charterer’s obligation toonly instruct the vessel to safe ports. A port is safe if avessel can reach it, use it and return from it without, inabsence of some abnormal occurrence, being exposedto danger that cannot be avoided by good seamanship. It serves as an assurance from the charterer to theshipowner that the vessel and her crew will not beexposed to dangers when complying with the charterer’sorders. This warranty, if not expressly stated in theCharterparty, will be implied. (9) Does the outbreak of Covid-19 render a portunsafe? Whether a Covid-19 affected port is unsafe, dependson:- (i) the type and degree of "danger" involved Type: Normally, a port is unsafe because it exposes thevessel to physical dangers. This may include the dangerof a vessel’s crew being exposed to the contagiousCovid-19. In the most extreme of situations, all of thecrew could fall ill, leaving the vessel insufficientlymanned. However, a port may also be unsafe if itexposes the vessel to legal risks such as prolongedquarantine or isolation pending the submission of healthcertificates or legal declarations that are not ordinarilyrequired. Degree: A Covid-19 affected port would be unsafe only ifthe risks or dangers at the port are so imminent that areasonable shipowner or Master would decline to sendthe vessel there. Therefore, if the risk of contractingCovid-19 is exceptionally high at a particular port, eitherdue

due to a great number of positive cases in the region orthe notorious lack of safety measures implemented bythe port authorities, to the extent that a reasonableshipowner would be unwilling to send his vessel to theport, it could be regarded as an unsafe port. (ii) whether the danger is avoidable If the risk at the port can be prevented or reduced bytaking preventive measures, the port is likely to beconsidered safe. Most ports, including Malaysia, haveimposed special measures to reduce the risk of Covid-19. Similar measures were also taken during the Ebolaand MERS outbreaks and numerous ports remainedopen. Accordingly, if a port is seeing a steady flow oftraffic despite being exposed to Covid-19, it is anindication that the port is likely to be legally safe. Thecontinuing vessel traffic at the port may be sufficient toallow a reasonable shipowner and Master to concludethat the said port is legally safe. (iii) whether the outbreak of Covid-19 is considered anabnormal occurrence If an alleged danger at a port is a result of an abnormaloccurrence, the port is not legally unsafe for thepurposes of a safe port warranty and the charterer is notin breach of the warranty. An abnormal occurrence is something very rare andunexpected for the particular port, for the particular ship’svisit at that particular time of the year. The transmissionof Covid-19 is now global. Alarm was raised in January2020. Unless the question of port safety arose at theearly days in the spread of Covid-19, it is less likely forthe outbreak to be considered an abnormal occurrencenow. However, in a case where the outbreak of Covid-19 isfound to be an abnormal occurrence, the shipownerbears the risk for the resulting loss.

Page 6

(10) What if the port becomes highly exposedto Covid-19 only after the instruction is givenby the charterer? A time charterer is in control of the employment of thevessel. It is within the time charterer’s power to changethe vessel’s employment by appropriate orders giventimeously. A time charterer has a continuous obligationto make subsequent orders to avoid the new dangerthat arises at the originally designated port, byinstructing the vessel to an alternative port or orderingthe vessel to leave the Covid-infected port. Being subject to a continuous obligation, it would beprudent for a time charterer to protect itself under itsstring of sub-charters, or bills of lading, against theconsequences of a change in port in performing itscontinuous obligation; or indeed if the shipownerdeclines to proceed to that port. Whether the bill oflading is made subject to the terms of the Charterpartywould be relevant. A voyage charterer however, would not ordinarily havethe power of re-nominating a port because the chartereris bound by the ports expressly stipulated in aCharterparty. Even for Charterparties that contain arange of ports of loading or discharge for nomination,once nominated, it is as if the port had originally beenwritten into the Charterparty. Thus, charterers under avoyage Charterparty are generally not subject to thecontinuous obligation. While voyage charterers generally lack the power to re-nominate ports, some voyage Charterparties contain a“so near thereto as she may safely get” provision (e.g.“The said vessel shall proceed to the loading port orplace stated in box 10 or so near thereto as she maysafely get and lie always afloat…”). This is a libertyclause that may allow the shipowner to load ordischarge the cargo at an alternative port or place. due

(11) Can the shipowner or Master decline toenter a port due to Covid-19? Although the Master is obliged to comply with theorders of employment of the vessel given by thecharterer, the shipowner is responsible for the safety ofthe vessel and her crew. A shipowner or Master isobliged to refuse the orders of the charterer if itendangers the safety of the ship or her crew. TheMaster may therefore, decline to comply with orders toproceed to a patently unsafe port. However, the shipowner takes the risk of a repudiatorybreach of the Charterparty, if the port is laterdetermined to be safe. If the shipowner complies with an order to enter aCovid-infected port that is found later to be legallyunsafe, the shipowner is entitled to claim damages fromthe charterer for breach of the safe port warranty;provided the shipowner has not waived its right tocontend that the charterer is in breach. Hence,shipowners should make an express reservation ofrights when entering a potentially unsafe port. Shipowners must note that even if a port has beenfound to be legally unsafe due to Covid-19, theshipowner’s claim for damages arising from breach of asafe port warranty may be challenged if the Mastercontributed to or failed to mitigate the damage (forexample, by failing to take reasonable precautionsagainst the transmission of the virus).

SAFE PORT WARRANTY

May 1, 2020

Page 7

DEVIATION

May 1, 2020

(12) Is the shipowner at liberty to deviate fromthe voyage if a crew member is suspected of aCovid-19 infection? Under a voyage Charterparty, a shipowner is at libertyto deviate for purposes of saving, or attempting to savelife. Some Charterparty clauses go further, to affordshipowners the liberty to deviate and call at ports enroute the named voyage, provided it is for a reasonablepurpose relevant to the voyage (e.g. Clause 3 ofGENCON 1994, and BIMCO Liberty and DeviationClause). Time Charterparties too allow for deviation for thepurpose of saving life. Further, the shipowner’s duty toproceed with due despatch under a time Charterparty,is subject to the Master’s judgement as to the safety ofthe ship, crew and cargo. As such, if it is established that there is a genuine riskto life, the shipowner may deviate from the voyage. (13) If the shipowner decides, or chartererrequests, to deviate from the voyage todisembark crew suspected of infection, whobears the deviation expenses? In the absence of a specific clause under theCharterparty which provides that the deviationexpenses are to the charterer’s account, generally theshipowner bears such costs. Shipowners may checkwith their respective insurers whether the deviationexpenses, such as costs of additional bunker and portcharges are covered.

For time charters, charterers should examine theCharterparty to identify if such deviation could amountto an off-hire event, or allow for deduction of hire. (14) What if the deviation results in delay in thedelivery of cargo, or the cargo is delivered to aport other than that stated in the bill of lading? In the absence of express provisions under the bills oflading allowing for deviation, the carrier (usually theshipowner) still has an obligation to deliver the cargo tothe designated port. The shipowner could be liable forthe loss of and / or damage to the cargo arising out ofdeviation, particularly if the cargo is perishable. The shipowner, acting as a carrier under a bill of lading,may seek to rely on provisions under the Hague Rulesor Hague-Visby Rules (where applicable), to excludethe liability for loss and damage resulting from“quarantine restrictions” or “saving or attempting tosave life or property at sea”. The shipowner shouldcheck with its insurers if there is a Shipowners’ Liabilityto Cargo (‘SOL’) Cover in place that protects forliabilities related to the loss, short landing or damage tocargo. If the shipowner or charterer needs to deviate from thedesignated voyage, it is prudent to negotiate anddiscuss the options with cargo interests for the loadingor discharging at an alternative port, to minimise thepotential risk of loss or damage to cargo.

Page 8

FORCE MAJEURE

May 1, 2020

(15) What is a Force Majeure clause? A force majeure clause protects parties who are unableto fulfil their contractual obligations due to superveningevents beyond the parties’ control. The clause allowsparties to suspend or be excused from the performanceof obligations that are impaired by the force majeureevent. A force majeure clause is a creature of contract andmust be expressly stipulated in the Charterparty. It cansometimes be found using different terminology, butwith similar effect, under “exceptions clauses”. (16) Can the outbreak of Covid-19 amount toa force majeure event? This depends largely on the wording of the forcemajeure clause in the Charterparty, and the eventslisted in the clause. The outbreak of Covid-19 may fallwithin the description of “disease” (BIMCO Infectious orContagious Diseases Clause), “pandemic”, “any placewhere fever or epidemics are prevalent” (Baltime Form,Clause 14(a)), “quarantine restrictions” (Hague-VisbyArticle IV, rule 2, Shelltime 4, Clause 27), “restraint ofprinces” or some general wording such as “or any othercauses” or “events beyond the Parties’ control”. Typically, the clause requires the performance to be“prevented” by the relevant event for it to take effect.However, some clauses are drafted to also covercircumstances where the performance is merely“hindered” or “delayed” by the event.

There must be a causative link between the Covid- 19pandemic and the hindrance of performance. (e.g.“Neither the Vessel nor Master or Owner, nor theCharterer, shall be in breach of its obligations, or beresponsible for any loss, damage, delay or failure, inthe event that performance is prevented or delayed asa result of :- Act of God, quarantine restrictions, arrestor restraint of princes or any other events beyond theParties’ control.”) (17) What is the consequence of Covid-19being recognised as a force majeure event? It will relieve a party from performing part or whole ofthe Charterparty that is directly affected by the outbreakof Covid-19, or suspend the obligation to perform theCharterparty until it is no longer prevented, hindered ordelayed by Covid-19. Some clauses may also address the issue of paymentsmade or services provided prior to the force majeureevent (e.g. cargo that are already loaded on the vessel,freight that has been paid). Care must be taken to examine the potential effect ofinvoking force majeure down the chain of contracts, e.g.between sub-charterparties, to bills of lading and to thesale and supply of commodities contracts. It requires acritical examination of the relevant clauses in eachcontract and a holistic analysis of the interplay betweenthe clauses. The considerations in this exercise include:Are the force majeure clauses back-to-back? What ifthe force majeure defence under the first contractsucceeds but fails under the subsequent contract orvice versa? What if an intermediate contract does notcontain a force majeure clause? Is there an indemnityclause or an Inter-Club Agreement which alters theallocation of risk in a multi-contract claim?

Page 9

FORCE MAJEURE

May 1, 2020

Give notice: Force majeure clauses commonly require a party to providenotice and details of the event within a fixed time period. Failure to do sotimeously may deprive an affected party from relying on the force majeureclause.

Mitigate the loss or damage: A party relying on the clause is under a duty toexercise reasonable endeavours to prevent or mitigate the effects of the forcemajeure event. For instance, if a party is relying on ‘quarantine restrictions’ as aforce majeure defence for the late delivery of cargo, reasonable efforts must beshown to have been taken to release the vessel from quarantine as soon aspossible. This may include steps to disinfect the vessel, closely monitoring thecrews’ health condition and submitting timely reports to port authorities.

Gather evidence: It is crucial to gather contemporaneous evidence of the factssupporting the position taken surrounding Covid-19, to demonstrate how theoutbreak affects performance of the Charterparty. Correspondence betweenparties, public announcements and marine department notifications are allimportant, as is evidence of the mitigating steps taken.

(18) If the performance of an obligation is also affected by mattersother than Covid-19, is the force majeure clause still applicable? For a force majeure clause to apply, the force majeure event must be the effectivecause preventing the performance of the affected party. If the affected party wouldhave been unable to perform its obligation even without the outbreak of Covid-19or any other force majeure event, it is unlikely that its performance will be excusedby reason of force majeure. (19) What should a party do to effectively invoke a force majeureclause?

Page 10

FRUSTRATION

May 1, 2020

there is a supervening event that occurred after thecontract is formed;

the supervening event caused a fundamental orradical change to the nature of parties’ contractualrights, rendered performance of the contractimpossible or deprives the contract of its commercialpurpose;

the supervening event is not self-induced or causedby the default of the party seeking to rely on theprinciple of frustration; and

the supervening event must not have beencontemplated by parties during the formation of thecontract, and there is no provision under the contractthat deals with it.

(20) Could Covid-19 frustrate the performanceof a Charterparty? The threshold to establish that a contract is frustrated isvery high, and applies only to extreme situations. Under Malaysian law, the doctrine of frustration isgoverned by Section 57(2) of the Contracts Act 1950,which states that the contract will become void if an actwhich, after a contract is made, becomes impossible orunlawful to perform. If parties merely wish for temporary relief of theirobligations under the Charterparty, it is advisable thatparties negotiate, rather than call the entire contractfrustrated. This is especially important for long termcontracts. (21) What are the requirements for a contractto be considered frustrated? The following 4 elements need to be satisfied:-

Inordinate delay in obtaining cargo due to severelogistics disruption, business closure, or cargocongestion at ports. The delay may frustrate acharter, but only if ALL source of alternative cargowithin the range of the loading port are unavailablefor a substantial period of time, relative to the lengthof the Charterparty.

Under a voyage charter where a port has beennominated by the charterer, but loading ordischarging is prevented or unavoidably delayed dueto port closure or quarantine restrictions, such that itdefeats the commercial purpose of the contract.However, frustration cannot be invoked if the voyagecharter provides that “the vessel shall proceed to theloading port or so near thereto as she may safelyget”, which allows the shipowner to discharge itscontractual obligations by proceeding to load ordischarge cargo at a reasonably near alternativeport, and where there is no impediment to load ordischarge cargo at that port.

(22) To frustrate a Charterparty on grounds ofdelay, how long does the interruption or delayneed to last? Parties should assess at the time of the occurrence,whether the delay would be of a very substantialduration, as compared to the unexpired balance of thecharter period. If there is a substantial period of charterthat will remain after the interruption is anticipated tocease, it is unlikely that the contract will be consideredfrustrated. It is important that the party seeking to invoke theprinciple of frustration maintains a record of theevidence used to assess the duration of the delay at thematerial time that decision is made, such as letters,telephone notes, emails, port and media release, andregulations, directives, or advisories from authorities. (23) What are the possible circumstances inthe Covid-19 outbreak that might frustrate aCharterparty? It may be artificial to identify all these circumstances,because it is very fact sensitive; dependent on theprecise turn of events and governing contractual terms.Theoretically, possible scenarios where Covid-19 mayfrustrate a Charterparty include:-

Page 11

CONTACTS

Alan Gomez

Managing Partner

T +603 2632 9682alan@tommythomas.net

Ganesan NethiPartner

ganesan@tommythomas.net

Sitpah Selvaratnam

Consultant

sitpah@tommythomas.net

Michael Yap Chih HongPartner

michael@tommythomas.net

May 1, 2020

T +603 2632 9682

T +603 2632 9682T +603 2632 9682