Legal Implications of COVID-19 on Charterparties and Crew Employment on Hong Kong-Flagged Vessels

ABSTRACT

This article will discuss the legal implications of the COVID-19 virus on charterparties and crew employment on Hong Kong-flagged vessels. The article commences with an introduction to charterparty provisions which are relevant to potential issues caused by COVID-19, including (i) unsafe port clauses; (ii) quarantine restrictions and delay clauses; (iii) epidemics clauses; and (iv) laytime clauses and a discussion of the law on these points. The article will then discuss the application of force majeure clauses and the doctrine of frustration under English law. In addition to the legal implications arising from the COVID-19 virus on charterparties, this article will examine a shipowners’ obligations in respect of health and safety of seafarers on Hong Kong-flagged ships.

INTRODUCTION

On 30 January 2020, the World Health Organization ("WHO") declared the outbreak of the novel coronavirus ("COVID-19") to be a Public Health Emergency of International Concern (the "WHO Advice"). While COVID-19 is having a significant impact on economic activity in China, China is not alone in experiencing an economic impact, with the knock on ripple effect being felt in countries across the world.  As an international industry, the shipping industry is directly exposed to the practical and legal issues COVID-19 raises. These issues are not academic, with ships expected to be delayed by measures implemented by the relevant port authorities and the slowing down of China’s economic activities. What the effect is in, in the first instance, a function of the charterparty clauses.

CHARTERPARTY CLAUSES

A number of charterparty clauses may be considered and/or enlivened as a result of the COVID-19 outbreak. The exact effect on any individual charterpary will be a function of the factual matrix and the clause or clauses in question.

(i) Unsafe Port Clauses

One issue for consideration is whether a port affected by COVID-19 is a “safe port”. The test for an unsafe port is well known. As established in The Eastern City [1958] 2 Lloyd’s Rep. 127, 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”. Notably, the Supreme Court in The Ocean Victory [2017] UKSC 35 commented on the well-known test in The Eastern City that "the test has stood the test of time" and should remain the test for subsequent cases.

Generally, safe port disputes focus on the physical characteristics of a port, the risk of damage to the vessel itself and whether that damage can be avoided by the exercise of good navigation and seamanship. The test for an unsafe port is not restricted to physical considerations. A port can be unsafe for other reasons. A port may be unsafe for, among other reasons, political safety. It is possible that a severe viral infection may pose risks to the crew and the cargo, which may in turn render a port unsafe. In Ciampa v British India Steam Navigation Co Ltd [1915] 2 K.B. 774, a vessel was held to be unseaworthy as it had come from a port contaminated by plague, necessitating fumigation of the vessel at her next port. By extension, a port infected by COVID-19 could arguably be construed as causing actual damage to a vessel if it led to restrictions at a future port, rendering it unseaworthy. If the vessel could not avoid exposure to such danger, this may lead to an unsafe port argument.

While much of the immediate focus will be on the performance of existing voyages, time charterers have a primary obligation to nominate a port that is, at the time of nomination, prospectively safe. This primary obligation is followed by a secondary obligation for the charterers to cancel the original order and to issue new orders to another port that is prospectively safe at that time if the original port is no longer safe.  This position may be amended by specific charterparty clauses such as Shelltime 4 clause 4(c), which states:

Charterers shall use due diligence to ensure that the vessel is only employed between and at safe places (which expression when used in this charter shall include ports, berths, wharves, docks, anchorages, submarine lines, alongside vessels or lighters, and other locations including locations at sea) where she can safely lie always afloat. …”

The effect of this clause is to displace the absolute obligation with one to exercise due diligence. The charterers will only breach this due diligence obligation if they fail to take reasonable care to establish that the port is safe.

As a result, as set out in The Saga Cob [1992] 2 Lloyd’s Rep. 545, charterers will need to monitor the factual landscape closely with a view to ensuring that they are capable of discharging their primary, secondary and/or due diligence obligations to ensure the nominated port is safe.

(ii) Quarantine Restrictions and Delay Clauses

Delays occasioned by quarantine restrictions will differ depending on both the type and wording of individual charterparties and the type of quarantine restrictions in place. Under a time charterparty, should the ship be required to deviate for crew health reasons, or be delayed by quarantine, the charterers may be able to place the ship off-hire. Alternatively, if the deviation or delay was a consequence of the charterers’ employment instructions, the ship may remain on-hire. For charterparties incorporating the Hague or Hague-Visby Rules, Article IV r 2(h) may provide a defence for loss or damage arising or resulting from quarantine restrictions.

(iii) Epidemics Clauses

A charterparty may contain a general “epidemics clause”. Subject to the interpretation of such a clause, an epidemics clause may be sufficient for a shipowner to refuse orders to proceed to an area where COVID-19 is known to be prevalent. It is recommended, however, that specific advice is sought before any reliance is placed on a general “epidemics clause”. 

In response to the 2014 Ebola outbreak, various industry bodies and operators developed Ebola clauses for both time and voyage charterparties. The BIMCO clauses dealing with Ebola were drafted in general terms for use in response to any virulent disease, and are along the lines of the BIMCO War and Piracy Clauses. Other clauses used at that time may be Ebola specific, and would only apply to COVID-19 if the language of the clauses was sufficiently wide to capture the present factual landscape.

It is also necessary to consider post-contractual expenses during the negotiation of terms. Post-contractual expenses include cleaning, fumigation and quarantine expenses. Owners who are chartering their vessels on time charter to regions which are exposed to viral outbreaks or other infections regions should consider obtaining financial guarantees before allowing their vessels to proceed to such areas. 

(iv) Laytime Clauses

Laytime under a voyage charterparty only commences once a ship has tendered a valid notice of readiness ("NOR"). It is often assumed that a ship will obtain free pratique on arrival at the berth as mere formality. In ports or places where COVID-19 is known to be present, mere formality can no longer be assumed.

If NOR cannot then be validly tendered until free pratique has been granted at the berth, there will potentially be delay, which, absent contrary wording in the charterparty, rests with the shipowner.

FORCE MAJEURE AND FRUSTRATION UNDER ENGLISH LAW

(i) Force Majeure

The term “force majeure” has no established meaning in English law, and the contractual clauses in each contract vary. Nevertheless, it is common practice to name events that will constitute force majeure events and to add a catch-all provision covering events beyond the parties' reasonable control. The list of named events may include “epidemic or pandemic” and “any law or any action taken by a government or public authority”, provided that the action is sufficiently proximate to the event relied upon. It is similarly common for a force majeure clause to include a provision stating that a force majeure event should not be reasonably foreseeable. The consequences of a force majeure event are usually to suspend performance and to have the time for performance extended and which may be coupled with on-notice termination provisions.

However, it is important to note that the effect of force majeure clause also depends on how the contract terms are interpreted. In Classic Maritime Inc v. Limbungan Makmur SDN BHD [2019] EWCA Civ 1102, the dispute related to non-performance of shipments under a contract of affreightment between the owners and the charterers. The contractual clause in question was termed as follow: "Exceptions – neither the vessel, her master or owners, nor the charterers, shippers or receivers shall be responsible for loss of or damage to, or failure to supply, load, discharge or deliver the cargo resulting from: Act of God,…floods…accidents at the mine or production facility…or any other causes beyond control; always provided that such events directly affect the performance of either party under this charter party." At the material time, the dam near the loading ports burst, causing catastrophic flooding in the area and stopping of production at the iron ore mine. The iron ore mine owner suspended its operations and ceased to supply cargo.

The issue was whether parties can rely on the force majeure clause. The owners argued that the collapse of the dam had no causative effect on the charterers as the shipments would not have been performed in any event. In finding against the charterers, the court held that although the burst of the dam made performance of the contract impossible, the charterers would not have performed the contract even if the dam did not burst. There was no direct linkage between the incident beyond control and the non-performance.

In other words, even if epidemic is listed as a force majeure clause, the court may not necessarily rule that the contract will be terminated. It will depend on the interpretation of the clause and the specific factual circumstances.

It is similarly common for shipbuilding contracts to contain a force majeure clause. Delays caused by the outbreak have already prompted some Chinese shipbuilding yards to declare force majeure under their shipbuilding contracts. According to estimates of China Association of the National Shipbuilding Industry as reported in TradeWinds, over 95% of the shipowners have expressed their understanding over the potential delay caused by travel restrictions imposed by local governments to contain the COVID-19 outbreak. Among these shipowners, more than 50% have agreed to extend their contracts. On the other hand, 1.5% of the shipowners have said outright that they would reject any force majeure declared by the shipbuilding yards. Accordingly, the effect of delays caused by the outbreak and the possibility of applying the force majeure clause in this context remain to be seen.

(ii) Frustration

In the absence of an applicable force majeure clause, the general doctrine of frustration may be invoked if COVID-19 prevents the parties from performing their contractual obligations. Once a contract is frustrated, the parties’ contractual obligations are discharged.

Mere hardship, inconvenience or material loss will not frustrate a contract. The doctrine of frustration only arises when an event occurs that is both unexpected and beyond the control of the shipowner and the charterer, and renders it physically or commercially impossible to fulfil the charterparty, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the charterparty.

Whether performance is frustrated due to COVID-19 will depend on the factual landscape at the time frustration is claimed. In The Hermine [1979] 1 Lloyd’s Rep. 212, it was held that an obstruction that merely caused delay did not render a port unsafe unless the delay was sufficient to frustrate the commercial venture. If the effect of COVID-19 on the performance required is such that it transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract, the charterparty may in those circumstances be frustrated. As a general statement, frustration is historically difficult to argue as a matter of English law.

The circumstances and measures taken by government will also be relevant. There are no known complete travel bans for the crew and shipping surveyors to board vessels. There are no known restrictions for the cargo operations in China or in other countries. In the circumstances, it seems that the potential for a party to rely on the doctrine of frustration to excuse performance would appear to be remote.

SHIPOWNERS’ OBLIGATIONS IN RESPECT TO HEALTH AND SAFETY OF CREW ON HONG KONG-FLAGGED VESSELS

Hong Kong Ship Registry is the 4th largest ship registry in the world. Seafarers employed by Hong Kong flagged vessels are subject to Seafarers Employments Agreements ("SEA") and Collective Bargaining Agreements ("CBA") (which are submitted to the Marine Department Crew Affairs Department). These expressly incorporate the Hong Kong Employees’ Compensation Ordinance (Cap. 282) (“ECO”) and the international Maritime Labour Convention 2006 ("MLC"). Under the ECO and case law in Hong Kong, regardless of the nationalities of the seafarers and any arbitration clause in the individual employment contract the particular seafarer might have signed, the Hong Kong Court will still assume jurisdiction to hear a matter and the compensatory regime under ECO applies. Apart from the protections under the ECO, seafarers are also entitled to the benefits pursuant to the applicable articles under the MLC.

Amongst others, an immediate issue shipowners may face relates to crew changes. Whilst some shipowners may consider a complete suspension of crew changes to substantially reduce the risks of the spread of COVID-19, these are steps which may attract legal attention. Such steps may contravene the MLC, CBA and SEA which provide that the service period for seafarers onboard vessels shall not exceed 12 months in total.

To start with, the Standard A2.5.2 (b) of MLC on Repatriation provides that:-

2. Each Member shall ensure that there are appropriate provisions in its laws and regulations or other measures or in collective bargaining agreements, prescribing:

(b) the maximum duration of service periods on board following which a seafarer is

entitled to repatriation – such periods to be less than 12 months

With reference to the MLC requirements, the standard Hong Kong CBA contains a clause on duration of employment as follows:-

“A seafarer shall be engaged for a period mutually agreed between the seafarer and the Company and must be clearly identified on the Seafarers' Employment Agreement unless the Company operates a permanent employment system. Such service periods on board the ship, which may be extended or reduced by 1 (one) month for operational convenience, shall not exceed 12 (twelve) months in total.”

In addition, the Hong Kong Marine Mercantile Office of Hong Kong Marine Department (“MMO”) published form HKENG 1(Agreement and Lists of Crew) which requires that amongst other terms, the Seafarers Employment Agreement should contain a clause which provides:

            “The period covered by this agreement shall not be longer than 12 months.”.

On 7 February 2020, MMO issued a notice titled "Extension of Crew Agreement Service Period for Seafarers Working On Board Hong Kong Registered Ships in response to the Outbreak of Novel Coronavirus". It indicates that an extension of a seafarer’s service period can be exercised pursuant to section 3A of the Merchant Shipping (Seafarers) (Repatriation) Regulation (Cap. 478Q) provided that such extension is agreed by the seafarer voluntarily in writing. Such extension should also be set out properly in crew agreement and submitted to Marine Department within 28 days after signing in accordance with requirements stipulated in section 6 of the Merchant Shipping (Seafarers) (Crew Agreements, Lists of Crew and Discharge of Seafarers) Regulation (Cap. 478L). This arrangement is on a voluntarily basis and invites the question as to what shipowners and/or ship managers should do in circumstance where the seafarers refuse to such extension.

It appears that a seafarer is fully entitled to reject an extension of service period and shipowners and/or ship managers should not and shall not compel the seafarer to agree with the extension arrangement. Therefore, shipowners should make sure that all the applicable Hong Kong rules and regulations (including but not limited to the minimum manning requirement prescribed in Merchant Shipping (Seafarers) (Certification of Officers) Regulation (Cap. 478J)) as well as international conventions (for example the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers) are complied with at all times.

As a matter of law, as soon as the duration of the service period prescribed expires and the seafarer does not agree to extend the service period, the employment with that seafarer ceased and a replacement has to be put in place to maintain the minimum manning requirement. At the same time, the shipowners and/or ship managers are legally obliged to arrange repatriation of the seafarer. This would no doubt create tremendous practical difficulties for shipowners and/or ship managers if the ports do not allow crew change.

In order to tackle these issues, shipowners and/or ship managers should maintain regular and transparent communication with seafarers while at the same time consider all possible means to check the nearest available port which allow crew change to ensure that the minimum manning requirement is fully complied. Repatriation should be arranged as soon as practicable subject to quarantine rules and regulations of local port.

Extra-precautions should be exercised with crew changes, notwithstanding COVID-19 not being categorized as an occupational disease under ECO. It is arguable that should a seafarer contract COVID-19, he or she may have the right to recover compensation under the ECO with respect to a disease that is not a prescribed occupational disease if the disease is a personal injury by accident arising out of and in the course of employment. Hence, depending on the circumstances, it remains possible for a seafarer who has contracted COVID-19 arising out of and in the course of employment to be covered by the ECO.

Needless to say, apart from the physical health and well-being of the seafarers (further discussed below), the shipowners and/or ship managers should be mindful of the mental and psychological health of the seafarers, especially for those who consent to extend the service period during this COVID-19 outbreak to minimize the claim exposure under ECO.

To ensure the well-being of seafarers during this crisis, the International Trade Federation (ITF) has issued recommendations following the WHO advice and, in respect of seafarers, referenced the guidelines issued by the International Health Maritime Association. The International Health Maritime Association has made specific recommendations to the maritime industry, seafarers and dock workers, including non-restriction on embarkation of seafarers in non-affected areas, non-restriction on ship visits by port agents, chaplains, service personnel and others, recommendations on food hygiene and personal hygiene, provision of influenza vaccination, hand sanitizer and facial protection for crew members, and arrangements for handling sick crew members. 

Furthermore, most charterparties contain a warranty that the shipowner shall maintain throughout the charter period a full and efficient complement of master, officers and crew. If the Master or other crew members were to become incapacitated due to COVID-19, and relief crew are not available, there is a risk of breach of the charterparty if the efficiency of the seafarers is in issue.

CONCLUSION

COVID-19 is having, and has the potential to further impact on the Chinese economy and those of its trading partners.  As the majority of international trade by value and volume is carried at sea by ships, the virus outbreak not only risks effecting shore based activity, but maritime commercial activity as well.  It is therefore recommended that shipping advisors and maritime lawyers work closely with shipowners, charterers and other stakeholders in the shipping industry to deal with potential legal issues and disputes arising from the wide effect of COVID-19.

REMARKS

This article is largely based on the Reed Smith Clients Alerts contributed by the authors:

The authors would like to take this opportunity to thank their colleagues for their contribution and assistance, in particular, Min Li, Cheryl Yu, Donald Sham, Leah Lei, Angus Yu, Cindy Ha, Susanna Chiu and Caleb Li.

Partner, Reed Smith Richards Butler

Lianjun Li (M.Sc., LLM, FCIArb) qualified as a solicitor in Hong Kong, England and Wales in 2002 and is a partner and head of Commercial and Shipping Litigation Practice of Reed Smith Richards Butler Hong Kong. He is a fellow of the Chartered Institute of Arbitrators, a panel arbitrator of the Law Society of Hong Kong and some well-known arbitration institutions including the Hong Kong International Arbitration Centre, China International Economic Arbitration Commission and China Maritime Arbitration Commission, Singapore Chamber of Maritime Arbitration and Singapore International Arbitration Centre. He also serves as a member of the Hong Kong Maritime and Port Board, LMAA Supporting Members Liaison Committee (Asia Pacific) and the Transport and Logistics Committee of the Law Society of Hong Kong. He has extensive experience in dealing with dispute resolutions relating to international trade, shipping, documentary credits, cargo claims, insurance, investment and commerce and legal aspects of doing business, negotiation and litigation in China. He has been recognized by Chambers, Legal 500, Who’s Who Legal, Acritas Stars, China Business Law Journal and other leading legal rating firms as a leading individual for many years. He has been regularly engaged by many Chinese private or state-owned enterprises and World 500 Fortune companies in shipping/commercial disputes resolutions and advising on commercial transactions.

Partner, Reed Smith Richards Butler

Sally-Ann Underhill qualified as a solicitor in England and Wales and is a partner of Reed Smith LLP’s London office. She has been in the shipping industry for over 25 years and has extensive experience in shipping and aviation litigations. She is recommended as a lawyer in Legal 500 UK 2019. 

Partner, Reed Smith Richards Butler

Peter Glover is qualified as a solicitor in Hong Kong, England and Wales and Queensland and is a partner of Reed Smith Richards Butler. He has considerable experience in high value and complex shipping, international trade and commercial disputes involving court, arbitration and mediation proceedings. Prior to qualifying as a lawyer, he served for 11 years at sea on tanker. 

Of counsel, Reed Smith Richards Butler

Janice Dao qualified as a solicitor in Hong Kong and is a counsel of Reed Smith Richards Butler. She has wide range experience in arbitrations and advising owners, charterers and P&I clubs on various issues like charterparty disputes, bills of lading, ship arrests and crew claims.