COVID-19 – safe ports and international sale of goods
by Steffen Pedersen, Johan Wong and Ron Sim

The current outbreak of the novel coronavirus (Covid-19) said to have originated from Hubei province in China, has spread far and wide in recent weeks. Such a wide and almost unprecedented outbreak has raised serious health concerns globally and no doubt it has caused tremendous impact on shipping industry, international trade, and beyond.

In order to try to contain the outbreak, many countries have implemented various restrictions and procedures for vessels calling at their ports. For example in Singapore, the Maritime and Port Authority (MPA) has implemented temperature screening at all sea checkpoints, and has also required, among other measures, all arriving vessels that have been to any ports in mainland China, France, Germany, Iran, Italy, South Korea and Spain in the past 14 days, to submit the Maritime Declaration of Health form, Crew/Passenger list, Ship Sanitation Certificates, Last 10 Ports of Call list and list of all passengers and crew members with temperature above 37.5 degree Celsius, 12 hours before arrival at Singapore Port[1]. For now, ships can continue to berth at terminals in Singapore to carry out operations except for all cruise vessels which port calls had been ceased since 13 March 2020[2]. Depending on how severe the outbreak develops, more drastic measures such as enforced quarantine for ships or even partial port closure, cannot be ruled out.

In this article, the authors wish to highlight potential legal implications of Covid-19 in the contexts of charterparty and sale of goods contracts.

 

A. Safe port warranty under a charterparty

 

One of the most common questions facing vessel owners who charter out their vessels is whether they are obligated to follow vessel charterers’ instructions to proceed to a nominated port where there may be a risk of contracting Covid-19. Under English law, 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”^[3]. In the context of an outbreak of contagious disease such as Covid-19, the concept of a safe port may be said to cover the safety of crew members of vessels calling at the port.

Under a time charterparty’s express/implied safe port warranty, charterers will be obligated to order a vessel only to ports which are prospectively safe i.e. safe at the time when the vessel is estimated to reach there. An uncontrolled outbreak of contagious disease that poses severe health risks to those on board a vessel may arguably render a port unsafe. In practice, it is the authors’ view that strong and clear evidence of such uncontrolled outbreak at a particular port, lack of or insufficient preventive measures being taken by local port authority, and/or partial/ complete closure of a particular port due to an outbreak, would be necessary to render a port unsafe for the purposes of the safe port warranty. Short of this, it is likely that owners will be obligated to proceed to a nominated port as instructed.

A mere delay to a vessel’s arrival at berth due to say, ‘floating quarantine’ and/or other onerous preventive measures imposed by port authority, would be unlikely to render a port unsafe. In such scenarios, owners would generally be indemnified against any loss suffered or liability incurred as a direct consequence of complying with charterers’ order. Furthermore, it is arguable that a nominated port severely affected by Covid-19 (e.g. ports in the countries listed above) may be rendered unsafe in the event the outbreak reaches a stage where a vessel would be blacklisted or impounded or prevented to dock at a subsequent port merely by reason of having called at a previous port severely affected by the outbreak. If a nominated port is rendered unsafe, charterers will be under an obligation to re-nominate an alternative safe port.

Each case will depend on its particular facts and terms of a charterparty. It is suggested that owners and charterers alike should scrutinise charterparty clauses and if possible, consider incorporating protective clauses dealing with contagious disease into new charterparty fixtures. Such clauses generally provide for each party’s respective rights, obligations and remedies under the circumstances where the clauses are triggered, usually in the most severe cases of outbreak such as Covid-19 presently. Examples of these clauses are the BIMCO Infectious or Contagious Diseases Clause released in 2015 as a response to Ebola outbreak (since then incorporated into some standard form charterparties such as Clause 25 of the SUPPLYTIME 2017), and Clause 46 of the BIMCHEMVOY 2008 for tanker vessels.

 

B. Force Majeure and other relevant clauses under a sale of goods contract

 

The outbreak of Covid-19 has also impacted a large spectrum of sale of goods contracts. Other than the usual issue of force majeure discussed in our article on Ship Finance and Newbuilding, contractual parties may attempt to vary the terms (e.g. price) of contracts, to exclude/limit liability for breach or non-performance, or to terminate their contracts altogether, due to increase in costs or loss of demand for goods caused by Covid-19. Whether parties can do so will depend on the actual terms of the sale contracts.

If a sale contract contains a “price adjustment” clause, then parties may wish to vary the sale price of goods due to increase in costs of transportation caused by Covid-19. Such clause may take the form of, for example:

• Prices shall be adjusted as may be required to compensate for cost increases to the Supplier. Supplier shall provide Buyer with written notice of such price adjustments, which shall be reasonable, at least 14 days prior to the date any such price adjustment is to take effect.
• In the event the cost of transporting or shipping the goods increases significantly due to a major event or occurrence that is beyond the control of the Seller, then the Parties shall negotiate in good faith to adjust the sale price of the goods in a manner that is fair and reasonable.

 

Exclusion and limitation of liability clauses, if contained in a sale contract, are also useful when a contractual party is in breach of the sale contract partly/wholly due to the impact of Covid-19 but where a force majeure clause is not expressly provided for in the sale contract or not applicable under the circumstances. These liability clauses have the legal effect of either excluding (in total) liability of the party in breach or limiting its liability to a certain fixed amount, provided always the breach falls within the ambit of the clauses. The courts and tribunals are generally more ready to enforce a limitation clause as opposed to an exclusion clause, but each case will depend on the actual wording of the clauses and the factual circumstances.

Some standard form international sale of goods contracts contain a force majeure clause in the form of a “prevention of shipment” clause. For example, Clause 18 of the GAFTA Contract No. 88 (2018) provides for performance of the contract to be suspended if seller’s performance is prevented partially or otherwise by a force majeure event subject to specific notice requirements. If the force majeure event continues for “21 consecutive days after the end of the shipment period”, the buyer then has the option to cancel the unfulfilled part of the contract by serving a notice on the next business day after expiry of this 21 days’ period. If the buyer does not exercise the option, any unfulfilled part of the contract “shall be automatically cancelled” upon expiry of an additional period of 14 consecutive days. The burden of proof again lies upon the seller and the parties shall have no liability to each other for delay and/or non-fulfilment under this clause, provided that the seller has provided to the buyer (if required) satisfactory evidence justifying the delay or non-fulfilment.

Other than contractual clauses, governments may be taking proactive measures to declare Covid-19 as a force majeure event in appropriate circumstances and localities. For example, the China Council for the Promotion of International Trade (CCPIT) announced on 30 January 2020 that it would issue what is effectively “force majeure certificates” to assist affected businesses in minimising losses and/or avoiding liability arising from the Covid-19 outbreak in China. Such certificate might probably be effective and conclusive within Chinese jurisdiction and in respect of sale contracts governed by Chinese law.

However, if a sale of goods contract say between a Chinese seller and a foreign buyer is governed by English law and it contains a force majeure clause, the same requirements dealing with the clause would apply. In such a case, the CCPIT-issued force majeure certificate might well be treated as persuasive evidence for the Chinese seller in establishing the Covid-19 outbreak as a valid force majeure event under the contract. If the contract does not contain a force majeure clause, the certificate might be of no assistance to the Chinese seller. 

Concluding remarks

The outbreak of Covid-19 is both geographically and legally far-reaching. Preventive and containment measures are being implemented by the World Health Organisation (WHO) and individual governments around the world, and with rapid changes in keeping up with the developments. All prudent commercial entities likewise would do well to thoroughly analyse and consider the long and medium terms impact of Covid-19 on their businesses – both operationally and legally – as it seems to be a long battle ahead against Covid-19 globally.