‘Don’t be that guy’ by ordering Gulf danger voyages, charterers warned
CHARTERERS probably do have the legal right to insist that owners undertake dangerous voyages in the Middle East Gulf right now but should think twice before doing so, a legal expert has warned.
While oil majors and trading houses likely can insist on contractual performance, they risk both reputational damage and subsequently legal action from underwriters for exerting undue commercial pressure in the event of a major loss, said Watson Farley & Williams partner Sumeet Malhotra.
Shipowners should refuse orders if they genuinely feel ships and seafarers’ lives are on the line. But they should not use this as an excuse to duck now-unprofitable fixtures, and the verdict on whether their stance is justified will only be delivered by the courts at some point in the future.
Singapore-based Malhotra leads the prominent law firm’s offering on commodities and international trade disputes and frequently advises big name traders.
He has been paying close attention to the situation in the Middle East since the US and Israel launched their large-scale military offensive on Iran late last month.
“Don’t issue orders that imperil life and limb,” he entreated. “If you are a commodity trader with the ability to force an owner to carry out a transit, don’t do that. Do you want to be that guy when a ship gets blown up and bodies are washing ashore?
“I’m saying to owners, speak to your charterers. But if you are asked to imperil your asset and the lives of your crew, then by all means go ahead and disobey a legitimate voyage order.”
Even the most hard-hearted charterers should be aware that marine underwriters may be able to bring legal action against them in the event of a big claim, alleging that undue commercial pressure or economic duress was exerted on a shipowner.
Bulk trade hub
The Middle East Gulf is famously central to the world oil market. What is less widely recognised is that it is also pivotal in the bulk trades.
It is a key exporter of bauxite and phosphates, and buys in foodstuffs such as grains, which cannot easily be grown locally on account of the arid climate.
But thanks to the hostilities, traders are finding it difficult to get cargoes in or out. Even where they can do so, they are paying a big premium because a build-up of tonnage waiting for instruction, which is restricting supply. But the high rates could tank overnight if peace is declared.
The stakes are high. Traders who get these bets right stand to make big bucks, while those who don’t will take equally substantial hits.
Multiple shipping companies have terminated voyages through the Strait of Hormuz and the Red Sea in the wake of the hostilities, including Mediterranean Shipping Company, Maersk, CMA CGM and Hapag-Lloyd.
MSC has declared “end of voyage status”, a move that facilitates carriers cancellation of voyages before reaching the agreed port of discharge, usually for reasons of regional instability.
While not an established legal doctrine, the action allows them to discharge at alternative ports, shifting liability, risks and onward costs to cargo interests.
Additionally, many Middle East energy and commodities players have declared force majeure. These include QatarEnergy, Bapco Energies, Kuwait Petroleum Corporation, Chevron (Israel), Aluminium Bahrain and Fujairah Bunkering Hub.
Force majeure provisions can — but do not have to be — included in contracts, excusing a party from performing its obligations in the case of an extraordinary, unforeseeable event beyond its control.
The doctrine is not recognised in English law, by which the vast majority shipping contracts are governed. But courts generally uphold force majeure clauses where both sides sign up to them.
That enables either side to suspend obligations or even pull out of a deal altogether if the duration of event is prolonged.
Malhotra confirmed that some clients had asked him whether they can declare force majeure, or conversely, whether their counterparties can do so.
“I’m explaining that in this time of uncertainty, you have to pay close attention to how your obligations are worded in your contracts,” he said.
“You then have to decide, in light of the present circumstances, whether performance is prevented or hindered.”
However, the question of whether a contract that was previously in the money would now be loss-making is irrelevant in the eyes of the law.
“The law doesn’t care about commercial exigency. Just because a contract becomes more expensive to perform doesn’t mean you can walk away from that contract,” Malhotra contended.
Force majeure facts
Another caveat is that counterparties have to be informed of the invocation of force majeure within three days of the commencement of the force majeure event.
Eleven days after the start of the US/Israeli bombardments, those that have not already done so may have missed the operative window.
“You can’t simply say, there’s a war, I can’t perform, force majeure, thank you very much. It doesn’t work that way. Make haste is one piece of advice I’ve given clients.”
Traders will have much else on their plates right now and are not well positioned to collect the detailed evidence needed to support invocation.
That said, given the seriousness of the unfolding situation, a commercially mind judge may have sympathy with an alternative claim brought under the English law doctrine of frustration, which is essentially a plea of impossibility.
The right of owners to refuse orders depends on contractual wording. The snag here is that test is subjective, making interpretation perennial subject matter for court cases.
The 2013 wording of Conwartime, commonly used in time charters, sets the threshold at war or a wide range of hostile acts which “in the reasonable judgement of the master and/or the owners, may be dangerous or may become dangerous to the vessel, cargo, crew or other persons on board”.
War risk clauses in tanker charters, such as Shelltime and Shellvoy, are more restrictive, and may not apply except in the case of formally declared hostilities. Neither the US nor Israel has formally declared war on Iran.
Malhotra said that common sense judgement suggests the relevant criteria are currently met. But whether tribunals or courts would uphold the point remains anybody’s guess.
“It won’t be the owner or the master doing the assessment six months from now. It will be clever barristers cross-examining witnesses and talented barristers can turn facts around.”
Finally, Malhotra also pointed out that physical closure of a shipping lane does not equate to the legal closure of a shipping lane, which is the probably the reality for practical purposes.
But the legal position effectively refuses to acknowledge the real world; the strait is an international waterway. It cannot be declared closed by Iran’s Islamic Revolutionary Guard Corps, nor for that matter declared open by Donald Trump.
“This will be an issue for arbitration in three- or four-months’ time if a [shipowner] alleges they could not bring a vessel in because of the closure of the Strait of Hormuz.
“I would say, can you show me an unequivocal declaration by any authority that is vested with jurisdiction that the Strait of Hormuz is closed?
“You would also have to produce reams and reams of corollary evidence, like underwriters saying they were not going to insure vessels.”
Despite widespread reports to the contrary from generally accurate broadcasters and business newspapers this has not actually happened. While it is true that premiums have risen sixfold, hitting 3% of hull value in some cases, this doesn’t get an owner off the hook.
Pretty much the same proviso applies to Washington’s advice not to undertake transits until it can arrange for naval protection. You still have to live up to your agreements, Malhotra argued.
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