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Novel Coronavirus (2019-nCoV): Legal issues and Impact on International Trade & Transportation

04.02.2020

Wai Yue Loh

Wai Yue Loh Head of China Practice in Singapore, Chief Representative of Beijing Office

Kimarie Cheang

Kimarie Cheang Of Counsel

Cindy Wang

Cindy Wang Associate

The novel coronavirus was first reported in late December 2019. The outbreak of the virus originated from the inland city of Wuhan, the capital of the Hubei province, PRC, but has quickly spread to coastal cities within China such as Shanghai, Guangzhou, Shenzhen and Tianjin, among others. Additional cases are also being identified daily in an increasing number of other countries.

On 30 January 2020, the World Health Organisation (WHO) declared the outbreak as a Public Health Emergency of International Concern (PHEIC) and has proposed certain Temporary Recommendations to reduce exposure to and transmission of the virus.

We highlight below some potential contractual issues for international shipping and trade.

Safety of the port – Can an Owner refuse to go to an affected port?

Generally, under a time charter, an owner is obliged to comply with a charterer’s legitimate employment orders, unless compliance with the charterer’s order exposes the ship to a safety risk. It is currently unclear whether the virus is at a stage where it may render a port ‘unsafe’ according to the legal definition. The position will have to be assessed on a case-by-case basis. Furthermore, although the WHO has declared the outbreak as a PHEIC, it has at the same time recommended that no travel or trade restriction be imposed. However some countries are already implementing a ‘No travel’ policy to China.  Some international ports have also imposed additional checks and quarantine measures on vessels arriving from China, or those with Chinese crew on board. 

As highlighted above, determining the ‘unsafety’ of an affected port may prove difficult and will depend on the facts, bearing in mind the evolving situation. If an owner refuses to follow a charterer’s order without sufficient grounds, the charterer may in principle be entitled to claim damages and potentially even to terminate the contract if the owner’s conduct can be said to be repudiatory or renunciatory. An owner should, therefore, carefully review its contractual position and take legal advice as necessary. On the other hand, where an owner does follow a charterer’s order(s) and suffers loss as a result, it may potentially be entitled to an indemnity from the charterer, although this would depend on the precise terms of the contract, including the state of knowledge concerning the virus at the relevant time.

Quarantine, off-hire, laytime and demurrage – What happens if a crew member becomes infected?

Under a time charter, an owner will generally be responsible for matters relating to the crew.  If a crew member becomes infected, the owner should follow their normal procedures in relation to arranging for the crew member to be quarantined and for the treatment and repatriation of the crew member as necessary. Where the illness results from following a charterer’s order then, as mentioned above, the owner may be able to claim any costs of repatriation, medical expenses, etc., from the charterer but this will depend on the terms of the charter and the allocation of risk that they provide for. 

With regard to the position under a voyage charter, the position is expected to be similar to that in relation to deviation for the purpose of saving life. One issue to bear in mind, however, is where the ship arrives in port and the symptoms of the virus are discovered on board at that time or before arrival at the port and/or quarantine restrictions are in place affecting whether the ship will be able to obtain free pratique. This may affect whether valid notice of readiness can be tendered if it prevents loading or discharging as the case may be. Laytime will not start to run until such time as a valid NOR can be tendered and an owner will bear the risk of such delay. The quarantine of crew will also usually be an exception to laytime running.

A further issue arises whether, where a vessel has to deviate to obtain medical assistance for its affected crew member, the charterer would be entitled to place the ship off-hire.  This will depend on the relevant circumstances. If the crew member becomes infected as a result of a charterer’s order, then the deviation may not give rise to off-hire, but this is highly fact-sensitive as it is possible that the owner will be deemed to have accepted the risks of going to an affected port.  The off-hire provisions in the contract should be reviewed carefully in such a case to ascertain the position.

Overall, the legal regime is dependent on the applicable charter terms and it would be prudent for all new fixtures to incorporate the BIMCO Infectious or Contagious Diseases Clause for Voyage and Time Charterparties.  The clause was developed following the outbreak of the Ebola virus a few years ago, and is intended for use in response to extreme illness, as opposed to more commonly encountered widespread diseases. It is based on the long-established BIMCO war and piracy clauses.

Force Majeure – Can an affected party rely on FM?

Given the recent declaration by the WHO, FM provisions are likely to be increasingly relied upon and invoked by an affected party.  The China Council for the Promotion of International Trade (CCPIT) announced that it would be offering “force majeure certificates” to businesses in China affected by the outbreak of the coronavirus in Wuhan.  

Whether a party can successfully invoke FM and/or rely on the CCPIT certificates to do so, will depend on the governing law of the contract and the terms of the relevant clause.

As a matter of English law, FM is a creature of contract.  Generally, a party who seeks to rely on a FM clause bears the burden of demonstrating the following:

  1. It could not perform its obligations due to the relevant event.
  2. The inability to perform was beyond its control.
  3. There were no reasonable steps the party could have taken to avoid the event or its consequences.

Where the outbreak escalates and has real implications on the operation of businesses (such as the shutting down of business operations as a direct result of the outbreak), this could potentially fall within the scope of a FM clause. Parties to potentially affected contracts should review their FM provisions carefully to ensure that they fall fully within the wording of the FM clause in order to obtain its protection and that any notification and/or mitigation requirements are complied with. Such a party must also gather as much documentary evidence as possible to evidence any relevant FM event. 

Recommendations

There is potentially a significant degree of business interruption that could ensue from the coronavirus, bearing in mind, for example, that: Singapore has now closed its borders to all who have been in China for the last 14 days: British Airways has suspended direct flights to and from mainland China; and Hong Kong plans to limit cross-border travel between the city and mainland China. These decisions will all potentially significantly impact on businesses, in particular those with staff and management who may have been in China over the festive period.  We are already starting to see declarations of FM from Chinese entities involved in international shipping and trade.

We strongly recommend that existing contracts should be reviewed to identify any potential risks and exposures arising from the developing situation. Any new contracts entered into should incorporate express and clearly drafted provisions to allocate potential risks as appropriate between the parties concerned. When in doubt, please take legal advice.

This above is not a complete list of issues to be aware of arising from the Coronavirus, and should you have any queries, please do not hesitate to contact the authors of this article or your usual contact at Ince.

Article authors:

Wai Yue Loh Kimarie Cheang Cindy Wang