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Ukraine/Russia crisis: potential implications for shipping contracts

News / / London

The background

Following recent developments in Ukraine, the international community has acted quickly in introducing sanctions against Russia, targeting a number of Russian entities and Russian individuals, including specified shipping companies and their vessels, as well as financial institutions. Key are the US, EU and UK sanctions against Russia. The scope of these sanctions is continuously evolving in response to the escalating situation and it is important for those who may be impacted to keep a close eye on daily developments. For more details on the specific sanctions in place, please see our sanctions updates from 2 March here, and 15 February here.

The international disapprobation of Russia’s actions (including but not limited to the sanctions that have been introduced) has resulted in the global shipping and marine insurance industry taking a step back from doing business with Russia for the present time, and perhaps indefinitely. Given that some Russian shipping companies and the ships they own have been specifically targeted by sanctions, as have a number of Russian financial institutions (who will be among those financing shipping and trade transactions), the shipping sector has to tread warily in deciding who it can and cannot deal with. Further, there have been indications that some banks have ceased to issue letters of credit to cover the trading of Russian crude oil irrespective of destination even where the relevant trading is not prohibited. P & I Clubs have also reportedly been concerned about whether banks will be able to process claims even if P & I cover (of Russian owners and operators and related entities) is considered valid. Additional war risk premiums have also affected the market and industry press has suggested that some owners operating in the Black Sea have found it difficult to obtain cover for inflated war risk premiums.

There is understandably reluctance to fall foul of sanctions where they clearly apply. However, there is also a lack of clarity in some cases over whether a particular trade or transaction is covered by sanctions. The shipping industry is, therefore, acting out of an abundance of caution, particularly as the situation is constantly changing. Obviously too, many will be unwilling to be do business with a regime responsible for and/or individuals/entities directly or indirectly linked to Russian actions in Ukraine irrespective of the risk of breaching sanctions.

Further, on 28 February 2022, the UK Ministry of Transport indicated that Russian vessels would no longer be allowed into UK ports. This prohibition came into force on 1 March 2022 and includes not only vessels flying the Russian flag or registered in Russia but also those owned, controlled or operated by any person connected with Russia or by Designated Persons (i.e. persons on the Sanctions List). This is effectively a blacklisting of Russian vessels and it may be that other countries will adopt similar measures.

The type of contractual and operational issues that the international shipping industry is now facing as a result of the situation in Ukraine and the resulting sanctions regimes have previously arisen in past conflict situations, including Russia’s annexation of Crimea in 2014, the potential closure of the Straits of Hormuz in 2012 and then again in 2019, as well as the sanctioning of different Libyan regimes over the years. Nonetheless, no two geopolitical events are the same and those who may have entered into, or are contemplating entering into, charterparties or other shipping or sales contracts that may be affected by the crisis are advised to carefully monitor the situation and also to consider carefully their existing or future contractual relationships. Among other things, the following contractual issues may arise.

Unsafe ports

As at the time of writing, Ukrainian ports remained closed. Reportedly, however, most Russian ports in the Black Sea remained open. Some other ports in the area also continue to operate. This situation may change and developments in this regard should be monitored closely. Therefore, it is important to check the specific wording of any express safe port warranty in a charterparty. If there is no express warranty, there may be an implied one. Some safe port warranties only require the charterer to exercise due diligence – for example, the Shelltime form. Otherwise, the owner may benefit from an absolute warranty.

Whether a port is safe or unsafe potentially encompasses consideration not only of physical risks but also political risks, as well as the risk of being detained or blacklisted (as a result of sanctions).

Voyage orders

The trading limits specified in the charterparty should be checked to determine any trading exclusions and allow the owner to decide whether it can refuse orders to call at any particular port.

A charterer is obliged to give alternative voyage orders if a nominated port is unsafe or subsequently becomes unsafe. However, much will depend on the charterparty provisions, specifically the war risks clauses which are discussed in more detail below. Generally speaking, however, both the unfolding events in Ukraine and the level of risk involved (high or otherwise) will be relevant in deciding whether new employment orders must be given.

The position may also differ between time and voyage charterparties. Under a voyage charterparty, a port is usually named and an owner will be deemed to have accepted the risks associated with that port at the time of concluding the charterparty.

Where the master reasonably believes that obeying the charterers’ orders will potentially endanger the vessel, her crew or cargo, he is entitled or even obliged to refuse to comply with the charterer’s employment orders. Again, however, the level of risk will be key in deciding whether the master’s conduct was reasonable.

Pursuant to Clause 8 of the NYPE charterparty, an owner is entitled to an implied indemnity for the consequences of following charterers’ employment orders. If, however, the charterparty contains an additional war risk premium payment provision which anticipates the owner accepting orders to transit a war risk area (and provided the additional premium is paid by the charterers) then the implied indemnity may not operate as the owner may be taken to have already agreed to bear the risk under the terms of the charterparty.

Frustration/force majeure

The relevant contract - whether voyage charterparty, contract of affreightment or sales contract – may expressly incorporate a force majeure clause. In those cases, the parties should review the wording of the provision carefully to establish whether it is engaged in their particular situation. Depending on what the clause says, one or both parties may be   entitled to suspend performance or even terminate the contract.

As to whether the charterparty or other contract has been frustrated, under English law frustration arguments are often unsuccessful because commercial contracts are generally considered to have allocated the relevant risks between the parties. Broadly speaking, however, it may be more straightforward to plead frustration of contract in the case of a voyage charterparty than a time charterparty because the former is of generally shorter duration so any delay in performance will usually be considered more significant.

It is also possible for sanctions to render a contract frustrated, for example if it becomes illegal to deal with the counterparty. The charterparty or other contract should, however, be checked for any sanctions clauses. We deal with the BIMCO sanctions clauses below.

BIMCO Sanctions Clauses

BIMCO has a range of sanctions clauses: Sanctions Clause for Time Charterparties 2020; Sanctions Clause for Voyage Charterparties 2020; BIMCO Sanctions Clause for Container Vessel Time Charterparties 2021; and BIMCO GENCOA Sanctions Clause for Contracts of Affreightment 2022. The clauses are intended to allocate sanctions risks as between the contracting parties.

In broad terms, the clauses give an innocent party the right to terminate the charterparty and claim damages in circumstances where their counterparty (or the third parties they are responsible for under the clause) are listed by a sanctioning authority or government and become subject to sanctions restrictions. Furthermore, in circumstances where the trade or activity itself is or becomes subject to sanctions restrictions, the owner has the right to refuse to proceed with the employment. The Time Charterparties clause allows an owner to refuse the charterers’ orders if it reasonably suspects that these may expose it to sanctions. The owner can then request alternative employment orders and if these are not forthcoming, the owner can discharge the cargo at an alternative port at the charterers’ time and expense.

The standard form clauses may be amended to deal with specific sanctions risks relevant to the parties concerned.

Deviation

The terms of the contract of carriage will dictate whether a vessel is at liberty to deviate to discharge at an alternative port. Where there is an express deviation provision in the charterparty, the owner should nonetheless be alert to the terms of the related bills of lading. The bills may incorporate the charterparty provisions or may provide for discharge at a port other than the one named in the bills. Absent such provisions, delivery to an alternative port may constitute a breach of the bill of lading contracts.

Irrespective of any express provision, an owner, through the master, has an implied right to deviate to avoid danger to the vessel, cargo and crew.

Parties to subsisting charterparties may wish to vary their charters in any event to allow for discharge outside of the Ukraine area.

Delay (off-hire or demurrage)

Delays resulting from the Ukraine situation may result in claims for off-hire under time charterparties or demurrage/detention under voyage charterparties. Whether such claims are well-founded will depend on the relevant off-hire/laytime and demurrage provisions in the relevant charterparty. Further, some charterparties may incorporate bespoke clauses dealing with specific geopolitical events and delays.

War risks

Any relevant charterparty should be reviewed to see if it incorporates a war risk clause that deals with the outbreak of war or warlike situations. Such clauses generally specify that the contract may be cancelled or terminated in the event of war/hostilities/warlike operations breaking out, either between a number of specified nations or involving the flag state. If a vessel is being ordered to proceed to a war risk area, some charterparties will provide that the owner has the right to refuse the order, although it cannot refuse orders if it would be unreasonable to do so. Other charterparties will not permit an owner to refuse orders if war risk insurance is available.

In broad terms, for a war risk clause to be relied on, it is generally not necessary for war to be formally declared and whether a state of war exists for the purposes of a particular clause will be a question of fact. Furthermore, while some war risks clauses will operate to exclude the charterers’ safe port warranty, others will not. In addition, unless the off-hire clause in a time charterparty expressly provides otherwise, hire may continue to run during any periods of delay associated with war risks.

Under the standard COMWARTIME 2013 clause, a vessel is not obliged to proceed to any port or area where any such war risks exist that in the reasonable judgment of the Master and/or the owner may be dangerous or are likely to become dangerous to the vessel, her cargo, crew or other persons on board the vessel. In assessing whether a risk is dangerous for these purposes, the Master and the owner must take into account both quantitative factors (i.e. the degree of likelihood that a particular peril may occur) and qualitative factors (the seriousness of the consequences of that given peril to the vessel and her crew). The latter requirement will only be satisfied if the threatened harm is of a serious or important type. The VOYWAR 2013 is a similar provision. The definition of war risks under these provisions is broad and it may be considered that it covers the current situation in Ukraine. However, other war risks clauses may be more restrictive, for example those in tanker charterparties. Among others, the Shelltime form, ShellLNGTime contain their own version of a war risks clause and such clauses should be reviewed carefully before any steps are taken.

The BIMCO War Cancellation Clause 2004 gives the parties the option of cancelling the contract altogether if war breaks out between two or more stated countries. A formal declaration of war is not required to invoke the clause.

War risks insurance

Absent a provision to the contrary, the responsibility and costs associated with insuring the vessel against war risks will usually fall on the owner. The VOYWAR 2004 and VOYWAR 2013 provide that the owner can insure the vessel against war risks but will be responsible for any additional premium and insurance. However, the CONWARTIME 2013 requires the charterers to reimburse the owner for any additional premium and insurance where they order the vessel to go to or through a war risk area and the owner reasonably requires additional war risk cover. Without more, the fact that it has become much more expensive to insure against war risks will not entitle the owner to terminate the charterparty.

Blocking and trapping insurance is a form of war risk insurance and gives an owner the right to compensation where its vessel is prevented from leaving port as a result of war risks extending over a considerable period of time, usually over 12 months. It is aimed both at physical hindrances (for example, where a vessel is trapped because the way out of the port has been blocked) but will also usually cover a foreign state power detaining the vessel in port. Once a vessel has been detained for the relevant period, the assured is deemed to have been deprived of the vessel’s use without any likelihood of recovery for the purposes of ascertaining whether she is a constructive total loss.

On 15 February 2022, the Joint War Committee amended their “Hull, War, Piracy, Terrorism and Related Perils Listed Areas” to include Ukrainian and Russian waters in the Black Sea and Sea of Azov. Owners should, therefore contact their war risks insurers before calling at any port mentioned.

Negotiating future contracts

Owners and charterers seeking to enter new fixtures should keep uptodate with the political and other relevant developments. A risk assessment should be carried out and applicable sanctions checked.

More specifically, they may wish to consider whether any of the following steps are appropriate in their particular case:

  • In the case of a charterparty chain, using back to back clauses to ensure that rights and obligations are consistent
  • Including an express safe port warranty
  • Incorporating sanctions clauses, either standard form or bespoke
  • Reviewing trading limits and excluding key risk areas
  • Incorporating appropriate war risks clauses
  • Addressing liability for any increase in war risk insurance premium
  • Including a force majeure clause
  • Reviewing off-hire/laytime and demurrage provisions
  • Due diligence on proposed counterparty (are they a sanctioned entity?)
  • Practicalities of making payment and/or receiving funds
In the event of any concerns, it is recommended to take legal advice. 
Jamila Khan

Jamila Khan Partner and Head of Office, Piraeus

Reema Shour

Reema Shour Professional Support Lawyer

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