Tension in the Gulf: The contractual implications

Tension in the Gulf: The contractual implications

Overview

The recent seizures of an Iraqi oil tanker and a UK flagged ship by Iranian authorities have further increased tensions in the Gulf following earlier attacks on tankers in Fujairah and the Gulf of Oman. But what are the contractual implications for ships operating in the area?

This short guide highlights some of the key issues that may affect the obligations and rights of contracting parties, with a focus on BIMCO clauses. In all circumstances, the parties should carefully review their contractual terms for current and future fixtures and, if in any doubt, seek legal advice before acting.

Most time charter parties contain a so-called War Risks clause. Some of these clauses were written many years ago and do not necessarily reflect the nature of modern conflict. It is very important that you take a close look at what your War Risks clause says and understand what the wording may or may not entitle you to do.

BIMCO recommends using the latest editions of its War Risks clauses – CONWARTIME 2013 for time charter and VOYWAR 2013 for voyage charters. The clauses contain a very broad definition of “War Risks” that include warlike operations that do not require a declaration of war by states and also acts of hostility and malicious damage. The clauses also consider War Risks that may pre-date the charter party, which means that an escalation of risk is not required to invoke the clause.

1. Can owners refuse to transit the Strait of Hormuz?

BIMCO’s CONWARTIME 2013 and VOYWAR 2013 clauses give the owner the right to refuse an order by charterers to proceed to, or continue to proceed to or through an area which in the reasonable judgement of the master/owner will expose the ship, crew and cargo to “War Risks”.  The definition of “War Risks” is broad. Nevertheless, the current situation does not fall within the meaning of “war” where two governments have to be involved. To come within the definition of “hostilities”, the current events need to be acts on behalf of a sovereign power - which remains unclear. The definition of “War Risks” further includes “acts of malicious damage” and the recent attacks on the tankers would fall within this definition.

The threshold test to invoke the clause is to assess the risk and level of danger to the ship, which must be a tangible danger. No complex analysis of the degree of risk and whether it is likely to occur is required. Whether or not a situation is dangerous depends on the nature, severity, extent and prevalence of the danger for the individual ship.

Up until now, only tankers have been targeted in the area. Most recently, the risk to British flagged ships has increased following the seizure in the Strait of Hormuz of the Stena Impero. But the total number of ships involved is very low compared to the overall volume of seaborne transport through the area. So, type of ship, numbers of ships at risk and flag are all key factors in assessing the “risk” under BIMCO’s War Risks clauses. But the situation remains volatile and owners need to keep the level of risk to their ships under constant review. 

BIMCO recommends using the 2013 editions of its War Risks clauses. Earlier editions of these clauses, such as the 2004 versions, apply a test to the validity of charterers’ order of “real likelihood” that the ship will be exposed to danger.

While the risk to a ship based on readily available information allows a diligent owner to make a reasonable judgment, assessing and concluding that an attack is a “real likelihood” is more complex. 
The 2013 clauses take a more objective and straightforward approach to assessing the risk to the ship, crew and cargo and should be used in preference to earlier editions. If your charter party already contains an earlier than 2013 edition of VOYWAR or CONWARTIME, care should be taken to ensure that the test has been properly met based on facts and not speculation before rejecting a voyage order.

2. Are owners obliged under the BIMCO War Risk clauses 2013 to transit the Strait of Hormuz, even if the level of risk has not increased since the date of the charter party?

No, owners can reject charterers’ orders to transit even though there is no material increase in the war risk since the date of the charter party. The 2013 clauses contain the words “whether such risk existed at the time of entering into this Charter Party or occurred thereafter”. This is an important addition often missing from other War Risks clauses and you should check your charter party in this respect before contemplating a rejection of orders. Similarly, some time charter may be agreed based on a restricted trading area basis (as opposed to “worldwide trading”). 

It could be argued that owners agreeing to such a restricted trading area have a greater opportunity to evaluate the risk to their ship when calling at ports within that area during the charter period – and have therefore accepted any existing risks.

3. Can owners ask for alternative orders?

This is a matter of contract. The BIMCO War Risks clauses give the owners the right to request the charterers to nominate an alternative safe port within the loading and discharging range. But again, this request should only be made if the level of risk in the intended area/port is such to pose a real danger to the ship. In the present situation in the Gulf, the number of attacks has so far been relatively low, and it might be difficult to argue persuasively that any port in the area has become unsafe as a result.

4. What happens if Iran closes the Strait of Hormuz?

The Iranian government has threatened to “close” or “blockade” the Strait of Hormuz to prevent ships entering or leaving. The contractual implications of such an event depend on the terms of the charter party; if a ship was trapped in the Gulf for a protracted period, it might constitute a force majeure event if the charter party contains a force majeure clause.

It is unlikely that a blockade would give owners the right to terminate the charter party on the basis of contractual frustration. The doctrine of frustration would most likely not apply due to the following reasons:

  • In the context of wars, hostilities or threats, the presence of war clauses might prevent owners from arguing frustration.
  • Even a significant increase in cost for performance is unlikely to frustrate a contract. A charter party could be frustrated depending on the duration of charter period and the interruption of the service. In the Sea Angel however, where a vessel was detained for 180 days with an initial charter period of 20 days, the contract was not frustrated as the event was foreseeable. 

5. Who pays the increase in War Risk premiums under a voyage charter and time charter party? 

This is a matter of contract. BIMCO’s VOYWAR 2013 and VOYWAR 2004 state that the owners can insure the ships against War Risk perils, and any additional insurance related thereto and have to pay the premiums for those.

However, in case the ship is ordered by charterers to proceed through a War Risk area, the charterers must reimburse owners for the additional premiums paid. Under CONWARTIME 2013, the charterers must reimburse the owners for any additional premium and insurances that the owners reasonably require related to War Risk and which is beyond owners’ normal war risk insurance cover. 

The reference in the clause to additional insurances is related to scenarios where CONWARTIME 2013 is used for piracy risks and will then include War Loss of Hire and/or Kidnap and Ransom cover. CONWARTIME 2004 provides for reimbursement by charterers for actual premium and calls for additional premiums only when the war risk underwriters require additional premiums for the vessel transiting the High-Risk Area. We recommend that CONWARTIME 2004 is replaced with CONWARTIME 2013.

6. Can Owners cancel a voyage because of a significant increase in War Risk premiums?

A significant increase in costs rendering the performance of a contract unprofitable does not ordinarily give owners the right to terminate the charter party. The fact that performing a contract more onerous or expensive is not sufficient to bring about a frustration of the contract. The performance of a contract must be unjust to frustrate a contract.

7. What happens if the ship is damaged during the transit?

Again, this is a question of contract and the individual provision of the charter party. The BIMCO war risk clauses do not address a damage claim.

Owners might argue that the damage resulted from charterers breach of the safe port warranty. This is because the approach to the port must be safe in order for the port to be safe. For ports which can only be accessed via the Strait of Hormuz, it is likely that the Strait can be considered part of the approach to the port. However, under the given circumstances, a port would only be considered unsafe where the attacks were a normal characteristic of the port.

While there seems to be a significant risk of attacks on British ships and oil tankers, this risk is not a normal characteristic of the ports in the area. Therefore, it would probably be quite difficult for owners to bring a damage claim under the safe port warranty.

The damage would most likely be covered by the ship’s war risk insurance or H&M.

8. Can owners reject voyage orders claiming unsafe port?

The nature and extent of recent attacks and the seizure of the UK flagged ship are highly unlikely to give other owners sufficient grounds to argue that ports which require a transit of the Strait of Hormuz are unsafe and reject charterer’s voyage orders for calling these ports (see question 3).

9. Can an owner terminate a charter party due to the current situation?

BIMCO’s VOYWAR 2013 war risk clauses give the owners the right to terminate the charter party once the requirements are met. When considering a termination of a charter party where the BIMCO VOYWAR 2004 is incorporated, owners should carefully consider the requirements set out above which are also relevant for a termination. In the absence of a war clause, the owners will face severe difficulties cancelling or terminating a charter party or voyage.

General things to keep in mind:

  1. Incorporate the BIMCO CONWARTIME 2013 or VOYWAR 2013 to be able to reject voyage orders or in case of a voyage charter to terminate the charter party in accordance with VOYWAR 2013.     
  2. As an owner: check your financing documentation on whether it contains a restriction to transit a Listed Area. Transiting a High-Risk Area without having additional War Risk insurance and approval from insurers may constitute an Event of Default under the loan agreements.
  3. Always have all information updated: consult BIMCO´s website to obtain guidance and information on the current situations and measures to be taken.
  4. Have a look at the trading areas under time charter parties and exclude the Gulf if required.
  5. Use back -to – back clauses up and down the chain to ensure that the rights and obligations under all charter parties are aligned.
  6. What to do for new voyage fixtures: address the increase in insurance premium.
  7. If the BIMCO war risks clauses are used for contract of affreightments: replace the reference to contract or charter party by “voyage” to avoid any termination of the contract when only one voyage is affected.

 

Nina Stuhrmann
in Copenhagen, DK

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