Emirati law firm Fichte & Co partner Ravi P Jawani and associate Keshav Raychaudhuri warn charterers and owners to pay particular attention to ’frustration’ clauses in the wake of attacks on tankers in the Middle East Gulf
Tanker attacks have a long history as a powerful weapon in international conflict, and can have a significant destabilising impact on regional economies and finances in the shipping industry.
During the Iraq-Iran War in the 1980s, oil terminals and tankers came under severe attacks, which directly affected the economies of both nations, in addition to the safety of maritime traffic.
More recently, on 12 May 2019, four oil tankers were hit by a series of co-ordinated attacks at Fujairah. A month later, on 13 June 2019, two oil tankers, Marshall Islands-flagged Front Altair and Panama-flagged Kokuka Courageous, were attacked in the Gulf of Oman. While there were no serious casualties, the incidents brought back the spectre of the 1980s tanker wars, threatening commercial navigation and the security of global energy supplies.
In response, insurance premiums for vessels passing through the Middle East Gulf have reportedly gone up by about 10%. War risk premiums for vessels sailing in the region have now surged to around US$200,000 for VLCCs, according to industry reports. The premiums were closer to US$50,000 around the time of the first attacks in May.
As a result of the attacks, both shipowners and charterers wisely halted bookings in order to reassess risks. But who will pay the bulk of the extra insurance costs: cargo interests, shipowners or charterers?
Annual war risk is one of several forms of insurance a vessel obtains while sailing into high-risk regions. In the wake of the attacks, the London insurance market’s Joint War Committee extended the list of waters deemed high risk to include Oman, the United Arab Emirates and the Middle East Gulf. Under the new terms, any vessels calling for bunkering in these ports will suffer high premiums.
War risk clauses have evolved over time to determine when an owner is at liberty to deviate or repudiate a charterparty agreement based on specified war risk perils such as acts of war, piracy, terrorism, sabotage and blockades. In CONWARTIME 1993, the presence of a war risk lies in the “reasonable judgement of the master and/or owners” so that a vessel is not required to proceed through any area where it appears that the vessel, the crew or the cargo on board "may be", or are "likely to be" exposed to war risks.
A shipowner trading in high-risk waters will need to pay additional war risk premiums. Whether it is the shipowner’s obligation or the charterer’s obligation to bear this additional expense will largely depend on the terms of the charterparty. For fixtures yet to be finalised, it will be a matter for negotiation.
As an example, under the CONWARTIME 1993 clause, war risk insurance premiums are stipulated for the shipowner’s account.
Another question that may arise is whether or not the parties will have a right to repudiate the agreed fixture if it has become uneconomical as a result of an increase in insurance premiums.
In certain cases, the "doctrine of frustration" permits a party to a contract to not carry out contractual obligations if there is a change in circumstances. However, it is unlikely that the courts will consider a change in the financial feasibility of operations as an acceptable reason to invoke the doctrine. Nevertheless, "frustration" may occur if ports critical to the performance of the charterparty become inaccessible by reason of war or blockade.
With regard to war and terrorism, under the current circumstances of higher risk and increased war risk premiums, contracting parties should pay particular attention to frustration clauses. If they come before a court, these may have considerable commercial consequences depending on the courts’ interpretation.