With tensions rising in the Straits of Hormuz, Stephenson Harwood partner Simon Moore examines how recent attacks may affect operators’ legal contracts
A fifth of the world’s oil passes through the Straits of Hormuz to the Gulf of Oman – the only sea passage from the Middle East Gulf to the open ocean – making the waterway a strategically important bottleneck for tanker shipping.
With tensions in the region on the rise, Stephenson Harwood partner Simon Moore examines the potential impacts to contracts from recent attacks on tanker vessels.
Some of the immediate after effects of the latest incidents include:
Considerations for owners and charterers
Below we consider some of the legal and practical issues arising for owners and operators.
However, this may not be straightforward – a mere apprehension of risk is not enough and an owner/master that has cold feet based on recent events and does not wish to go to the Gulf of Oman is unlikely to be in a position to simply refuse to perform the voyage or change route, absent specific charterparty wording.
Owners considering a deviation from the customary route or refusing to perform the voyage for fear of facing a similar attack run a serious risk of being in breach of contract and would be well advised beforehand to take legal advice and speak to their P&I Club, as well as carefully reviewing the charterparty terms for relevant clauses.
Relevant charterparty clauses
War Risks clauses for use in charterparties have been developed over a number of years in order to try and reduce the uncertainty for when an owner or master has the liberty to deviate or even cancel a charterparty upon the happening of certain specified War Risks perils.
These are commonly defined to include acts of war, acts of terrorists, piracy, sabotage and blockades, among others.
In the case of both the CONWARTIME 1993 and VOYWAR 1993 clauses, the presence of a War Risk lies in the “reasonable judgment of the master and/or owners” so that a vessel is not required to proceed through any waterway or canal where, in the same reasonable judgment, it appears that the vessel, crew or cargo “may be, or are likely to be exposed to War Risks”.
The words “may be” or “likely to be” bring into play a difficult assessment of whether or not during the intended voyage the named perils are sufficiently certain to arise, so as to trigger a right to exercise the liberties the clauses potentially allow (ie cancellation or deviation).
Other forms of War Risks clauses, through the use of different wording, may require a higher or lower degree of probability that the named peril will arise during the voyage, or allow a wider or narrower discretion by an owner or master.
War Risks clauses may also make provision for the allocation and responsibility for payment of any additional costs, upon the exercise of a liberty, such as choosing to discharge at an alternative port, or even allocate responsibility for payment of additional War Risks insurance premiums.
Although not relevant on present facts, some charterparties may provide for automatic termination following an outbreak of war between specified countries.
War Risks, waivers and the status quo
Questions may arise as to whether, should a known War Risk peril exist at the time of entering into a fixture, an owner may be taken to have accepted the risk of that peril so that they subsequently lose the right to exercise a liberty under a War Risks clause based on the continued existence of the same peril.
This may result in an owner losing the ability to rely upon the War Risks clause to exercise a liberty unless the situation regarding the relevant peril (ie terrorism) had significantly worsened since the date of the fixture.
This requires a careful analysis of the facts.
Responsibility for payment of increased War Risks insurance premiums
An owner being asked to trade in a Listed Area will normally need to pay additional War Risk premium and potentially a Crew War Bonus.
Which party, the charterers or owners, are obliged to pay for these will depend upon the wording of the relevant charter.
For those fixtures not yet agreed, it will be a matter for negotiation. Under the CONWARTIME 1993, for example, War Risks insurance in respect of the vessel and premiums/calls are for an owner’s account.
Impact of significantly increased War Risks premiums on the charterparty
The fact that a fixture may have become unprofitable due to a significant increase in costs, in this case a significant increase in War Risks insurance premiums, will not ordinarily give rise to a right to an owner (or a charterer, if the insurance is their responsibility) to cancel a fixture.
The English law doctrine of “frustration” allows, in some very limited instances, for a change of circumstances to give rise to a right for the parties to be relieved from performance (unless those circumstances have been brought about by one of the parties that is seeking not to perform).
However, a change in the economic burdens associated with performance will not ordinarily relieve a party from its obligation to perform, even if costs have dramatically increased.
Ensuring access to the best available and most up-to-date information
It is in the interests of both parties to stay up-to-date and closely monitor the latest developments and events in the Middle East, ensuring that the risks of further attacks are assessed and understood within the contractual framework agreed.
Effect on existing loans
Owners would be well advised to check their loan documentation to ensure these are not impacted by a voyage to a Listed Area.
Typically, loan documentation will impose requirements for a borrower to ensure that they have in place additional War Risks insurance, covering areas of designated high risk and/or require that they do not go into such an area without first consulting and obtaining the necessary approval from their insurers.
A failure to do so may be an Event of Default under the loan agreement.
Practical steps for owners to try to minimise risks of an attack
Owners travelling to the Listed Areas would be well advised to undertake a thorough ship security assessment, in accordance with the ISPS Code, to ensure that it has an up-to-date ship security plan, in co-ordination with specialist security agencies.
This may involve deploying additional guards, the cost and responsibility of which (including embarkation and disembarkation) will need to be carefully thought about and considered in relation to the charterparty terms and allocation of responsibilities.
Note that some sources caution against the use of armed guards that may run the risk of a misunderstanding with state controlled patrol boats.
Further steps aimed at reducing the risks of an attack might include transiting high risk areas at full speed (although the impact on costs and responsibility for additional fuel costs will again need to be considered) and during daylight hours.
Lookouts maintaining extra vigilance is obviously recommended, especially for operators of tankers or gas carriers.
During fixture negotiations, owners should have careful regard to the trading areas named in a time charterparty to ensure that these reflect an owner’s perception of risks and insurance cover available.
Time charterers will generally be obliged to indemnify owners for the consequences of their voyage orders.
If these orders involve travelling to an area where the ship is sabotaged, then a charterer may potentially be held liable for any consequences arising.
In the event of an incident, detentions or delays might also arise, giving rise to further issues of demurrage and off-hire disputes.
Issues under sales contracts
Issues will also arise from a sales contract perspective.
For example, a CIF/CFR seller will wish to consider whether it can pass on to buyers any additional War Risks premiums arising under the charterparty.
Also, a CIF buyer will need to consider whether the cargo policy purchased by the seller covers them in the event of an incident.
These and no doubt other issues require careful thought in light of recent events.