The COVID–19 virus: Legal challenges for the shipping and offshore industry
The fast spreading of the COVID-19 virus world-wide and actions by regulatory bodies create challenges for all industries, and particularly the shipping and offshore industry, being of international character.
Much information is available but fragmented and we shall herein set out in short, several issues of importance and give basic information to help our clients to handle the situation at hand in the best possible manner.
Force Majeure as a general legal principle
It should be noted initially that the COVID-19 outbreak in Norway and under Norwegian law in our view must be described and recognized as a force majeure ("FM") situation. The basic requirement under Norwegian law is that FM situation must be something which the party invoking FM was not and could not be aware of when the contract was entered into, and the party must also take all reasonable measures to overcome the situation or the effects (the hindrance) caused thereby. This is also stated in United Nations Convention on Contracts for the International Sale of Goods Article 79 (CISG).
However a force majeure situation in itself is not a valid excuse for not performing obligations under a contract. The FM situation must cause hindrance or prevent a party from performing the obligations undertaken. The party invoking FM has the burden of proof both that there is a FM incident and that this has caused the hindrance or prevented the fulfillment on the party's obligations.
Under English law (common law), as opposed to Norwegian law, FM is not a legally accepted concept, and must be particularly agreed in the contract. Whether an event amounts to FM must under English law be decided based on the wording of the contract. Furthermore, both under Norwegian and English law, the extent and effect of FM, deciding the parties rights and obligations, must be decided on the basis of the provisions of the contract.
Notice of FM
Most contracts require that a party who wishes to invoke FM must give notice in writing to the other party of the FM situation and the effect which this is assumed to have on the fulfillment of the contract. Such notice must be given within a short period (as set out in the contract). The requirements concerning such notice will differ. In international shipbuilding contracts the period is usually 10 days after the "Builder becomes aware or should have become aware of any cause of delay as aforesaid". If notice is not given, the effected party may not subsequently invoke FM as a valid hindrance and claims e.g. permissible delay.
In the Norwegian Total Contract 2005 (NTK) the requirement is that notice shall be given "as soon as possible". On the other hand there is no specific provision in NTK stating that a party will otherwise be prevented or barred from invoking FM if he fails to give such notice.
It is a generally accepted principle in international contract law that notice shall be given and must be received by the other party "within reasonable time" after the party who invokes FM "knew or ought to have known of the impediment". Failure to give such notice will have two effects; the burden of proof will inevitably be heavier as notice is not given timely, and the party may also be liable for damages to the other party for failing to give such notice.
Such a notice may be of general nature, as the effects of the FM will still not be fully known.
Clients who are or suspect that they will be affected by the COVID-19 situation is therefore well advised to send a general FM notice to their counterparts to secure their rights. Further notice(s) should then be given when the effects are more clear. However, we emphasise that also such a general FM notice must be worded in accordance with the procedures set out in the relevant contract.
On the other hand, parties who receive FM notices are required to reply to same as this may be seen as an acceptance of the FM situation and possible permissible delay. If a general notice has been received, parties are well advised not to just accept this as being received, but review the wording of the relevant contract, and request the other party to send further information/notices when further information concerning the actual delay is known, and in the meantime reserve all rights.
Duty to mitigate
It follows both from general legal principles as well as from the wording in most standard contract that a party invoking FM has an obligation to mitigate the effects thereof versus its counterpart.
When FM has occurred, a party may be inclined to use (or rather, abuse) this opportunity to gain as much extra time as possible, particularly if it is already delayed for other reasons. This, of course, is not acceptable behaviour, and e.g. under a shipbuilding contract a party invoking FM must do its "utmost to avoid or minimise" the delay caused by the FM.
Practical situations as effects of the COVID-19
Since the COVID-19 no longer is an issue for each country but a pandemic and affecting all countries, restrictions imposed by each autonomous authority have effect. This may be suppliers in different countries down in the supply chain, where FM is not directly, but indirectly affecting a party and the performance of a contract.
Lack of intermediate products needed in manufacturing final products
In principle the intermediate products needed are available, but the production of manufacturers of the actual product needed may be delayed and/or stopped due to lack of work force with the suppliers and/or manufacturers. Further we have seen export restrictions imposed in order to secure vital products such as protection equipment for health personnel for each country.
Parties should be aware that a party invoking FM has an obligation to try to get alternative suppliers, even if this may be more costly.
Certificates expire and cannot be renewed
For operation of rigs and ships, classification and statutory certificates are needed. Failure to renew and maintain same will be a breach of the obligations under the relevant contract or charter party. A ship may in principle be considered unsafe and the vessel subject to port state control and be detained also for other reasons. Ports may be unsafe without being declared unsafe in the more traditional sense of the word. Again the reason may be actual illness or quarantine denying ships to enter or to allow people ashore, both passengers and crew.
IMO has issued a circular letter addressing these issues, but all IMO can do is to encourage co-operation and a pragmatic approach between flag and port states, as IMO cannot issue a general exemption from the mandatory provisions of the relevant statutory conventions, nor delay implementation of mandatory regulations coming into force - not even in the current uncertain situation. Further, all the major classification societies (also acting as agent for national maritime authorities) have advised their customers that they generally accept the COVID-19 situation as an exceptional circumstance in terms of granting postponement for those surveys where this is possible based on class rules and statutory conventions, and invite customers to use already established remote survey schemes where possible. However postponement shall not exceed 3 months from the certificate expiry date.
It is however clear that neither of the international conventions from IMO or ILO have been worded to take into account the current situation. For statutory certificates issued by the national maritime authorities, each owner has to find flexible solutions with the relevant flag state. For the Norwegian flag, certificates are automatically prolonged for 3 months without specific application.
Insurance of rigs and vessels
Under insurances subject to Norwegian law the certificates from class and national authorities are defined as "safety regulations". All certificates must at all times be valid. If not, e.g. an expired certificates may qualify as a breach of safety regulations, and if a subsequent insurance event occurs that could have been avoided if the relevant certificate had been in place, the owners right of cover under the relevant insurance may be in jeopardy. Since the insurer has a right to demand a survey of the vessel, it must however be assumed that a general prolongation of existing certificates by class or flag state will be binding on the insurer and has no negative effect on the owners' rights under the insurance.
Further issues will arise under Loss of Hire Insurance, where the repair of the vessels may be delayed due to the COVID-19 situation. If such a delay is caused by the COVID-19 (e.g. personnel not being available, yard being partly closed, parts necessary are delayed), it may be questioned whether this delay will be covered by the LOH insurance, since the delay may be said to have been caused by COVID-19, which may arguably be considered a peril not insured against.
In the day to day operation of ships, the implications for shipowners and operators due to such outbreaks can and will be significant. Delays may occur and costs arise not only when the ship is in an area where the risk of infection is high, but also at a later date when the ship calls at ports far outside the region where restrictions were so imposed to reduce the risk of the disease spreading. In this respect, no clause or short summarized advise can solve all the problems that may arise due to countries more or less worldwide imposing restrictions or sanctions on ships.
Most charter parties are today entered into on BIMCO recommended forms and very often governed by English law. As stated above, COVID-19 is recognised as pandemic. The BIMCO Infectious Disease Clause (BIDC) may thus be included in the relevant charter party and if so, the application thereof has to be considered under the relevant governing law. This is e.g. the case for the BIMCO form SUPPLYTIME 2017. We are of the view that it should be accepted that the term "Affected Area" as defined in BIDC today will include areas world-wide where there is a risk to expose the vessel or its crew to COVID-19.
Many charter parties used in offshore supply contain specific FM clauses, e.g. SUPPLYTIME 2017 which in Clause 35 sets out a specified list of incidents being defined as FM. The effect of a FM situation is that "neither party shall be liable for any loss, damage or delay due to any of the following force majeure events and/or conditions to the extent the party invoking force majeure is prevented or hindered from performing any or all of their obligations under this Charter Part, provided they have made all reasonable efforts to avoid, minimize or prevent the effect of such events and/or conditions". It is worth noting that there is no requirement that the event could not have been foreseen by either party, but on the other hand there is a clear requirement for causation, and a firm duty to mitigate the effect of FM.
One of the measures authorities are taking is to protect their ports to prevent spreading via ships entering. At the same time it is vital to maintain the world-wide trade, both to combat the virus and to secure best possible that the world can still function. Owners will therefore experience that there are very strict restrictions in port, which may lead to congestion and delay. One question is whether an owner can refuse to call at a port where he is likely to have the ship delayed or detained due to the virus or precautions taken to combat the virus.
In time charters the risk for loss of time is from the outset with the charterer. The issue for the owner is to protect its vessel and crew from getting infected. Employment in SUPPLYTIME 2017 is restricted to "voyages between any good and safe port or place and any place or Offshore Units where the Vessel can safely lie always afloat with the area of operation". If the port is deemed not "safe" the owner can refuse to follow the orders of the Charterer to sail or call at such ports.
Whether or not a port is “unsafe” due to COVID-19 will be viewed case by case based on the prevailing risk factors in the port, including inter alia whether measures have been put in place in the port to reduce or avoid the risk of infection, both to passengers and crew. The proximity of the vessel to the shore / likelihood of the vessel’s crew coming into contact with possible sources of infection are also relevant, and also whether there would be a risk of quarantine or detention of the vessel if calling at the nominated port. An order to call at a port is from the outset valid and the owner is obliged to follow such orders. The owner has the burden of proof to show that there is an unacceptable high risk of infection or detention for a port to be deemed unsafe, both under Norwegian and English law
If the vessel is unable to perform the work under the charter party and time is lost due to COVID-19 related issues, the question is whether the owner remains entitled to the charter hire, or whether the vessel shall be deemed off hire. This must be decided on basis of the wording of the relevant charter party and the governing law.
In general, the starting point in a time charter is that hire shall be paid unless there is a specific provision to the contrary. If a charterer wishes to invoke the off-hire provisions he will have the burden of proof. The same applies if the owner alleges that any exceptions apply. The relevant clauses are (as always) there to allocate the risk between the parties. The wording of the actual off-hire clauses are therefore very important, and the wording differs within the various charter parties. We shall again use SUPPLYTIME 2017 as an example:
The condition for placing a vessel off-hire is that an off-hire event as set out in the charter party has occurred. In the present situation the most practical event is "deficiency of Crew". If a sufficient number of crew are ill due to the COVID-19 and as a consequence the vessel is unable to perform the services required, this should from the outset be considered as “a deficiency of Crew” and the vessel be off-hire. If, on the other hand, the remaining crew is healthy and is able to perform the services without any loss of time, the vessel is not off-hire.
The off-hire clause in SUPPLYTIME 2017 exempts from this main rule if the reason preventing the vessel from working is “quarantine unless cause by the crew having communication with the shore other vessel at any infected area not in connection with the employment of the Vessel", and other specific reasons including FM. This means that if the vessel is quarantined in the next port when coming from an affected area, or because a member of the crew is infected, she will remain on-hire. If the vessel is delayed in connection with a crew change where the incoming crew have to remain in quarantine, the vessel will be off-hire, since providing crew is the owners risk.
Contracts for drilling and other offshore units – definition of FM and main issues
With reference to the general comments above, particularly relating to the difference between English law and Norwegian (continental) law, the crucial element is in all contracts to consider the actual wording of the specific contract.
The standard offshore contracts used in Norwegian sector, including the standard drilling and accommodation contracts, have a general and short definition of FM as "an occurrence beyond the control of the Party affected, provided that such Party could not reasonably have foreseen such occurrence at the time of entering into the Contract and could not reasonably have avoided or overcome it or its consequences."
On the other hand LOGIC, being a form mostly used on the English sector of the North Sea, has a typical English law approach and sets out an “exhaustive list”, meaning that all of the events/types of events that comprise FM are listed. That list does not include reference to “epidemic”, pandemic or disease. However, the LOGIC general terms include within the definition of FM “Changes to any general or local Statute, Ordinance, Decree or other Law, or any regulation or bye-law of any local or duly constituted authority or the introduction of any such Statue, Ordinance, Decree, Law, regulation or bye-law”. It may therefore be significant in relation to those contracts where local or national authorities introduce relevant mandatory legislation in relation to COVID-19, and this may also include issued guidelines.
A significant issue under offshore contracts is to determine the relevant threshold in respect of measures that must be taken to avoid or overcome FM. Based on the situation as of today, it is clear that contingency plans to avoid COVID-19 outbreak on the rigs as well as for handling an outbreak if it occurs, will be key issues.
Whether an event causing stop or delay in the services will be regarded as FM is decisive as to whether rate will apply, and which rate, which must be assessed specifically based on the defined rate structure on a case by case basis.
Another key issue is whether the contract may be terminated due to FM. It is standard and seen in most contracts a right for a party to terminate the contract if such party has been prevented from performing its obligations under the contract for a certain time period (as defined in the contract) due to FM.
Summary – and advise going forward
The actual situation is today at best uncertain, and the relevant facts changes rapidly, with new legislation coming into effect on a daily basis. It is clear that this is very difficult to handle for any national or international business in the maritime sector.
In addition to the first priority for all businesses now; to fight the virus and try to contain the spreading of same, management must seek to secure their business and bottom line in order to survive and get out of the situation best possibly. This means that as far as possible it should be "business as usual" in the very unusual times.
What can and should be done is hereunder to take into consideration the COVID-19 situation and try to hedge best possible for this, both for existing contracts (analyse contractual rights and obligations and mitigation measures) as well as new contracts now being entered into. As the COVID-19 situation is well known worldwide today, this cannot be relied upon as a FM situation and "excuse" going forward, as this today is something which the parties can foresee and therefore regulate the risk for in their new contracts. A tailor-made "corona clause" should therefore be considered for all new contracts.