Tankers waiting to discharge off Long Beach, California on April 22, 2020. – (CBS Los Angeles)
May 14, 2020
Charter Parties Amidst the COVID-19 Pandemic – Force Majeure? – U.S.A. shipping law perspective
For the first time, in more than 100 years, the world has been struck by a pandemic with consequences that could not have been foreseen just a few months ago while engaging in the routine operation of cargo vessels.
The chartering forms that evolved over the last 50-70 years, adequately anticipate wars and conflicts and have clauses and provisions addressing such contingencies, but they did not anticipate the momentous impact of a microorganism severely affecting worldwide maritime transportation. The decisions of maritime courts and arbitrators have not dealt with issues arising from factual patterns such as those currently being encountered in the wake of Covid-19.
When owners and charterers were negotiating fixtures in January and February 2020, unless they were dealing through clairvoyant brokers, they could not have envisioned what would happen next, in midperformance, one or two months later. Nobody could have foreseen government ordered and enforced shutdowns of entire national economies; grand scale disruption of supply and demand over scores of commodities; shutting down of terminals, storage facilities, oil production and refining; and generally what makes up the very fabric of international maritime commerce. Suddenly, routine shipping activities were severely disrupted, and shipowners and charterers found themselves navigating shipping markets uncharted by maritime law and the guidance of universally accepted standard charter party clauses.
“Force Majeure”
This law-French term is being spoken these days with hushed uncertainty by those wondering about the legal impact of the universal pestilence on the business of shipping. Contagious illness is one among several fortuitous causes that, under the law, may excuse contractual obligations:
“D’une force majeure ou d’un cas fortuit. Ces deux expressions, qui, dans le language de la loi, paraissent etre le plus souvent synonymes, designent tout evenement qu’on ne saurait resister quand meme il serait prevu, come le feu du ciel, un tremblement de terre, la grele, la maladie, la mort, la guerre.
(Translation: “Force majeure or a fortuitous event. These two expressions, which, in the language of the law, seem to be most often synonymous, designate any event which one could not resist even when it would be foreseen, like the fire of the sky, an earthquake, the hail, the sickness, death, war.”)
LEHMAN, STERN & CO. v. MORGAN’S L. & T. R. R. & S. S. CO., 2 Teiss. 236 (La. 1905) Dissenting opinion of Louisiana Appeals Court Judge Moore at pp. 247-248 citing Baudry-Lacantinerie, Precis de Droit Civil II, 891. (emphases added).
The origins of the concept are traceable in Roman law, from where it passed into English common law. Id. at 241. “Sickness,” in the civil law and common law traditions, is regarded a force majeure event. It is so under U.S. maritime law as well. See e.g. Cheek Neal Coffee Co. v. Osaka Shosen Kaisha, 36 F.2d 256 (E.D. La. 1929) (consequences of quarantine).
Can Covid-19 excuse charter party obligations as a force majeure occurrence?
Suppose that a tanker chartered under ASBATANKVOY without any amendments to Clause 19 or relevant additional clauses regarding storage, arrives at her port of discharge with a cargo of crude oil only to find out that shore storage capacity is filled – refining having slowed down because of severely reduced demand caused by Covid-19 restrictions. Further, suppose that the vessel has a relatively low demurrage rate, and the market is rising. While the charterer wants to use the vessel as storage paying at the demurrage rate, the owner wants to discharge and move on to the next fixture. Is either party entitled to rely on the general exceptions clause to resolve the issue in its favor?
Under a charter party form such as ASBATANKVOY there is no standard maximum allowable period during which the cargo receivers must receive the cargo. Of course, there is a space in part I of the form for the parties to specify allowable laytime and demurrage, but the charter party does not specify how much total time is allowed for the discharge of the cargo. Under standard Clause 9 in Part II it is clear that the charterer is required to designate the discharging berth or location and make the necessary arrangements. It provides: “The vessel shall load and discharge at any safe place or wharf, or alongside vessels or lighters reachable on her arrival, which shall be designated and procured by the Charterer, provided the Vessel can proceed thereto, lie at, and depart therefrom always safely afloat, any lighterage being at the expense, risk and peril of the Charterer.” U.S. case law that has dealt with this subject holds that the charterer who is thus obligated to designate and procure a discharging berth or other discharging facility must do so within a reasonable time. Williams v. Theobald, 15 F. 465, 469 (N.D. CA 1883).
In Williams v. Theobald, quoting English case law, the court noted “Now, could it be reasonably held that under such a charter-party as that the charterer could select and name a dock which he knew would not admit the ship for months, and so compel the ship to remain as a floating warehouse for him during those months?” Id. At 469. If the charterer fails to designate the safe place or wharf, or alongside vessels or lighters reachable on arrival, or leaves it to the consignee to do so, who in turn fails to perform, the charterer is liable to the owner for damages. Id.
Nonetheless a charterer might argue that the congestion of several vessels waiting to discharge was the effect of Covid-19 and, in turn, it caused drastic curtailment in the refining of crude oil, and all storage facilities became incapable of accommodating additional crude oil, thus preventing the charterer from nominating a discharging berth or lightering vessels.
Necessary conditions for an effective force majeure defense
Though under American maritime law, a pandemic is an event that may be considered force majeure or an Act of God, a party asserting it to excuse its failure to contractually perform will need to jump through a number of legal hoops in order to succeed, including the following: (1) the exception claimed must be set out in the contract; (2) the occurrence relied upon as an excuse must be within the scope of the contractual exceptions; (3) the exception claimed must actually prevent performance and be the sole cause of the inability to perform; (4) the exception claimed must be the proximate cause of the inability to perform.
The exception must be expressed in the contract as part of the parties’ agreement
None of the events regarded by the law as force majeure, excuse failure or inability to perform any maritime contractual obligation, unless the contract itself specifies the exception on which a party relies to excuse performance. A force majeure exception is not available automatically, by operation of law. Thus, in Tweedie Trading Co. v. James P. McDonald Co., 114 F. 985 (S.D.N.Y. 1902) a government prohibition of the trade that had been agreed by the parties did not, nevertheless, excuse the charterer from being liable in damages to the owner for terminating the charter party. There was no contractual exception excusing performance by reason of change in the law that prohibited the trade. “[I]t is well settled that a force majeure clause… defines the area of unforeseeable events that might excuse nonperformance within the contract period.” Gulf Oil Corp. v. F.E.R.C., 706 F.2d 444, 452 (3rd Cir. 1983); Morgantown Crossing, L.P. v. Manufacturers & Traders Trust Co., U.S. Dist. LEXIS 22949, *14 (E.D. Pa. Nov. 10, 2004).
In most charter party forms, catch-all exceptions clauses attempt to excuse performance obligations of contracting parties over a broad range of events. Consider e.g. the General Exceptions in Clause 19 of the ASBATANKVOY charter as it applies to both owners and charterers:
“GENERAL EXCEPTIONS CLAUSE……And neither the Vessel nor Master or Owner, nor the Charterer, shall, unless otherwise in this Charter expressly provided, be responsible for any loss or damage or delay or failure in performing hereunder, arising or resulting from:- Act of God; act of war; perils of the seas; act of public enemies, pirates or assailing thieves; arrest or restraint of princes, rulers or people; or seizure under legal process provided bond is promptly furnished to release the Vessel or cargo; strike or lockout or stoppage or restraint of labor from whatever cause, either partial or general; or riot or civil commotion.”
The excepted event must be within the scope of the clause
In order for the charterer or owner to have its performance excused under the exceptions clause they need to show that the general exceptions wording makes the exception claimed available.
“[I]t is well settled that a force majeure clause… defines the area of unforeseeable events that might excuse nonperformance within the contract period,” and that, in claiming force majeure excuse, the “nonperforming party has the burden of proof.” Gulf Oil Corp. v. F.E.R.C., 706 F.2d 444, 452 (3rd Cir. 1983). A party claiming to be excused under an exceptions clause has the burden of proving that the events it claims excuse its performance are within the scope of the clause. The Aquarius, 44 F.2d 805, 806 (D. Md. 1930).
Looking at the scope of the force majeure clause of the ASBATANKVOY noted above, it is obvious that the occurrence of Coronavirus cases at the port of discharge, does not of itself excuse the charterer from designating a discharging berth or place reachable on arrival. One might argue that the occurrence of the pandemic is within the “Act of God” category, but then the inability of the charterer to designate a discharging berth is due to the receiving storage facilities being filled to capacity, and such wording is not included in the general exceptions clause.
The excepted event must be the cause in fact
The mere occurrence of any one of the events set out in the exceptions clause does not thereby operate to excuse a party’s claimed inability to perform. The event must actually prevent performance.
“In order that the contingencies specified in them (excepting clauses) shall constitute a good defense, performance must have been thereby rendered in a practical sense impossible, illegal, or dangerous. […] It is not sufficient that the happening of one of them adds materially to the… embarrassment of the parties relying on it, if nevertheless it is still possible to perform.”
Wheeling Valley Coal Corp. v. Mead, 186 F.2d 219, 222 (4th Cir. 1950); see also SS ARISTOTLE S. ONASSIS, SMA 1558 (1981) (citing Central Argentine Railway Limited v. Marwood, [1915] A.C. 981); and SHETLAND LIBERTY, SMA 2787 (1991).
Accordingly, the mere outbreak of the pandemic and its occurrence at the place where the performance is to be rendered does not, without more, excuse the party who is failing to perform. The outbreak must cause the inability to perform.
The excepted cause must be the sole proximate cause
It is not enough for the event mentioned in the exceptions clause to be causally connected to the impossibility of the performance. The excusing event must also be the proximate cause of the inability to perform. In the context of our discussion on the outbreak of the pandemic, it must be the pandemic itself that proximately causes the inability of the charterer to provide a discharging berth or lighter vessel to receive the cargo.
The event on which a party relies to excuse performance, must be the sole cause. “If by itself it [the restraint] could not have prevented performance, it will not excuse merely because, in combination with nonexcepted causes, it did so.” Berwind-White Coal Mining Co. v. Solleveld, 11 F.2d 80, 83 (4th Cir. 1926); Wheeling Valley Coal Corp. v. Mead, 186 F.2d 219, 222 (4th Cir. 1950). Moreover, the performance-excusing cause must be not only the sole cause, but also the proximate cause, as distinguished from a remote cause. See Hellenic Transport, 273 F. at 297; W. K. Niver Coal Co. v. Cheronea S.S. Co., 142 F. 402, 409 (1st Cir. 1905);U.S. v. CARGO OF LINSEED, 20 F.2d 199, 200 (S.D.N.Y. 1927).
For purposes of its operation as a performance excusing event the cause on which a party relies must be temporally and spatially proximate. Thus, in the example we are using, if the outbreak of the pandemic in the destination port occurred some weeks before the carrying vessel’s arrival, and it was the first in a long chain of causation, it is doubtful that it can be relied upon to excuse the charterer’s obligation to receive the cargo within a reasonable time after arrival. For example, if the state government issued business shutdown orders to limit the community spread of the virus; and this, in turn, caused decreased demand for gasoline by the commuting labor force; and as a consequence crude oil receiving shore tanks could not accommodate more crude oil because refiners reduced or shut down their activities; and the charterer could not nominate a berth capable of receiving the cargo to be discharged, the Covid-19 virus could not be relied upon on as the sole direct proximate cause of the restraint. See generally for temporal proximity: The ALTUS, SMA 2620 (1990); The AQUARIUS, 44 F.2d 805, 807 (D. Md. 1930). For spatial proximity see Bird v. St. Paul Fire & Marine Ins. Co., 120 N.E. 86, 88 (N.Y. 1918); Id. See also Continental Ins. Co. v. Arkwright Mut. Ins. Co., 102 F.3d 30, 35 (1st Cir.1996).
Conclusion
Even “though force majeure” / “act of God” are legal concepts well recognized in the maritime law of the United States, their deployment as defenses to excuse performance of charter party obligations is relatively difficult. They are governed by a set of well-established rules, conditions, and qualifications that whoever asserts such a defense must meet. In our view, for all of its impact on shipping, the novel Coronavirus will rarely excuse performance of charter party obligations.
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