The global outbreak of COVID-19, in all types and at all levels of markets, has been causing widespread concerns and worries, and has also been affecting the global shipping industry profoundly. In this regard, we now present a brief analysis as regards how to adequately prepare for and respond to the pandemics under such passive circumstances for the owners, ship managers and/or charterers under those Charter Parties, regardless domestic or overseas.

I.  Relevant Clauses in Charter Parties that might be Applied to Protect Either Party or Defend against the Other Party with the current Outbreak of COVID-19

In response to the current impact of COVID-19 upon the contract performance, we, as a starting point, shall firstly review the terms and conditions of the charter party, as the essence of contract law, regardless under the common law or Chinese law, is pursuing for the principle of "pacta sunt servanda". Therefore, in case of any dispute, the contractual provisions would always be taken as the priority standard. Among several versions of commonly applied Charter Parties, the relevant clauses that might be relied upon in response to COVID-19 and/or in relation thereto would normally include: safe ports, ship seaworthiness, delay and/or off-hire, demurrage, force majeure, etc..

1. Safe Ports. During the outbreak of infectious diseases, it needs to rely upon the contractual provisions to determine whether the port impacted by the infectious diseases is nevertheless a safe port, and whether the owner(s) or charterer(s) is/are nevertheless obliged to sail the vessel for such port notwithstanding that there exists the risk of infection by the infectious diseases. Determination of whether a port is safe or not is a question of fact, the relevant risks, delays or liabilities assumption resulting therefrom might need to be settled by amicable agreement or through the proceedings if the resulting consequences of the outbreak of infectious diseases are not specifically provided under the charter party. Under a time charter, the Master is obliged to sail the vessel into the designated port as per the instructions of the charterer. Pursuant to the safe port warranty clause under a time charter, irrespective of express or implied term, the charterer is obliged to instruct the vessel to proceed to a port that is anticipated to be safe, which obligation shall be applied when the charterer names a port. However, if the named port becomes unsafe after the charterer's naming, the owner is entitled to request for the change and the charterer thus is obliged to cancel the original instruction and nominate another new safe port. If a vessel under the time charter is to call at a port impacted by the infectious diseases as a result of following the instruction of the charterer, whilst the owner has yet agreed to take the risks arising therefrom, the owner may be entitled to request the charterer to indemnify the losses of quarantine and disinfection costs that directly resulting therefrom. Under a voyage charter, the safe port issue is not so clear, and the failure to sail the vessel into the nominated port may constitute a breach or repudiation of the contract, as a result of which the charterer shall be entitled to claim damages, unless the owner may deviate for another port pursuant to the deviation clause in the charter party. If the voyage charter is for one voyage only, the unsafe ports may result in frustration of the contract which may lead to the termination of the charter party unless such voyage charter includes the trans-shipment clause or lighterage clause.

2. Seaworthiness. If a vessel is to be chartered after it having been called at an area impacted by the infectious diseases, such vessel may not be fit for receiving and transporting cargo; if a vessel is delayed due to quarantine and isolation which ultimately resulting in the cargo damage, or if any crew is infected with COVID-19, such vessel may be deemed as unseaworthy, as a result of which the owner shall be deemed as having breached its liability to provide a seaworthy vessel.

3. Delay/Off-Hire. In the event of delay or off-hire due to examination, quarantine, isolation or compulsory departure of the vessel by the port authority caused by such epidemic, the liabilities distribution and/or assumption arising therefrom shall be determined in accordance with the specific terms of the charter party. Where the charter party expressly sets out which circumstance shall be deemed as delay or off-hire in case of occurrence of the infectious diseases, such specific provisions shall be applied. If the owner can prove that passing by the port was due to the charterer instruction, which directly resulting in the delay or off-hire, the corresponding liabilities may be shifted to the charterer.

4. Demurrage. Calculation of demurrage also depends on the specific terms of the charter party. Some Charter Parties may explicitly provide the quarantine and isolation clause. For instance, the ASBA (Association of Ship Brokers and Agents) tanker voyage charter party expressly provides, “Should the Charterer send the Vessel to any port or place where a quarantine exists any delay thereby caused to the Vessel shall count as used laytime; but should the quarantine not be declared until the vessel is on passage to such port, the Charterer shall not be liable for any resulting delay”, which means the owner is not entitled to charge the demurrage against the charterer in such circumstance. Under other Charter Parties, where the terms thereof require the vessel to complete quarantine before commencement of loading and/or unloading time, the issue of free pratique may arise. The owner is not entitled to submit a notice of readiness for loading and/or unloading until the free pratique has been granted. Therefore, once the vessel has been called at an infected area or any crew is suspected of being infected, the owner shall then bear the cost of obtaining such free pratique.

5. Force Majeure. The application of force majeure clauses depends on the different versions of the Charter Parties and on the laws governing such Charter Parties, which will be further analyzed in detail as follows.

II.     Application of Force Majeure Clauses under Domestic and Overseas Charter Parties upon COVID-19 Occurrence

• ​Charter Parties Being Governed by English law or American law

​1. Under English law or American law, there is no defined meaning of force majeure. Therefore, under a charter party being governed by English law or American law, the event of force majeure must be so detailed to expressly include the infectious or contagious diseases or epidemics/pandemics, such that it would then be possible to claim force majeure in the event of an infectious disease such as COVID-19 and to rely thereon to further claim the rights and/or or remedies such as the exemption, extension, cancellation and etc. If the infectious or contagious diseases or epidemics/pandemics are not expressly listed as force majeure events thereunder, it might be not easy for the parties to claim such circumstances as events of force majeure, and accordingly neither party shall be entitled to claim extensions, exemptions or cancellation and etc. on such basis.

2. Some other versions of standard charter party try to detail the same, for instance, BIMCO's Supplytime 2005 standard charter party has included "epidemics" and "any other similar cause beyond the reasonable control of either party" into the listed force majeure events thereof.

3. If there exists a force majeure clause in the charter party, but the infectious or contagious disease or epidemics/pandemics is not expressly specified as force majeure events (for the convenience of reference, such clauses are hereinafter defined as "Incomplete Force Majeure Clause"), it’s recommended to further review whether the force majeure clause therein expressly includes acts of government, prohibition or quarantines. If such events are explicitly included in the charter party, and the relevant port is indeed announced to be closed by the government due to COVID-19 or is congested due to inspection and quarantine, or the vessel is required to be quarantined by the local government, it is highly likely that such acts of government, quarantine, etc. could be relied upon to claim as force majeure, and then to claim further for corresponding rights and remedies.

• Charter Party Being Governed by Chinese law

​1. Under Chinese law, force majeure is a statutory principle, therefore, in case COVID-19 is to be claimed as a force majeure event, and where there is an explicit force majeure clause (including the Incomplete Force Majeure Clause) in the charter party, the priority may be granted to rely on the force majeure clause therein, and the statutory principle might also be considered to be relied on.

2.  The statutory principle is mainly based on the PRC Civil Code (succeeding and deriving from those set forth in the PRC Contract Law). After the outbreak of COVID-19 in 2019, the Standing Committee of the National People's Congress in 2020 had announced that COVID-19 may be characterized as "force majeure" and the Supreme People's Court since that has been issuing series of Guiding Opinions as regards How to Properly Handling Civil Cases Related to COVID-19 Epidemic in Accordance with the Law. In combination with the statutory principle, even if there does not exist force majeure clause in the charter party, or there exists only the Incomplete Force Majeure Clause, a claim of force majeure might also be considered and further claims for exemption or deferred performance or cancellation might also be ruled (however, pursuant to the relevant regulations and judicial interpretations, cancellation based on statutory principles rather than on the terms of the charter party is subject to strict conditions, and if the conditions required by law are not met, only deferred performance and partial or total exemption of liability for the loss would normally be upheld).

No matter by whatever means to claim force majeure, extra attention should to be paid to the specific details in practice, and each clause should be under strict scrutiny where there is specific agreement on the same (for instance, force majeure clause in general would expressly provide that the party claiming for force majeure shall be required to notify the other party of the occurrence, suspension and/or ending of the force majeure event within a specified time period and in the specified manner, and to take mitigating/avoidance measures wherever possible, etc.), so as to avoid the waiver of existing rights and remedies due to procedural default/misconduct.

III.   Application of the Common Law Doctrine of "Frustration of Contract" and of the Chinese Law Principle of "Change of Circumstances" upon COVID-19 Occurrence

If it is impossible to rely on the force majeure clause/principle, the second best option is to consider "frustration of contract" (common law) or "change of circumstances" (Chinese law). Both are legal principles that not necessarily to be expressly agreed in the charter party and, and in the event that a situation occurs that may trigger these principles, such principles could be directly applied at the applicable laws. However, irrespective of the "frustration of contract" under common law or the "change of circumstances" under Chinese law, application of such principles could have the significant effect of cancelling/terminating the contract, therefore the respective country has imposed strict restrictions upon the application in order to prevent those principles from being abused.

1. Under common law, “frustration of contract” means that “a contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract”. Generally speaking, there are two possible scenarios in which “frustration of contract” may be applied to cancel a contract: one scenario is where there is no force majeure clause in the charter party, for example, the BARECON 2017 standard bare boat charter party does not include a force majeure clause, and similarly, the NYPE 2015 standard charter party does not include a force majeure clause either; the other scenario is where the charter party has only the Incomplete Force Majeure Clause, which does not explicitly include the force majeure events such as government restriction, government injunction, inspection and quarantine, etc.. In such scenario, the party to a contract may have to pursue the doctrine of "frustration of contract" to cancel the charter party, but while seeking to cancel the charter party, such party must prove that performance of its obligations was frustrated and the burden of proof of which shall be on that party. Typically, "frustration of contract" consists of the following elements:

(1)   significant or extraordinary change of situation must have occurred such that performance in strict compliance with the contract is no longer just nor reasonable;

(2)   the principle of applying frustration of contract is that, once the performance of a contract is frustrated, such contract shall forthwith and automatically be terminated and neither party is under any further performance obligation or liability to the other party;

(3)   frustration of contract shall not be due to the act or election of the party seeking to rely on the frustration to avoid performance of the contract (i.e., not attributable to the party seeking to rely on the frustration to avoid performance of the contract or due to such party’s fault), and it must be the outside event or extraneous change of situation.

Thus, frustration of contract means there occurs outside event that causes the contract unable to be performed and further results in the automatic termination of the contract, thus a situation under which performance could be deferred shall not constitute the frustration of a contract. The effect of COVID-19 on charter party for the time being is that, although there will be ports imposing restriction measures, most of the charter parties are likely to be in a situation where performance can be deferred rather than being prevented at all. It is therefore unlikely that a party to the charter party would be upheld under applicable law, if such party intends to rely on the doctrine of frustration to claim cancellation of the charter party. 

2. Under Chinese law, the principle of "change of circumstances" was derived from the judicial interpretation (i.e. Article 26 of the Interpretation II of the Supreme People's Court on Certain Issues Relating to the Application of the Contract Law of the People's Republic of China) and is nowadays expressly promulgated by the PRC Civil Code, pursuant to which it could be concluded that such principle could be applied for situations not caused by force majeure nor belonging to commercial risks. However, the conditions for the application of such principle in judicial practice are much stringent. Under the Notice of the Supreme People's Court on Correctly Applying the Interpretation II on Certain Issues Relating to the Contract Law of the People's Republic of China So As to Serve the Primary Objectives of the Party and the State, it is proposed that in respect of such Article 26, "people's courts at all levels must correctly understand and carefully apply it. If, on the basis of the specific circumstances of the case, it is necessary to apply that in such case, it should be reviewed by the Higher People's Court. If necessary, it should be reported to the Supreme People's Court for review."

It can be inferred that, in the light of the current impact of COVID-19, regardless for the doctrine of “frustration of contract” under common law or the principle of “change of circumstances” under Chinese law, if one party intends to rely on those to achieve the purpose of cancelling or changing the charter party, strict conditions for applying of the same must be satisfied, it is therefore very difficult to do so.