Ukraine: Shipping Issues Arising Out Of The Ukraine Crisis

Last Updated: 15 April 2014
Article by Stephen Askins, Michelle Linderman and Amanda Urwin

The background facts

The situation in Ukraine remains fluid and, with events moving quickly, very little is certain. Attention is focused on the Crimea with rumours in early March of Russian naval vessels at times blockading the Kerch Straits which, if true, would quickly isolate the main port of Mariupol. At present, the US and EU appear committed to achieving a non-military solution to the ongoing crisis. Limited sanctions have been introduced by both, aimed at freezing and/or seizing the assets of persons designated under the sanctions for their involvement in undermining the democratic process in Ukraine or misappropriating assets of the State. Russia has introduced its own limited sanctions in response. No-one wants to see any kind of armed escalation, but we can expect a period of uncertainty as Russia decides how it will react.

Ukraine's importance in terms of wheat and corn supplies is significant. It is also a key exporter of metals and minerals to Europe, Russia and beyond. Ukraine ranks as the world's fourth and fifth largest exporter of corn and wheat respectively and it is the world's fifth largest steel exporter. It is also a vital gateway for Russian natural gas to Western Europe, with approximately a fifth of the gas used in Europe flowing across the country. Together with Russia, Ukraine forms the northern coast of the Black Sea, an important shipping route for agricultural products, metals and energy.

The potential disruption for the corn, wheat, gas and steel industries, together with the resulting rise in prices, is causing considerable concern. An escalation of tensions and any military action may have repercussions for shipowners, charterers, crews and insurers alike.

We outline below some of the legal issues that the shipping industry may face if the situation in Ukraine escalates.

Charterparties

War Risk clauses

Charterparties often include specific provisions relating to the outbreak of war or warlike situations. Such clauses generally provide that the contract should be cancelled/terminated in the event of war/hostilities/warlike operations breaking out, either between "two or more" of a list of specified nations (often including Russia and "any country in the EC"), or involving the flag state of the vessel.

What constitutes "war" in this context was the subject of an arbitration in 2002 (Northern Pioneer) where limited German participation in the NATO bombing operations in Kosovo led to charterers purporting to terminate charterparties involving German flagged ships. The Tribunal found that the action was not "war" and that, in any event, Germany was not "involved" (in what was a war between Kosovo and Yugoslavia) for the purposes of the clause. The matter found its way to the Court of Appeal ([2002] EWCA Civ 1878) primarily on points of procedure but the Court confirmed that any right to terminate must be exercised within a reasonable time of war breaking out and doing so a month later was too late.

In the context of a war involving only Russia and Ukraine, then any reliance on a similar termination clause will probably be restricted to charterparties involving vessels flagged in those countries. Whether military intervention by the EU (or individual countries) or the US would be enough to widen the effect of the clause to allow a more general right of termination is likely to turn on the degree of their involvement.

In order for War Risk clauses to be relied upon, it is generally not necessary for war to be formally declared. Whether a state of war (including "hostilities/warlike operations") exists for the purposes of these clauses will be a question of fact. The meaning of "hostilities/warlike operations" is, of course, wider in scope than "war".

One other key question for owners will be whether they have to go there. As we saw during the height of the piracy problem, issues may arise over the right to refuse orders to Ukraine. In the wake of the Triton Lark ([2012] EWHC 70), BIMCO reissued the War Risks Clause (Conwartime and Conwarvoy 2013) and whilst that case was focused on the piracy threat off Africa, deterioration of the situation in Ukraine may see an early test of the principles set out by the Court in the consideration of whether a vessel is exposed to War Risks and whether those War Risks "...may be dangerous or may become dangerous to the vessel, cargo or crew".

In this context, War Risks include:

"...act of war, civil war or hostilities; ....warlike operations;...blockades (whether imposed against all vessels or imposed selectively against vessels of certain flags or ownership...) by any person....or the government of any state..."

What is "dangerous" will depend on the facts and will depend on both quantitative factors (the degree of likelihood that a particular peril may occur) and qualitative factors (the seriousness or otherwise of the consequences of that peril to the vessel). Issues may arise therefore as to whether an owner or master can refuse to go to an area where a War Risk exists and, because of that peril, will be dangerous at the time the vessel arrives there. The Conwartime clause expressly provides that a vessel does not have to pass through a blockade.

It should also be noted that whilst some War Risk clauses will operate to exclude the charterers' safe port warranty, others will not. Furthermore, unless the off-hire clause in the charterparty expressly provides otherwise, hire will generally continue to run during any periods of delay associated with war risks.

When a War Risk clause is invoked and discharge occurs at an alternative port to the one originally nominated, whether the owners will be entitled to additional freight will depend on whether or not the substitute port is within the range specified in the charter. If it is, then freight may be paid as per the charterparty but, if it is not, then the charterers will be obliged to pay all of the additional costs associated with proceeding to and discharging at the alternative port.

Port safety

Charterparties may contain either express or implied safe port warranties. It is well established in law that a port will be safe where, at the relevant time, the vessel can reach it, use it and leave it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship. The time for assessing the safety of the port is the time at which the charterer nominates the port (i.e. it must be "prospectively" safe). Safety means both physical safety and political safety. A port may, therefore, be unsafe if there is a risk of seizure or attack, or if the vessel may be detained, impounded, blacklisted or confiscated.

The question of whether a blockade to Ukrainian ports by the Russian naval forces would amount to an "abnormal occurrence" for the purposes of a safe port warranty is complicated. Following the House of Lords decision in The Evia (No.2)[1983]1 AC 736, the test for an "abnormal occurrence" in these circumstances would be one of foreseeability. An event can be abnormal but foreseeable. The deemed foreseeability or otherwise of any blockade would be key to the question of whether or not damages might be available to shipowners for breaches of charterers' safe port warranties.

Where charterers nominate an unsafe port, owners are entitled to reject that nomination on the basis that it is invalid. In the event that a valid nomination is made but, prior to the arrival of the vessel the port becomes unsafe, a time charterer will be obliged to nominate a new port. Under a voyage charter, the position is less clear and, unless the charterparty specifically provides for it, the charterer may not be able to change its nomination without the express consent of the owner. That is why voyage charters will often provide for a vessel to proceed to the nominated port "...or so near thereto as she may safely get...". Considerations as to whether a charterparty is frustrated may arise if a vessel cannot get close to the nominated port at all.

Frustration

If the situation escalates, or if the Russian naval forces do blockade Ukrainian ports and prevent commercial vessels from entering or leaving, shipowners and/or charterers might seek to argue that their charterparty is frustrated on the basis that the vessel is unable to navigate to Ukrainian ports. It must be noted, though, that frustration is difficult to argue successfully under English law. It would require the party claiming frustration to show that the event relied on had fundamentally changed the performance obligations originally contemplated by the parties and had made further performance under the charterparty impossible, illegal or radically different from that which was originally contemplated by the parties.

Whether there is frustration will depend on the nature of the charterparty and the length of the delay caused. Those entering into charterparties that might be affected by blockades of Ukrainian ports should consider incorporating terms that allocate the risks associated with such occurrence e.g. for delays, extra expenses etc.

The fact that contractual obligations become more onerous or expensive to perform is unlikely in itself to frustrate the contract. So if, for example, access to Crimean ports were blocked for a period of time otherwise sufficient to frustrate the charterparty, the charterparty may not be frustrated if another route would be available, i.e. delivery to another Ukrainian port which is not blocked and onward transportation by road/rail to the original destination port.

Deviation

Charterparties should be reviewed to see whether they allow deviation to a different port although, absent an express provision, the shipowner/master has an implied right to deviate to avoid danger to the vessel, cargo and those on board. Parties may wish to vary their charterparties to allow for discharge at other Ukrainian ports, or even ports outside Ukraine. Conwartime for example, expressly provides for this.

Bills of lading

If it has been agreed that cargo is to be delivered at an alternative port, owners and carriers should be aware of the potential problems posed by an issued bill of lading which names a specific discharge port. It may be that a bill of lading incorporates the terms of the charterparty, or permits discharge at a port other than the one named on the bill. If no such provision exists, however, delivery to an alternative port may constitute a breach of the bill of lading contract. The parties should also bear in mind that even where a bill of lading appears to incorporate the charterparty provisions, proceedings might be commenced in a jurisdiction in which different principles may apply.

Obligation to pay for and arrange insurance

In the absence of express provisions to the contrary, responsibility for, and the costs associated with, insuring the vessel will fall upon owners rather than charterers. Should charterers wish to order the vessel to, or through, an area of heightened war risk, the vessel's insurers may require the payment of additional premiums to compensate for the additional risk. In these circumstances, the issue will arise as to who is responsible for any additional premium and it will depend on the charterparty provisions whether the charterers are to reimburse the owners for any additional premium paid.

Comment

The situation in Ukraine remains in a "watch and see" phase. There is a lot of tension but seemingly a willingness on all sides to resolve things diplomatically. It is to be hoped that that resolve holds good. However, the introduction of sanctions by both the US and EU could give rise to a tit for tat escalation that may yet impact on commercial shipping even if both sides avoid any kind of military action. It remains to be seen whether sanctions will be increased and, in particular, whether any will be imposed against companies or indeed ports operating in the Crimea region. If military action does happen, then that is likely to be considered as a war or warlike situation with repercussions for the various stakeholders involved in any charterparty or contract of carriage. Those transacting business in the region should keep up-to-date with matters in order to minimise any risks to their commercial operations and ensure that any contracts are drafted to take account of the risks that may develop in the future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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