The increased threat of piracy attacks has drawn attention to the need for special clauses/revision of various contract terms.
Charterparties
The high frequency of acts of piracy off the Horn of Africa and more wide ranging attacks in the Indian Ocean has keyed the area to be designated an additional premium “War Risk” area. In general terms, a time charterer cannot direct the Vessel to any port, place, area or zone where the vessel could be reasonably expected to be exposed to such War Risk, without first obtaining the owners’ written consent. In some voyage charters the owners may refuse to perform to enter the load or discharge port or may require the charterers to nominate another safe port. The owners will be free to give their consent or withhold it as the owners will have a reasonable interest in protecting their vessels from piracy attacks. It need be underlined that very different considerations may apply if the vessel is trading under a time or a voyage charter.
It should be underlined that the standard form of a number of charter parties do not expressly cover the situation, and BIMCO and other strong market participants such as Shell have created their own recommended clauses for dealing with acts of piracy and terrorism. Owners should pay extra attention to the standard part of the charter used and make sure his interest in respect of an act of piracy is covered (to the extent possible in the course of commercial negotiations). Unfortunately, despite the high publicity, we still see charters are entered into by a recap referring to a previous standard charter without paying too much attention to the terms of the standard form. The owners should first check how trading areas, war risk insurance and piracy are regulated.
We have in recent months seen an increased focus on these clauses. The charterers want to have as much freedom as possible to trade the vessel, and prefer specifically to clarify that passage through Gulf of Aden and the Indian Ocean is always permitted. Some owners want to restrict such trading. Both parties have to assess the recommended vessel routing suggested by authorities in calculating the time and cost of the performing voyage. Most commonly the owners see the charterers’ need and focus on including provisions in respect of additional insurance coverage falling to be for the charterers’ account. Additional factors for owners include seaworthiness issues linked to compliance with Best Management Practice, on hire/off hire clauses, crew war risk bonuses and liability issues arising from placing weapons on board ships.
Difficulties can arise where a charter is entered into with full knowledge of the current situation, but without clarifying how owners can exercise their discretion to refuse to proceed into an unsafe area. A charterer will in such situation argue that the owner had to be very aware of the situation and must be deemed to have allowed trading through Gulf of Aden/Indian Ocean since no reservations were made. This will be a strong argument if the vessel was already trading through Gulf of Aden/Indian Ocean or the owner had to understand that this would be a part of the vessel’s intended trade. Counter arguments from the owner could be that the vessel was supposed to have another trading area but the charterer later changed the trading area, or that the acts of piracy and risk have significantly increased since the date the charter was entered into. Factually this is easier to demonstrate in the context of port risks. In any event, we strongly recommend both charterers and owners to address the issue when negotiating the charter and specify any restrictions/requirements in the charter. This is a situation known to the parties and should not be overlooked or left to the very general standard provisions.
Another question that should be considered is to specify clearly if the vessel will go off hire or remain on hire if hijacked. For a bareboat charter, the vessel will normally stay on hire. For a time charter a recent English judgment (MV “Saldahna”) ruled that the vessel remained on hire, but the judgment was linked to specific wording in that contract (NYPE). If the charterer insists on being permitted to trade the Gulf of Aden/Indian Ocean it may be a reasonable requirement to clearly state that the vessel will remain on hire if hijacked. It could also be considered to add provisions on who will cover the additional costs as a consequence of a hijacking; i.e. in a bareboat charter the bareboat charterers will handle the hijacking through his insurance company. However, the owner will most likely also incur some cost for legal advisors and also additional fees for the mortgagee’s professional advisors which will be chargeable to the owner. Whilst it is hard to argue that the hijacking is a default of the charterers, these additional costs are likely to be reimbursed by the charterer as a consequence of an implied indemnity for following charterer’s orders. A provision stating that the charterer will indemnify the owner for any reasonable costs in relation to such hijacking is recommended (unless already covered by more general indemnifications).
Bills of lading
Duties are owed to cargo interests under contracts of carriage carried under negotiable documents such as bills of lading. This may affect the owner or charterer, dependent on which is considered the Carrier under the bill. A number of standard bill of lading forms are in existence, often containing “liberties” permitting the Carrier to deviate or discharge cargo other than at the named port in the event the Master determines the voyage to be unsafe. Charterparties frequently permit the charterer to select the form of bill of lading to be issued which will then bind the owner, or the owner undertakes to issue bills of lading “as presented”. Care should be taken when negotiating new chartererparties to ensure that where possible bills are only permitted to be issued in a form which preserves the carrier’s rights to deviate in case of unsafety.
The form of bills of lading may also be regulated by agreements between seller and buyer which will themselves contain force majeure provisions.
Financing agreements
We have also seen that the banks financing the vessels have an increased focus on acts of piracy. After all, an important part of their security is the mortgage over the vessel, and this security is jeopardized if the vessel is hijacked.
We have seen in many loan agreements that the definition of “Total Loss” includes hijacking where a vessel is hijacked for a period of more than 30 days. The result is that the loan is accelerated and shall be repaid within a period of 90 – 180 days. Such provisions do not comply with reality. A hijacking will very often last for more than 30 days. The current average delay in obtaining the release of a pirate hijacked vessel is around 180 days. The English courts have concluded that the vessel will not be considered an actual total loss under insurance policies as the ransom demand indicates an intention to return the vessel to its owner. In such situation, the owner risks that the loan is accelerated and must be repaid, while no payments will be received under the insurances. Under certain Loss of Hire insurances under the Norwegian Plan, detentions of vessel for 6 or 12 months may be treated as constructive total losses, so it is prudent to check not only the insurance terms, but also the type of cover. It would be in the best interest of the owner to have the requirements in the loan agreement brought in conformity with the insurance terms.
Also, most loan agreements have an extensive list of covenants. Usually there is a general provision to trade the vessel in accordance with insurance requirements. However, the banks should consider adding additional covenants for trading in piracy infested areas, such as compliance with Best Management Practice and requirements for additional insurances with a specification of these always subject to approval by the banks. An Owner is under an obligation to notify underwriters if his vessel is trading in an additional premium war risk area, and notification to the lender can be made at the same time. On the other hand, an owner trading regularly through Gulf of Aden/Indian Ocean cannot every time run to the bank for permission or review of additional insurances, and the banks most likely would not wish to administer such additional follow up of the vessel’s trade. Inclusion of certain requirements will, however, raise attention to these matters.
An important matter to consider for an owner is also to ensure that his charters are back-to-back with the requirements under the loan agreement/mortgage on these issues.