November, 2020 - FAQs: legal issues arising from delays in discharging Australian coal in China
FAQs: legal issues arising from delays in discharging Australian coal in China
The Club has learned that a number of ships loaded with Australian coal are experiencing significant delays in receiving authorisation to discharge in Chinese ports.
It has been suggested that the discharge of Australian cargoes is being restricted in China, but no official policy has been published, at the time of writing. One possibility is that Chinese authorities are enforcing carbon quotas with new vigour, following China’s recent commitment to becoming carbon neutral by 2060, meaning that traders who have exceeded their allocated quota are now unable to take delivery of further cargoes of coal. Whatever the reason, delays are being experienced up to several months, giving rise to the question of which party should bear the associated losses. We set out below some FAQs addressing some of the issues being faced by our Members.
Will ships remain on hire during the delay?
Under a time charter, owners/disponent owners continue to receive hire for the duration of the charter in the absence of an applicable off-hire event. Most standard off-hire provisions are unlikely to apply in a situation of this kind, not least because the ship itself is at all times available for the charterer’s service. Wholly extraneous restrictions are unlikely to trigger standard off-hire clauses, such as clause 15 of the NYPE 1946. That said, bespoke off-hire provisions which operate in these circumstances may exist and each charterparty will need to be considered in detail.
What if the ship is delayed beyond the charter period?
The charterer is obliged to re-deliver the ship within the provided maximum time charter period. In case of late re-delivery, an owner is, in principle, entitled to be compensated at the market rate for the overrun. However, when the duration of a time charter is qualified with the wording "WOG", i.e. "without guarantee", an owner cannot assert that the charter ends automatically when the indicated WOG period has lapsed.
A charterer would only be in breach if it failed to give an estimate of the likely duration in good faith. The test for good faith is simply whether the charterer genuinely believed at the time of fixing that the trip would last for the stated period. There is no requirement for the estimate to be made on reasonable grounds or without negligence (see The Lendoudis Evangelos II [1997] 1 Lloyd's Rep. 404). If a charterer knew that discharge would take an inordinate time, this would be factored into whether it made an estimate in good faith. The current delays in China are unexpected and the duration of any restriction remains uncertain, so it is likely to be difficult to establish that a charterer is not entitled to the benefit of a "WOG" provision.
Can re-delivery notices be withdrawn after the ship is delayed?
Notices of approximate re-delivery must be given honestly, in good faith and on reasonable grounds (see The Great Creation [2014] EWHC 3978 (Comm)). A charterparty often provides for "approximate" re-delivery notices, which can be amended in good faith, and for "definite" re-delivery notices which generally cannot be changed once given. Depending on the language of the clause, there will be a point when a re-delivery notice becomes binding on the parties, and thereafter cannot be withdrawn. A charterer would then become liable in damages, at the prevailing market rate, for any ongoing detention after the conclusion of the charter in accordance with the re-delivery notices.
Can an owner claim an implied indemnity from its charterer?
An owner may argue that it should be compensated for any additional losses incurred due to the delay under the general implied right of indemnity due to complying with the charterer’s orders. To succeed with such an indemnity claim against a charterer, the owner’s loss, damage or liability must be effectively caused by the charterer’s order and cannot result from a risk or cost which the owner has expressly or impliedly agreed to bear under the contract. Essentially there must be no break in the chain of causation between the charterer’s orders and the owner’s losses.
However, an owner places its ship at a time charterer’s disposal for so long as the contract continues and the charterer pays hire. Delay in discharge falls within this envisaged use, even if the delay at a particular port is extensive. It is therefore likely to be difficult to recover an indemnity from a charterer in the present circumstances.
Will an owner be able to claim demurrage?
It is understood that ships are delayed at anchor after arrival at the relevant Chinese ports. As a general principle, under a voyage charter, once the notice of readiness ("NOR") has been tendered, time will count and run continuously unless there are any applicable laytime or demurrage exceptions. Under a port charter, where NOR may be tendered at the customary anchorage, any delay thereafter will therefore be for the charterer’s account unless the circumstances of the delay fall within any of the exceptions. The burden is on the charterer to show that an exception applies. However, in the context of berth charters, assuming the ship is delayed at anchor, the owner will bear the time loss since it will not be permitted to tender NOR until the ship berths.
Can an owner can claim damages as well as demurrage?
Under English law, it is has long been established that demurrage represents the liquidated damages payable by the charterer for its breach of the agreed period for loading or discharge. The demurrage rate reflects the parties’ estimate of the loss the owner is likely to suffer if the ship is detained beyond the agreed period of laytime. This will therefore be the usual measure of liability of a charterer’s liability to an owner for an extensive delay unless there is a limit on the period of demurrage or the delay is a result of a breach by the charterer. Failing to complete cargo operations within laytime will not constitute a breach unless time is expressly stated to be of the essence.
That said, the recent decision in The Eternal Bliss [2020] EWHC 2373 (Comm) has altered this pre-conception somewhat and paved the way for the possibility of a damages claim in addition to demurrage. In that case, the owner was entitled to damages, in addition to demurrage, for losses independent of claims for delay to the ship in respect of the deterioration of cargo because of the delay. However, in the context of coal cargoes, which are not perishable it is unlikely that similar additional damages will be easily available.
Can an owner terminate a voyage charter for the delay?
The mere fact that the charterer has not loaded within the laytime does not constitute a breach and does not, therefore, entitle the owner, without more, to terminate the charterparty and withdraw the ship from service. It is not enough that the period of delay is unexpected, excessive or commercially unacceptable.
Is this a "force majeure" situation?
It is common for voyage charters to include a "force majeure" clause which relieves the parties of their obligation to perform, and liability for damages, if a defined event has occurred. In the absence of such a clause, "force majeure" cannot invoked. However, such clauses are notoriously difficult to invoke, and any flexibility in the language will be construed against the party trying to rely on the clause. It is up to the party seeking to invoke the clause to prove:
- there were no reasonable steps that could have been taken to mitigate the event or its consequences.
- that its non-performance was due to circumstances beyond its control; and
- that it has been prevented, hindered or delayed (as the case may be) from performing the contract by reason of that event;
- the occurrence of an event identified in the clause;
Many "force majeure" clauses require a specific prohibition by governments or, in more arcane language, a "restraint of princes". Given that there is no clear policy prohibition against Australian cargoes, the restrictions in their current form will be weak candidates for invoking such force majeure provisions. Moreover, the enforcement of environmental legislation in the context of quotas, is likely to be regarded as simply the enforcement of a national law, as opposed to a "restraint". Therefore, it may be difficult to bring the current delays within a standard force majeure clause.
Might charterparties be frustrated by the delays?
The English law concept of frustration brings a contract to an end with no further liability for either party. For frustration to apply, there must be an extraneous event outside the control of the parties and not provided for in the contract that renders performance illegal or physically impossible, or a radical change in circumstances from those anticipated at the time of contracting, such that the commercial purpose of the performance becomes impossible to attain. In light of this very high bar, and given that delays are commonplace in shipping, delays of one or two months are unlikely to justify frustration, even in the context of a single time charter trip.
Could the cargoes be considered unlawful in the circumstances?
The charterer has a duty to provide a lawful cargo under most standard charters, e.g. NYPE line 24. This denotes that the cargo will be lawful to load at the port of loading and lawful to discharge at whichever port the charterer elects to designate as the discharge port. Cargo may be classified as dangerous or unlawful if it triggers legal obstructions, due to violation of some municipal law, that cause the ship or other cargo to be delayed or detained However, given that the import restriction appears to be an unofficial verbal ban and some Chinese ports may still allow the import of Australian coal, it may be difficult to establish that there is violation of Chinese local law to ship Australian coal to China such as to render the cargo unlawful.
Can an owner claim unsafe port?
A delay will only render a port unsafe if it is of sufficient duration. The case law indicates that an "inordinate delay" is required, which is likely to be such a period of delay as would frustrate the charter. As discussed above, the present circumstances are unlikely to frustrate the charter and so, it follows, delay is also unlikely to found a good claim for unsafe port.
While there is case law that a port can be unsafe for political reason if there is a risk that the ship can be confiscated by the local government when entering the port. This is not the case here as any restriction does not impose a risk to the ship.
Are there any practical solutions?
If, as has been suggested, the restrictions on discharging coal are a consequence of carbon quotas not being exceeded, owners or charterers may consider prevailing on cargo owners to seek alternative traders that may still have carbon quotas available to purchase coal or consider discharge in a port outside of China.
Unfortunately, however, this is an unenviable situation for both owners and charterers alike and there may be no easy solution other than to simply wait. However, each situation will differ depending on the terms of the applicable charterparty.
Members are invited to contact the Managers with any queries arising out of the issues addressed above.