20th April 2020

On the 11 March 2020, the World Health Organisation announced that the novel Corona Virus (COVID-19) was being treated as a world pandemic. It has resulted in the lock down of various nations, with many non-essential services being ordered closed in order to mitigate the spread of the virus.

Though ports largely remain open to cargo vessels, the pandemic has impacted the shipping industry due to shortages of crew, the closure of shipyards delaying necessary refit works and restrictive measures being implemented by certain ports in order to ensure the safety of their personnel. As supply chains break down, and contractual deadlines are missed, parties are investigating how to mitigate their exposure to the damages being incurred as a result of this unprecedented virus.

Force Majeure

Force Majeure is a principal at law which is a defence to performance and which  allows for a party to refuse liability for damages caused to another due to an unforeseeable or unpreventable event which has rendered the performance of an obligation, impossible  The question that arises, therefore, is whether COVID-19 can be considered an unforeseeable or unpreventable event – a force majeure, and whether parties may rely on such a principle to mitigate their liability for damages.

The application of this principle largely depends on the choice of law provisions in the contract. The UK for instance, does not recognise force majeure as a principle outside of contract law and therefore, its applicability would depend on its express inclusion within the contract and the specific wording contained in the clause. Typical scenarios covered under a force majeure clause include acts of war, floods, earthquakes, restraint of government and strikes. If the contract included a force majeure clause, this needs to be carefully analysed to determine whether terms included are wide enough to cover defaults caused by a pandemic such as COVID-19.  Broadly speaking these clauses are triggered by the occurrence of an unforeseeable event at the time when the contract was made.  In this light, the terminology used in a number of standard forms frequently used in the shipping industry is being considered below.

Force Majeure and the Shipping Industry

Ship Sale Agreements:

Under the Singapore Sale Form, a Seller is exempt from his responsibility to pay compensation to the buyer for losses and expenses for failure to give notice of readiness ‘where the failure was caused by matters outside of the Sellers’ reasonable control’. The burden of proving this shall be on the sellers. Similarly the Nipponsale 1999 includes a widely drafted force majeure clause that annuls the agreement and exempts either party from liability ‘should the Vessel not be able to be delivered before the Cancelling Date through the outbreak of war, the restraint of Governments, Princes or People political reasons or any other cause over which the Sellers have no control’.  Both these clauses require the Seller to prove that the contractual obligation could not be completed  due to matters beyond their control that arose as a direct result of COVID-19. The Nipponsale inclusion of’restraint of Governments’ can also be argued to include, lockdowns, closure of non-essential businesses and quarantining measures.  On the other hand, the Norwegian Sale Form does not include a force majeure clause, therefore this will be dependent on the choice of law provisions and if the jurisdiction selected contains provisions in its local law to cater for force majeure events.

Ship building Agreements:

Saving amendments made to the standard clauses, The Shipbuilding Contract of the  Shipowners Association of Japan (SAJ), provides in Article VIII that ‘intervention of government authorities…labour shortages, plague, epidemics’ constitute grounds for postponement in the delivery date. Similarly the BIMCO NEWBUILDCON allows for the delivery date to be extended on the basis of force majeure events which include ‘any government…control, intervention, requirement or interference….epidemics…any other cause of a similar nature to the above beyond the control of the Builder or its Sub-Contractors’. While these clauses would seem to cater for delays caused by COVID-19, under BIMCO the builder would have to prove that such events were not caused by the error, neglect, act or omission of the Builder, could not have been reasonably foreseen at the date of Contract and that the Builder would have taken all reasonable efforts to avoid and minimise the effects such events would have on the delivery of the vessel.

Charterparties:

Under THE NYPE and BALTIME forms, the vessel will be considered off hire if  unable to operate due to a ‘deficiency of officers/men’. The NYPE allows for off-hire where this is caused ‘by any other cause preventing the full working of the vessel’. Under Shelltime 4, the vessel will be placed off-hire where time is lost …’for the purpose of obtaining medical advice or treatment for or landing any sick or injured person…[or]…due to any delay in quarantine’. These clauses would seemingly cover situations where a ship is delayed or becomes inoperable due to a number of crew becoming unwell due to the virus. While time charterparties require the voyage to be performed with the utmost dispatch, most charterparties would include a clause to allow for a deviation in order to save a life. In a time charterparty, charterers will have an obligation to nominate a safe port and therefore where a port has become unsafe due to COVID 19 an alternative port may be nominated . Many charters include reference to the Hague/ Visby Rules which under Article IV rule 2 (h) exclude carrier responsibility for loss or damage arising from quarantine restrictions, a useful provision in the current circumstances.

The Maltese Position:

Force Majeure is considered a defence for the non-performance or the delay of an obligation under the Civil Code. Article 1133 of the Civil Code states that ‘The debtor, even though there has been no bad faith on his part, shall be liable for damages, where competent, both for the non-performance of the obligation as well as for the delay in the performance thereof, unless he proves that the non-performance or delay was due to an extraneous cause not imputable to him’. It is further stated in Article 1134 that ‘The debtor shall not be liable for damages if he was prevented from giving or doing the thing that he undertook to give or to do, or if he did the thing that he was forbidden to do, in consequence of an irresistible force or a fortuitous event.’  Thus the question arises, as to what constitutes an irresistible force or a fortuitous event under Maltese Law?

In the case Margaret Gauci vs Pierre Caruana [1], reference was made to the Appeal Court decision in the names Mizzi Vs Paris et of 27 March 2009. Force Majeure was described as an irresistible force, one that could not be avoided by the exercise of due diligence. It cannot be claimed if a person has contributed to the damage by a positive or negative act. Therefore according to law, it is not sufficient for there to be an unusual disproportionate event, that is a product of the forces of nature, but it must be inevitable, in that it could not have been avoided through the exercise of due diligence of a bonus pater familias. Bartolo v Elesolar Company Limited [2] confirmed that the burden of proving the impossibility of performance lay with the person seeking its defence.

Malta also incorporated the Convention on the Contract for International Carriage of Goods by Road [3] (CMR) which makes provision for force majeure in Article 17(2). In interpreting the clause, Hill and Massent [4] stated thatWhat the carrier must show is more akin to the plea of impossibility of performance of a contract which involves an event which renders the contract not merely more onerous but completely impossible of performance. Writers on the CMR are agreed that the event must be one which literally ‘could not’ be avoided by the carrier.’ While David Glass [5] confirmed that “The carrier cannot hope, simply that ordinary care was taken, to escape liability. He must show that in respect of the particular loss or damage, no failing on his part could have contributed to it. It follows that a high degree of proof is required on his part, normally by proving the actual cause and showing how it arose with no fault on his part”.

Conclusion

Force Majeure provisions are interpreted strictly in order to ensure that they are not used unscrupulously by a party in order to evade responsibility. The existence of COVID-19 does not in itself create an automatic force majeure event. It must be causative, and directly impede the performance of the obligation due to say a port closure, a shortfall of crew to operate a vessel, a closure of shipyards to carry out repairs/building by government decree or due to mass infection or some other related act. Therefore, it is not sufficient that the performance of the obligation has become more burdensome, or is suddenly more expensive to fulfil. A party claiming force majeure will have to prove that they have employed the standard of care that is expected from a bonus pater familias to fulfil the contract, mitigate losses and must further prove that they have not contributed to the failure or delay in performance of the obligation through their own actions or negligence. Thus it is exceptionally difficult to apply the principle of force majeure when the obligation is inherently dangerous and risky.[6] In this regard, persons who entered into a contract after the outbreak of the COVID 19 virus and the imposition of various restrictions might have a hard time proving that the non-performance of their obligation was unavoidable.

Should you require further information about this topic, please do not hesitate to contact Dr. Martina Farrugia on martina.farrugia@fenlex.com.

©Fenech & Fenech Advocates 2020

Disclaimer │ The information provided on this Update does not, and is not intended to, constitute legal advice. All information, content, and materials available are for general informational purposes only.  This Update may not constitute the most up-to-date legal or other information and you are advised to seek updated advice.

[1] of 29 April 2009 1668/1995/1AF

[2] First Hall Civil Court, JRM 509/19991/1

[3] Inerntational Carriage of Goods by Road Act, Chapter 486 of the Laws of Malta

[4] CMR: Contracts for the International Carriage of Goods by Road: Hill and Massent: Lloyd’s of London Press Ltd, 1984 pg 86

[5] David Glass – The Divided Heart of the CMR Convention 14 E.T.L. 1979

[6] D’Amato et vs Camilleri 1988