The Donald vs The Rocket Man - Simon Croall QC and David Walsh

Tue, 26 September, 2017

Potential Legal Issues Under Time Charterparties for Vessels Operating in the Asia Pacific Region

The escalating tensions on the Korean peninsula reached new heights following President Trump’s speech to the United Nations General Assembly last Tuesday in which he said that the United States could “totally destroy” North Korea (the DPRK). The DPRK’s Foreign Minister, Ri Yong-ho, who compared Mr Trump's speech to "the sound of a barking dog", warned on Friday that Pyongyang could conduct an atmospheric hydrogen bomb test in the Pacific in response to the US president's threat. Most recently he accused the United States of declaring war on the DPRK.

The prospect of a hydrogen bomb test in the Pacific by the DPRK raises serious legal questions for ship owners and time charterers operating in the Asia Pacific region. We examine three such questions below.

Might ports in the region be considered legally “unsafe” by reason of the latest DPRK threat?

The classic English law definition of a safe port is that given by Sellers LJ in The Eastern City [1958] 2 Lloyd’s Rep 127, in which he stated at page 131 of the report that: “a port will not be safe unless, in the relevant period of time, the particular ship can reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship…”

This test was recently approved by the Supreme Court in The Ocean Victory [2017] 1 WLR 1793. In that case, the Supreme Court focused, among other things, on the meaning of the words “abnormal occurrence” in Sellers LJ’s formulation. Lord Clarke JSC said at paragraph 25 of the judgment that the key question when considering whether something is an “abnormal occurrence” is to ask: “Was the danger…something rare and unexpected, or was it something which was normal for the particular port for the particular ship's visit at the particular time of the year?”

Based on this approach it is hard to see how the threat of a hydrogen bomb test in the Pacific could, in the current circumstances, be anything other than an “abnormal occurrence” in the context of any potentially affected port. Assuming this is right, it seems likely that, for the time being, ports in the region will not be considered unsafe as a matter of English law: whilst the spectre of a hydrogen bomb test might be a danger to which a ship is exposed which cannot be avoided by good navigation or seamanship, it will almost certainly be an “abnormal occurrence” so far as particular ports are concerned.

The position might be different, however, if extra-territorial weapons tests more generally by the DPRK became a regular occurrence. It might then be argued that for ports potentially affected by such tests the associated dangers had become features of such ports.

It is also important to remember that the charterers’ obligation is to nominate a port which is prospectively safe. Thus, in The Evia (No. 2) [1982] 2 Lloyd’s Rep 307, it was held that although the vessel had become trapped after discharging at the port of Basrah during the Iran/Iraq war, this was unexpected at the time the port was nominated and so the charterers were not in breach of the safe port warranty. Unless there is greater clarity from the DPRK about where precisely such a test might take place, it would appear difficult to argue that any particular port in the region is prospectively unsafe.

Might owners be entitled to refuse to sail to the region in light of the threat by relying on war risks clauses?

Time charters often incorporate one of the BIMCO war risks clauses and the 1993 Conwartime clauses are often seen reproduced in full towards the end of the charterparty terms. The provisions entitle owners, among other things, to refuse to sail to areas which, in the “reasonable judgement of the Master and/or the Owners, may be, or are likely to be, exposed to War Risks”.

What do these words mean?

The words “reasonable judgement of the Master and/or the Owners” import an element of objectivity into the analysis. The court or tribunal considering the clause would be asking what a reasonable owner or master would think in the particular circumstances. The subjective instincts of a particularly sensitive owner or master would not be relevant.  

In The Triton Lark [2012] 1 Lloyd’s Rep 151, Teare J suggested that the degree of probability required by the words "may be, or are likely to be” could include an event which had a less than an even chance of happening but would not include a bare possibility.

“War Risks” are defined broadly in the clauses and include “any war (whether actual or threatened), act of war, civil war, hostilities, revolution, rebellion, civil commotion, warlike operations, the laying of mines (whether actual or reported), acts of piracy, acts of terrorists, acts of hostility or malicious damage, blockades (whether imposed against all vessels or imposed selectively against vessels of certain flags or ownership, or against certain cargoes or crews or otherwise howsoever), by any person, body, terrorist or political group, or the Government of any state whatsoever, which, in the reasonable judgement of the Master and/or the Owners, may be dangerous or are likely to be or to become dangerous to the Vessel, her cargo, crew or other persons on board the Vessel.”

In light of the above, one can certainly see scope for arguments between owners and charterers about whether orders to the potentially affected region can be refused. The tests themselves (especially set in a context where DPRK have indicated that the regard the US as having declared war upon them) might well be regarded as an act of war or a war-like operation. A more difficult question is likely to be the stage at which the risk of being exposed to a weapons test (or similar action) becomes more than a bare possibility for a particular vessel under time charter. This difficult issue is complicated further by the apparent unpredictability of the DPRK regime and the hyperbolic rhetoric which has recently been used on both sides.

If the DPRK’s threat materialises, could owners or charterers cancel their charters by relying on the war cancellation provisions?

A hydrogen bomb test in the Pacific, particularly if takes place anywhere near US territories such as Guam, could be construed by the US as an act of war by the DPRK. Indeed, as the DPRK’s most recent comments suggest, it is possible to envisage events short of such a test that will be regarded by one or both sides as meaning there is a state of war.

War cancellation provisions are commonplace in time charters and can be found, for example, in Shelltime 4 (clause 33), NYPE 93 (clause 32), Asbatime (optional clause 31) and in the pre-2001 version of the Baltime (clause 21(E)). They do not usually require a formal declaration of war to be engaged (see for example the NYPE 93 form) but they are usually drafted by the parties such that the right to cancel arises only when two or more identified parties are at war. Clauses often identify those parties as the permanent members of the UN Security Council (the P5); sometimes the member states of the European Union and the flag state of the vessel are also included. One might not, therefore, expect such clauses to respond to an outbreak of war between the DPRK and the US.

However, the Sino-North Korean Mutual Aid and Cooperation Friendship Treaty, signed between the PRC and DPRK in 1961, states in Article 2 that the two states will undertake all necessary measures to oppose any country or coalition of countries that might attack either nation.

Might this open the door to arguments by owners or charterers that they are entitled to cancel because there has been an outbreak of war between two members of the P5, even if there are no actual hostilities between the US and PRC? We suspect such an argument would be difficult. The decision of the Court of Appeal in The Northern Pioneer [2003] 1 Lloyd’s Rep 212 suggests that the English courts would probably construe the ambit of such clauses restrictively. (In that case, NATO operations in Kosovo were not deemed to be a “war” for the purposes of the war cancellation clause.) The answer will, in the end though, depend on the precise formulation of the war cancellation clause in question. Indeed, given the current tensions, owners and charterers trading in the Asia Pacific region may think it worthwhile to include a more extensive list of countries in their war cancellation clauses than had hitherto been considered necessary.

Conclusion

As the war of words between the US and the DPRK intensifies, it is inevitable that some owners will become increasingly jittery about the prospect of sending their vessels into the region. They would no doubt be well advised to check that they have the necessary protections written into their time charters as it surely only a matter of time before these issues arise and are tested before courts and arbitration tribunals.

Simon Croall QC

Simon Croall is an established commercial silk who has appeared in every court (including twice in the House of Lords). He is a sought after trial advocate as well as being respected in the appellate courts. In recent years much of his work has been in the context of International Arbitrations.

He led the team for Owners in landmark House of Lords case on remoteness in contract damages Transfield Shipping v Mercator Shipping ("The Achilleas") [2009] 1 AC 61. Recent reported highlights include another important case on damages Fulton Shipping v Globalia (The New Flamenco) in both the Court of Appeal [2015] EWCA 1299 and below [2014] 2 Lloyd’s Rep. 230, Essar Shipping v Bank of China [2015] EWHC 3266 on factors relevant to the grant of anti suit injunctions, AET Inc v Arcadia Petroluem (“The Eagle Valencia”) [2010] 2 Lloyd’s Rep. 257 (Court of Appeal), Mediterranean Salvage v Seamar [2009] 2 Lloyd's Rep. 639/ [2009] 2 All ER 1127 (Court of Appeal) on implied terms and Dalwood Marine v Nordana Lines (“The Elbrus”) [2010] 2 Lloyd’s Rep. 315.

simon.croall@quadrantchambers.com

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David Walsh

David is a highly regarded commercial junior with a strong reputation for intellectual rigour, skillful advocacy and client service. He has a broad practice with particular experience of insurance and reinsurance, shipping, commodities, shipbuilding and offshore construction disputes. He appears regularly in trials, interlocutory matters and on appeals in the English courts and also has a strong international arbitration practice, having been involved in numerous arbitrations on ICC, UNCITRAL, ARIAS, FOSFA, GAFTA, LMAA, LCIA and HKIAC terms.

David is ranked as a leading junior in the Legal 500 UK, Chambers UK, Chambers Global and the Legal 500 Asia Pacific directories, in which he has been described as "incredibly bright and very easy to get on with", "an 'unflappable' dry shipping junior who is particularly noted for his skilful advocacy" and "a 'go-to' junior for marine insurance".

david.walsh@quadrantchambers.com

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