Unrest in Egypt – issues faced by shipowners

by Reed Smith
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Current status in Egypt

The overthrow of President Mohammed Morsi by the Egyptian military has resulted in violent scenes, civil unrest and hundreds of deaths across Egypt. Many in the maritime world are watching closely to see what effect, if any, the events in Egypt will have on the Suez Canal. The Suez Canal is, of course, one of the world’s primary shipping routes with in excess of 20,000 ships passing through it each year.

On 31 August 2013, a COSCO container vessel was attacked in the Suez Canal; however, the attack was unsuccessful. In a statement by the Suez Canal Authority the incident resulted in “no damage, whatsoever, either to the ship or its cargo of containers.” To date, this has been the only reported incident in the Suez Canal during the recent period of unrest in Egypt. Nevertheless, the situation remains fragile and potentially volatile. This note sets out a number of key issues faced by shipowners in light of the current situation in Egypt.

Can owners refuse to call at Egyptian ports?

War risks clauses in charterparties usually provide a right of the owner to refuse to enter a load port or discharge port if, in the reasonable opinion of the master, entering that port would place the vessel, its crew or its cargo at risk of “war risks”. In the context of the current situation in Egypt, “war risks” usually include civil war or civil commotion.

When is the degree of risk in proceeding to a port to be assessed? This is usually understood to be the date of the charterer’s orders. Notably in The Paiwan Wisdom [2012] EWHC 1888 (Comm), it was held that, under the CONWARTIME 2004 clause, the shipowner was not precluded from relying on that clause to justify its refusal to proceed on a voyage to Kenya ordered by the charterer where there was no material change in the risk of proceeding with that voyage between the date of the charterparty and the date of the order.

Can owners refuse to transit the Suez Canal?

Some war risks clauses go even further and provide a right of the owner to refuse a charterer’s orders regarding the route the vessel should take to perform a voyage. This right of refusal is, again, confined to circumstances where, in the reasonable opinion of the master, the vessel, its crew or its cargo would be put at risk if the charterer’s orders (as to the route taken by the vessel) were followed.

In addition, there is English authority1 for the proposition that, in certain circumstances, an owner may be entitled to reject a charterer’s employment orders where following such orders would place the vessel, its crew or its cargo at risk, even in the absence of an express right to do so in the charterparty. In this context, employment orders would include the route taken by the vessel.

Whilst Egypt is currently experiencing severe unrest, given that only one vessel (of the 50-60 transiting the Suez Canal per day) has been affected by the unrest with no resulting damage, an owner would not be entitled to reject a charterer’s orders to transit the Suez Canal unless, of course, the situation deteriorates.

What happens if the Suez Canal is closed?

Given the significance of the Suez Canal for global trade, the Egyptian government and the wider international community will go to great lengths to keep the Suez Canal open. However, the situation remains unstable and, as such, shipowners may wish to consider the issues which might arise in the unlikely event that the Suez Canal is closed.

For vessels under time charter, the situation does not give rise to many complications. Hire remains payable at the daily rate and it will be up to the charterer to make alternative plans for the vessel’s employment.

The situation is more complex when vessels are under voyage charter. Freight may have been fixed in advance on the basis of a transit through the Suez Canal. If this becomes impossible because of its closure, an owner may find itself having to make a much longer and more hazardous journey to the discharge port (i.e., round the Cape of Good Hope) in order to fulfil its obligations to the charterer. The situation becomes further complicated on a laden voyage as the owner will owe additional obligations to the bill of lading holder.

Frustration

In certain circumstances, an owner may be relieved of his contractual obligations if the alternative route renders the contractual performance radically different from the original agreement between the parties such that the contract is frustrated.

This issue was considered in The Eugenia [1964] 2 Q B 226. In that case, charterers ordered the vessel to proceed through the Suez Canal at the outbreak of the Suez War. The charterparty required that the ship should proceed “via the usual and customary route”. The Court of Appeal held that this meant that the vessel should follow the route which was usual and customary at the time of performance, not the route which was usual and customary at the time the parties entered into the charterparty. On the facts, it was held that performance via the Cape of Good Hope was not radically different from that which was contemplated by the parties when the charter was concluded, and therefore the charter was not frustrated. For the doctrine of frustration to apply, “It must be more than merely more onerous or more expensive. It must be positively unjust to hold the parties bound” (Lord Denning at page 239). Given the date of this judgment, it will be interesting to see how the courts will approach this question 60 years on.

Safe port warranties

Most charterparties will contain a charterer’s safe port warranty. Accordingly, if, at the time the orders are given by the charterer to proceed to a port, that port is unsafe, then the owner is entitled to reject those orders. A port is considered “safe” if the vessel in question can get to, use and return from it without, in the absence of some abnormal occurrence, exposing the vessel to danger that cannot be avoided by good navigation and seamanship.

Whether a port is unsafe will depend on the facts of each case, but the current situation in Egypt is unlikely to render its ports unsafe without a further increase in disruption and danger.

Charterparty protection

For the reasons set out above, an owner is less concerned about the potential closure of the Suez Canal in the context of a time charter. However, owners may wish to provide expressly for the closure of the Suez Canal when entering into voyage charters. The charter could, for example, provide that, where a voyage is contemplated to involve transit through the Suez Canal, freight is to be renegotiated or subject to a deviation calculation if the Suez Canal is closed for a specific period.

For charters already on foot, a number of other charterparty clauses could provide rights for both parties, including clauses relating to war risks, deviation, safe port warranties and detention/demurrage. Furthermore, as mentioned above, owners should always consider their additional obligations to bill of lading holders.

Conclusion

Owners should continue to monitor developments in Egypt in order to ascertain the level of risk to their vessels, crew and cargo. The contents of this note is general only and should not be relied upon without specific legal advice.

1. The Hill Harmony [2001] A.C. 6382.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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