Coronavirus and its legal implications to the shipping and freight industry

Coronavirus Image : ScienceDirect

Coronavirus is defined as an enveloped non-segmented, single-stranded, positive-sense RNA virus named after it corona – or crown – like surface projections..

A novel coronavirus (2019-nCoV), is a new strain of coronavirus that has not been previously identified in humans or detected before the outbreak was reported in Wuhan, China in December 2019..

Who can contract this virus..??

People living or travelling in an area where the 2019-nCoV virus is circulating may be at risk of infection.. At present, 2019-nCoV is circulating in China where a vast majority of people have been infected..

People who have recently traveled from China or who have been living or working closely with those travelers can also contract this virus.. This includes “seafarers“, the people who keep the shipping and freight industry and therefore the world economy running..

The virus has caused severe disruption around the world and particularly in China, the world’s second largest economy and a trade powerhouse for most of the countries around the world..

Coronavirus forced Chinese authorities to extend the Spring Festival break initially from Jan 24 – Jan 30 to the 2nd of Feb in an attempt to contain the virus..

But it has been reported that at least 24 of China’s 31 provinces, municipalities and autonomous regions, including Beijing and Shanghai, have told businesses not to reopen before February 10 at the earliest..

As the virus rages in China, there have been severe disruptions in trade and as per Alphaliner, vessel calls in major Chinese ports have dropped by around 20% since the middle of January when the virus became more prevalent and the world rushed to control the spread of the coronavirus..

Factory shutdowns and other restrictions in China is expected to reduce global ocean container volumes by around 0.7% over the full year, or about 6 million containers..

It is important to remember that 7 of the world’s top 10 container ports are based in China and as per Alphaliner, “The full impact of the Chinese coronavirus outbreak on container volumes will not be fully measurable until ports announce their throughput numbers for the first quarter, but data collected on weekly container vessel calls at key Chinese ports already shows a reduction of over 20% since 20 January”..

Industry and shipping experts have also weighed in on the topic with Peter Sand, chief shipping analyst at BIMCO commenting that “A closure of the world’s manufacturing hub impacts container shipping at large, as it is a vital facilitator of the intra-Asian and global supply chain. This will affect many industries and limit demand for containerized goods transport.“..

Many container lines have announced blank sailings cancelling the calls into China to avoid the crew contracting and spreading coronavirus to other ports along the liner service route..

These cancellations alongwith the shutdown in China also means that in a lot of the cases, containers meant for the Chinese markets are either stranded on board ships, off loaded in alternate locations or sitting in the various ports and terminals incurring port storage, demurrage and detention..

A lot of these containers have been diverted to Busan in South Korea which has seen an increase of around 78% capacity..

Busan port officials have commented in the media that “Shippers are parking cargo at our ports, so later, perhaps when the coronavirus dies down and the level of cargo (backlogged in China ports) decreases, they can deploy a small ship to carry these cargo to their destination in Chinese ports”..

Since these extended void sailing programs on long-haul services (by container lines) are slated to continue until mid-March, any cargo volume recovery could be negatively affected, even after the end of the holidays” Alphaliner reports.

ALL of the above additional costs have NOT been taken in to consideration by anyone.. Not the seller, not the buyer, not the forwarder, not the carrier, not the ports and not the trade in general.. But there are several cost and legal implications to this.. So what happens now..??

Legal implications and the effects on trade

For those of you who are interested in learning about the legal and trade implications of this epidemic, below note from Malcolm Hartwell a legal expert in Maritime matters and Director of Norton Rose Fulbright South Africa Inc explains some of the significant effects the novel coronavirus is having on carriers, traders and insurers

Coronavirus and its effects on international trade and insurance

The deadly novel coronavirus outbreak (2019-CoV) has resulted in passenger and cargo ships being quarantined around the world, partial and complete travel bans to parts of China and shipping and airlines being unable or unwilling to deliver cargo to the contractual destination.

Non-delivery of cargo will affect traders, banks, shipping and airlines, freight forwarders and everybody else involved in the logistics chain.   Carriers will need to assess their obligations to deliver cargo, and their exposure to claims, by reference to their contracts of carriage – which may need to be amended to protect them from future liability. 

Cargo interests will also need to review their sales contracts, explore the possibility of recovering losses from carriers and assess to what extent they have cover under their insurance arrangements.

The most pertinent problems will be as follows: non-delivery of cargo due to ships and planes being placed into quarantine (and storage) at an intermediate final place of delivery and consignments being returned to the original place of loading.  Each of these cases will affect the parties to the sales contract and carriage contracts and have them looking to each other and their insurers for the resultant losses.

Although much of the world’s trade, particularly in commodities, is governed by comprehensive sales contracts, the rest often consists simply of a telephonic call, an exchange of emails or a written order followed by an invoice.  Buyers and sellers need to examine their sales contracts to ascertain whether they either have a claim under that contract for non-delivery or delivery to the wrong destination or a defense to such a claim.

Where comprehensive contracts have been concluded, the majority of them will include a force majeure or similar clause which will prevent the aggrieved party from recovering from the seller in the event that the cause of the loss is, broadly speaking, outside the reasonable control of the seller. 

Where there is no such clause or no contract at all, whether or not the aggrieved party can recover will depend on the law of the country where the claim is pursued.  In most common law countries such as South Africa, the seller would not be liable to the buyer for late or non-delivery caused by the coronavirus.  This is not always the case in common law countries and will depend on the circumstances and the applicable law.

That said, sorting out what should be done with the cargo will take careful consideration.

Insofar as the carriage contracts are concerned, the majority of these will be in the form of bills of lading, charter parties or air waybills.  Those contracts may be governed by national legislation and by carriage regimes such as the Hague-Visby Rules in the case of bills of lading or the Montreal Rules in the case of air waybills. 

Whether or not claims lie against the contractual or actual carriers will depend on the terms of the contract with that carrier.  In the vast majority of cases, carriers contract out of liability for consequential losses and also for losses that arise due to circumstances outside their control.  Fortunately for carriers and unfortunately for cargo owners, in most cases the burden of dealing with non-delivery will fall on cargo owners.

Cargo owners may wonder what insurance cover they may have.  Most of the word’s trade is insured on terms similar to those contained in Institute Cargo Clauses A (ICC(A)) which is a standard form developed in London market.

Although it is described as all risks insurance, the ICC (A) clauses are only designed to indemnify the insured in the event that there is physical loss or damage to the cargo.  As a general principle, unless there is physical loss or damage, a policy will not respond to a claim unless one of the supplementary clauses specifically allows for it. 

The policy excludes underwriters’ liability to indemnify the insured in the event that the loss or damage is proximately caused by a delay.

In circumstances where a cargo has not been delivered to its final destination due to quarantine, earlier delivery to another port, or return to the original port, and this caused the loss, then underwriters would argue that this is a loss caused by a delay and accordingly not covered. 

Generally, this argument would be upheld, but it will depend on the law of the country where the dispute under the policy is heard. 

The ICC clauses include a clause which requires underwriters to pay for the costs of forwarding cargo to its final destination if it is discharged at an earlier port.  This cover however only arises in the event that it is caused by a risk covered by the policy.  The policy covers loss or damage to the cargo only.  It does not cover consequential losses caused by the coronavirus outbreak and accordingly this extension would not wholly apply. 

If cargo is insured under terms similar to the ICC(A) and the cargo is not delivered to final destination, cargo owners must immediately advise their insurers.  This is because the insurance terminates at the place of delivery even if it is not the original place of delivery but gives cargo owners this option of asking insurers to extend the insurance for a further period either while they make other arrangements to deliver it or while it is in storage.

For international trade then the message is clear. All of the parties involved need to assess their existing contracts and determine their right to claim or their exposure to claims for non-delivery or delayed delivery. 

They also need to adjust their contractual arrangements going forward to protect their position. All those parties also need to assess their insurance arrangements to determine whether a claim will lie under the policy, whether they held a cargo insurance policy or any liability insurance carriers and logistics companies.

Force Majeure

There are several queries from the market regarding the “Force Majeure” clause that has been invoked on the back of this outbreak..

Muthu Jagannath of NAU Pte Ltd a claims correspondent/consultancy firm based in Singapore dealing with Transport Liability, P&I and H&M Claims clarifies the validity of force majeure for contracts which may be in force between Chinese and other international entities..

According to him taking various scenarios such as judgement, arbitration, and enforcement into consideration, “in the majority of the cases, it would be futile to pursue any recovery against Chinese entities due to the spread of the Coronavirus epidemic. Instead, it would be best to work with them in their movement of need and ensure that they are able to spring back with vigor when this exceptional situation is contained or dealt with“.. Sane advise indeed..

What has been the impact of coronavirus on your business and especially if you are in the shipping and freight industry..??

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