Background

The current outbreak of novel coronavirus (2019-nCoV) is causing widespread concern. On 30 January 2020, the World Health Organisation Director-General declared the outbreak a “Public Health Emergency of International Concern” whilst did not recommend any travel or trade restriction. The WHO and government authorities are actively monitoring the situation (see the latest news).

This article will discuss the potential impact on international arbitration, sales of goods, shipping and shipbuilding contracts.

Potential effects on international arbitration

As the coronavirus situation continues to evolve, parties involved in international arbitrations should pay close attention to the latest updates issued by the relevant arbitration institutions and government authorities. This is because various countries have since implemented measures which restrict/ban entry to visitors who come from or have recently travelled to mainland China.

Depending on the arbitral seat, this could be significant and may have an impact on progress of any arbitration proceedings. Due to such measures, Chinese witnesses may not be allowed entry to counties/regions where hearings are held or to attend hearings in person (as our recent experience shows). This may affect the quality of any evidence given and parties are advised to plan ahead to avoid any delays or risks of infection. Parties could also consider arranging for witnesses to give evidence via video link or agreeing postponement to any hearing date/deadline subject to permission from the tribunal and the applicable arbitral rules.

Below are some of the countries/cities which are considered popular choices of arbitration venues and which have adopted measures to limit the risk of spread of the virus:

Country/City Arbitral Institution Measures
London (the UK) The London Court of International Arbitration (LCIA) The London Maritime Arbitrators Association (LMAA) Advanced monitoring at airports with direct flights from China; Some airlines have suspended direct flights to and from mainland China; A 14-day period of self-isolation is recommended for those who have returned from Hubei Province (or elsewhere in China if showing symptoms);
Hong Kong (China) The Hong Kong International Arbitration Centre (HKIAC) All travellers from mainland China entering Hong Kong are required to go into quarantine for 14 days; Partial border closure with mainland China (including suspension of and/or reduced cross-border travel and transport services); Suspension of new visas to individual mainland Chinese tourists;
Singapore The Singapore International Arbitration Centre (SIAC) The Singapore Chamber of Maritime Arbitration (SCMA) New visitors who recently travelled to mainland China will be denied entry into or transit through Singapore; Issuance of new visas to PRC passport holders is suspected; Previously issued short term and multiple visit visas for PRC passport holders are suspended; Singaporean citizens and permanent residents who recently travelled to mainland China are advised to be placed on a 14-day leave of absence and self-isolation; Further, SCMA has also adopted precautionary measures for those who recently been to mainland China or displaying symptoms to refrain from attending or visiting in person;
Australia The Australian Centre for International Commercial Arbitration (ACICA) Ban entry to people who have recently left or transited through mainland China (except for Australian citizens, permanent residents and their immediate families); All travellers arriving out of mainland China are asked to self-isolate for 14 days;
The US The American Arbitration Association (AAA) Ban entry to people who have recently travelled to China (except for US citizens and permanent residents); Any returning US citizen who has recently been in Hubei Province will be subject to mandatory quarantine; Any returning US citizen who has recently been in the rest of mainland China will undergo entry health screening and monitored self-quarantine up to 14 days;

In addition, various arbitration institutions in mainland China (such as the China International Economic and Trade Arbitration Commission (CIETAC), the Beijing International Arbitration Center (BAC), the Shanghai International Arbitration Center (SHIAC) etc) have all adopted precautionary measures including postponing arbitration hearings and advising parties (and legal representatives) to refrain from attending in person and that they should seek to contact the institutions via alternative means. Those affected by the outbreak are also advised to seek to apply for an extension of time as per the applicable arbitral rules.

General Contractual Issues

Force majeure

One common issue in the context of an outbreak of infectious disease is whether the parties can invoke force majeure clauses and declare the outbreak as an extraordinary event which is beyond the parties’ control and which has hindered the performance of their obligations under the contract or made it impossible. The term ‘force majeure’ has no established meaning under English law and each force majeure clause must be examined individually based on the facts of each case to determine its meaning and consequences.

If a specific event does fall within the scope of force majeure clause, the next step is to consider what contractual effect the clause may have, for example, whether it is to release the parties from their contractual obligations forthwith without incurring liability or to suspend the performance of all or part of their duties.

Some force majeure clause may further require the affected party to give notice to the other party and/or to take reasonable steps to mitigate the results of the force majeure event, before he can rely on it. Any such requirements must be closely followed to ensure strict compliance with the force majeure clause.

As a matter of general rule, the burden of proof is on the party seeking to rely on the force majeure clause who needs to show that the event falls within the clause and that non-performance was due to the event. Further, the party in default is usually required to show that the force majeure event is the sole effective cause of its failure to perform its obligation. If, for example, the failure to perform a contractual obligation was caused by two matters (one is a force majeure event, the other is not), depending on the wording of the specific clause, the non-performing party might not be able to rely on force majeure (see Seadrill Ghana Operations Limited v Tullow Ghana Limited [2018] EWHC 1640 (Comm)).

Frustration

Under English law, a contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract or transforms the obligation to perform into a radically different obligation.

If a contract is frustrated, it is automatically brought to an end and the parties are excused from their future obligations. However, depending on the wording of the contract, if a party incurred obligations before the frustrating event, it remains generally bound to perform them (for example, sums that have fallen due at the time of frustration will remain payable).

Whether a contract may be set aside on the ground of frustration as a result of the outbreak will depend on the specific facts and terms of the contract. A party seeking to argue that it is a frustrating event will need to demonstrate that the outbreak could not have been reasonably foreseen by the parties at the time of the contract and that it has rendered performance of the contract physically impossible or illegal or made it radically different from what was contemplated by the parties.

Some legal issues arising out of the outbreak which are more specific to sale contracts, shipping and shipbuilding are separately discussed below.

Sale contracts

The outbreak is likely to have a knock-on effect on sale contracts. Due to restrictions on transport/travel, a seller may be in difficulty in making cargoes available at the load port and therefore may be in breach of its obligation under the sale contract. On the other hand, a buyer may have difficulties in finding a vessel which is willing to call ports/regions affected by the outbreak.

Timing is also important under sale contracts as delay in shipment or delivery could have a significant impact on the pricing of the cargo. For example, under a ‘classic’ CIF contract, the seller is under an obligation to ship the cargo within the shipment period. If the seller fails to do so (as a result of delay caused by, for example, closures of the load port or cargo being unavailable due to transport bans), the buyer may be entitled to terminate the contract.

Further, the parties should be aware of their rights and obligations with regard to nomination of vessels and any applicable delivery period. If the nominated vessel is rejected by the counterparty for reasons related to the outbreak, the buyer may have the right to nominate an alternative vessel provided that details were provided with due advance notice and in keeping with the other provisions of the contract.

Prices of the goods being imported or exported may fluctuate wildly (because of the outbreak) making the existing contractual arrangement commercially unviable. The parties may therefore look to find ‘excuses’ to get out of the contract by seeking to claim that performance has been prevented by a force majeure event. Whether they can do so will depend on the terms of the contract, and as mentioned above, such clauses will be construed strictly. Parties seeking to rely on such a clause will also need to carefully follow the procedural requirements of the clause.

In relation to the new GAFTA terms, the ‘prevention of shipment’ clause does not immediately grant the buyer the right to cancel but first allows a temporary suspension of the contract (see clause 18). If the force majeure event continues for “21 consecutive days after the end of the shipment period”, the buyer then has the option to cancel the contract by serving notice. It is therefore important that parties who wish to cancel the contract do not ‘jump the gun’ by declaring a force majeure event prematurely, which may have serious legal consequences under the contract.

Again, whoever seeking to rely on a force majeure clause will need to show that the performance of the contract was physically and/or legally prevented by the outbreak and that they are not themselves at fault. If the contract was concluded after, for example, the first reported cases of the virus or it was generally known, there could be an argument that any potential outbreak was generally foreseeable and the parties were taken to have agreed to perform the contract irrespective of the risks.

The doctrine of frustration may also apply depending on the factual circumstances. If, for example, the discharge port in a sale contract has implemented a complete ban on cargoes coming from, say Wuhan port, and as a result the seller cannot perform, there may be scope for the seller to argue that the contract was frustrated. The seller however needs to demonstrate that there are no alternatives in performing the contract without transforming the existing obligations into something radically different.

Shipping

The outbreak is also likely to affect shipping operations as previous experience shows. Each outcome will depend on the facts and the terms of the relevant charterparty. Some legal implications for delay, quarantine or other consequences as a result of the outbreak are briefly discussed below:

  • A shipowner is under an obligation to follow the charterer’s instructions unless its compliance may expose the ship or crew to unacceptable risks. However, if the shipowner refuses to follow the charterer’s orders without sufficient grounds, any delay caused as a result will be for the shipowner’s account.
  • If, as a result of the charterer’s orders, the shipowner incurred cost or expenses arising from quarantine and/or disinfection etc, then depending on the charterparty, the charterer could be liable.
  • At the same time, the shipowner may owe a duty to owner of the cargo which had been shipped under the bills of lading. Delay or deviation may potentially lead to claims from cargo interests.
  • Under a time charter, depending on the wording of the charterparty, a vessel may be placed off hire if she is delayed by quarantine (for example, see clause 21(a) of the Shelltime 4 form). Similarly, if a vessel is forced to deviate to offload an infected crew member, the vessel may also be off hire.
  • Under voyage charters, however, deviation to offload an infected crew would normally be for the shipowner’s account, unless a ‘reasonable deviation’ defence can be successfully raised.
  • Further, depending on the wording of the voyage charter, there is also the question of whether any time lost as a result of the vessel being placed under quarantine can count towards laytime. Relevant charterparty clauses should be closely examined to determine their effects on calculation of laytime and validity of NOR tendered.
  • Another possible scenario is that parties may seek to invoke force majeure clause contained in the charterparty on the ground that the outbreak is an extraordinary event which is beyond the parties’ control and which materially affects the parties’ abilities to perform the charterparty. Whether the parties are permitted to do so will depend on the specific wording of the relevant clause, the severity of the outbreak and how the parties are affected.

Shipbuilding

Most standard shipbuilding contracts contain force majeure provisions which are generally couched in wide terms in order to protect the builder from circumstances ‘beyond its control’. For example, Article VIII of the Shipbuilders’ Association of Japan form (the “SAJ Form”) lists a number of force majeure events which could entitle the builder to a postponement of the delivery date. Some potential scenarios which could be relied upon by the builder in the context of an outbreak of infectious disease might include:

  • “requirements of government authorities”;
  • “strikes, lockouts or other labour disturbances”;
  • “labour shortage”;
  • “plague or other epidemics”;
  • “quarantines”;
  • “shortage of materials, machinery or equipment”;
  • “other causes or accidents beyond control of the builder, its subcontractors or suppliers”;

A builder who intends to rely upon such clauses must establish:

  • the occurrence of a force majeure event; and
  • the delay claimed was caused by the force majeure event.

Further, care must be taken by the builder to timely comply with any contractual notice requirement under the contract (for example, see Article VIII(2) of the SAJ Form).

Assuming that the builder can establish that any delay resulting from force majeure events can count towards permissible delay under the contract, it is entitled to postponement of the delivery date. However, as mentioned above, force majeure provisions are generally construed narrowly. Unless the wording clearly so provides, force majeure exceptions will not normally benefit a party whose breach of contract or negligence has caused the event on which he seeks to rely.

Another possible scenario is frustration. However, although the doctrine of frustration may excuse the builder from performance of his obligations where these have been radically affected by supervening events, English law will not normally protect him if he is simply late in delivering the vessel as the result of events occurring beyond his control.

Please follow the links for further discussions on the effect on construction contracts and other employment issues.

Conclusion

At this stage, it is far from clear how long the outbreak will last and/or which countries may be affected. Depending on how the current situation may develop, other legal considerations may be at play. For now, commercial parties are advised to carefully evaluate the situation while paying close attention to their existing contract. When considering a force majeure/frustration situation, factual evidence is important and should be carefully gathered to show that the force majeure event was unforeseeable and there were no realistic alternative means in performing the contract.

Future contractual parties are advised to consider inserting clauses that specifically deal with risks that may arise from potential exposure to novel coronavirus. For charterparty contracts, the published “BIMCO Infectious or Contagious Diseases Clause for Voyage and Time Charter Parties” contains wording which could be used as a starting point for parties negotiating a similar clause. For other specialist contacts, care must be taken to ensure that, when preparing such clauses, commercial parties clearly identify the risks and obtain legal advice to best protect their respective interests.