The recent spread of the deadly Ebola virus is currently affecting West Africa, specifically Guinea, Liberia and Sierra Leone. However, there are concerns that the virus will spread further and indications are that it has already reached Europe and the USA.
There has been an impact on some commodity prices, with cocoa prices reaching their highest levels in over three years due to fears that the virus may reach the Ivory Coast and Ghana, which together produce almost 60% of the world’s cocoa.
Trade in other commodities in and out of the region, including oil, is likely to be impacted.
Commodities traders should be aware of and make provision for the potential legal issues which may arise as a result of the Ebola outbreak. This article addresses some key points to consider.
Force majeure and frustration
Affected parties may find contractual performance more difficult or financially unappealing because of rising commodity prices and/or costs (including production and shipment costs). The impact on shipping may affect trading parties, for example making it difficult to comply with obligations under sales contracts to supply a vessel to load/deliver goods at West African ports due to quarantine restrictions or closures.
In these circumstances, parties may consider whether they have an excuse for non-performance or an opportunity to terminate the contract.
Force Majeure: Under English law, force majeure is only available if the contract provides for it and only to the extent that the contract covers the specific circumstances preventing performance. If there is any ambiguity, it will be resolved against the affected party. Further, if the circumstances preventing performance change over time, the force majeure provisions may cease to apply.
The effect of a force majeure clause is often to suspend obligations until the cessation of the force majeure event. A party may be entitled to terminate in certain circumstances, but only if this is specifically provided for in the contract.
Frustration: Under English law, a contract may be discharged where an event occurs after the contract is entered into which is not caused by one of the parties; is not addressed in the contract; and where the event so fundamentally changes the nature of performance that it would be unjust to require it to continue.
English courts have been consistently reluctant to find that there has been a frustrating event. Frustration arguments are only successful where a party can show that a contract has become impossible to perform. If performance has become more time-consuming, more difficult or more expensive, this will not amount to frustration.
Quarantine and demurrage
For traders acting as charterers, there will be a number of shipping related issues to consider.
These include owners and charterers’ respective rights and obligations in relation to port safety; the impact of delays on the charterparty (including payment of hire); and the possibility that vessels coming from Ebola affected areas may be refused entry at subsequent ports of call1.
A particular issue likely to occur in relation to the Ebola outbreak is that of quarantine of vessels and/or ports. As well as the impact of this on payment of hire, traders acting as charterers will need to consider carefully the impact on them in relation to demurrage.
The situation where quarantine relates to the vessel is relatively clearcut. If a voyage chartered vessel is quarantined, she cannot be considered ready because the charterers do not have unrestricted access to the vessel.Therefore, demurrage does not count during quarantine.
In relation to quarantine of ports, a number of charterparties contain clear provisions. Clause 17(a) of the Asbatankvoy form makes clear that the charterers are liable for demurrage where they send the vessel to a port already in quarantine, but not where the port is declared quarantined during the voyage. Other charterparties contain similar wording, including BPVOY4 (Clause 29), ExxonMobil Voy2012 (Clause 23) and Shellvoy6 (Clause 23).
What happens when there are no specific contractual demurrage provisions addressing quarantine?
Charterers may argue that a quarantined vessel is not entitled to be paid demurrage unless she is ready in all respects. If a vessel is quarantined and awaiting free pratique2, charterers can argue that any Notice of Readiness (NOR) tendered is invalid3.
However, owners may challenge this. Lord Denning held in the Delian Spirit4 that where a ship apparently has a clean bill of health such that there is no reason to fear delay, even if she has not been granted free pratique, she is entitled to tender NOR and laytime will begin to run:
“I can understand that, if a ship is known to be infected by a disease such as to prevent her getting her pratique, she would not be ready to load or discharge. But if she has apparently a clean bill of health such that there is no reason to fear delay, then even though she has not been given her pratique, she is entitled to give notice of readiness, and laytime will begin to run.”
Beyond anticipating that the current situation will inevitably lead to defaults, it can be difficult to prepare in advance when the future spread of the virus remains unknown. However, a number of steps can be taken to mitigate against potential counterparty default generally, including:
- Evidence contractual terms in writing.
- Keep all correspondence relating to the contract (including notes of any oral communications) as in some circumstances these can be evidence of the agreement.
- Comply strictly with contractual terms (for example, nominations should be on time, shipment periods should not be missed, commodities should comply with the contractual specification). This is to prevent a counterparty using a contractual breach as an excuse for termination.
Commodities traders who may be affected by the Ebola outbreak should review the provisions of their existing contracts so as to establish where potential liabilities may lie. They should also ensure that where possible, new contracts contain clear and express provisions as to liabilities relating to the outbreak.