LEGAL ISSUES ARISING FROM A PORT LOCKOUT
With the Covid-19 pandemic raging on in full force, various countries around the world have scrambled to close their borders in a bid to control the domestic spread of the virus. Many companies in the shipping industry are faced with sudden and unexpected port closures and some of the legal issues arising out of these developments are:
- Whether a party faced with a port lockout situation is able to make a force majeure declaration;
- Whether a party faced with a port lockout situation is able to plead frustration and terminate the contract;
- Whether a party on the receiving end of a force majeure / frustration notice is able to pass this declaration downstream
REQUIREMENTS AND RESULTS OF DECLARING FORCE MAJEURE
A declaration of force majeure requires contractual backing and a force majeure clause is required before a contracting party is able to make such a declaration. These clauses often provide that neither party will be responsible for the complete or partial-non performance of their obligations in circumstances which are out of the control of either party. Provision is commonly made in these clauses for natural disasters, acts of god, and war. The consequences of a force majeure event happening are also often spelt out in the clause itself. It is not always the case that a force majeure event will result in the mutual termination of a contract. Sometimes, it is only the case that performance will be deferred until such time as the force majeure event is over.
A contracting party wishing to make a force majeure declaration will need to look carefully at the contract in question, to ascertain whether there is a force majeure clause in the contract, and the ambit of the force majeure clause. It will also need to look at its outstanding obligations under the contract, and the extent to which these obligations are impacted by the force majeure event. One example in which a port lockdown might result in good grounds for a declaration is if parties have contracted for the sale and purchase of a vessel and it is no longer possible for the seller to deliver / the buyer to accept deliver of the ship at the contracted place of delivery.
IF YOU CANNOT DECLARE FORCE MAJEURE, THEN WHAT
If the relevant contract does not include a force majeure clause, a contracting party faced with a port lockout situation may still be able to rely on the doctrine of frustration, though unlike force majeure, the operation of this doctrine results in the contract being automatically rendered void. There is no middle ground whereby obligations can simply be deferred for a period of time. Given this rather draconian consequence, the frustrating event must make performance impossible or fundamentally and radically alter the nature of the parties’ respective obligations such that the contract can no longer be said to be the same. In a port lockdown scenario, this might be relevant where a party is required to export a specific type of goods from a port but is no longer able to do so as no ships are allowed to leave the port. This of course, also presupposes that it is not possible to export the goods by any other means.
CONSIDER THE TOTAL PICTURE BEFORE DECIDING WHAT ACTION TO TAKE
Aside from considering the possibility of either making or being the recipient of a force majeure / frustration notice, companies should now also consider whether, in the event that they are on the receiving end of such notices, they are able to pass the notice downstream and avoid having to continue to be liable to their own subcontractors and/or counterparties who are supporting them in the transaction. All of this will depend on the specific obligations that have been undertaken in these other contracts and it is always best to look at the overall picture, before deciding on what position to take in relation to the situation at hand.
At Maritime-Partners, as part of our advisory services, we would be happy to assist you to assess issues that you may be facing and direct you to the correct channels for action.
DISCLAIMER : Please note the above does not amount to legal advice, and is an article raising points for discussion.
Maritime Partners is an independent advisory firm founded by partners with diverse maritime background and network.
We have extensive experience in Strategy, Operations, Shipowning, Finance and Risk Management through senior management positions with leading global and regional maritime companies and maritime start-ups.
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