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Shipowners, charterers as well as
traders have been urged to think
ahead and allocate risks and costs
that could potentially arise to
commercial contracts and
transactions in a war or warlike
conditions precipitated by a
possible US-led attack on Iraq in
the event of the latter's lack of
compliance to UN Security Council
resolution.
Noting that military action could
proceed swiftly if UN weapon
inspectors are impeded, a leading
London-based law firm has issued an
advisory to the industry on possible
implications to contractual
agreements in the event war ensues.
"If relations between the US, UN
members and Iraq deteriorate, this
will clearly be a major concern to
the shipping and trading community,"
Richards Butler, one of the top
shipping and admiralty law firm said
in a statement issued to PortsWorld.
The firm said in the event of
military action contractual
obligations would be affected,
including leading to cancellation
and frustration of contracts.
A contract can be cancelled by the
outbreak of a war if the parties
have expressly stipulated that it
should be cancelled.
One has to consider the particular
cancellation clause to see if it is
applicable.
The brief by the law firm said if
there is no war cancellation clause
the parties can still be discharged
from further performance if the
effects of war frustrate the
contract by rendering performance as
intended by the parties impossible.
Richards Butler also brought to
attention the issue of "unsafety" of
ports due to war.
A charterparty requirement that the
charterer shall not order the vessel
to an unsafe port (either by
inclusion of an express term or by
implication) encompasses the concept
that a nominated port could be
politically unsafe if a state of war
exists that puts the vessel at
physical risk of damage.
Fundamentally, a port is safe if in
the relevant period of time, the
particular ship can reach it, use it
and return from it without, in the
absence of some abnormal occurrence,
being exposed to unavoidable danger.
The point when the prospective
safety of a port is to be measured
is at the time of nomination by the
Charterer; otherwise the Charterer
would effectively become the insurer
against the risk of war breaking
out.
War or warlike situation could also
attract increased additional war
risks premia, vessel owners and
charterers were told.
If a significant event such as an
outbreak of war or as happened last
year on September 11th occurs, the
insurance market has a mechanism for
reflecting the sudden perceived
increase in risk in the cost of war
risks insurance: most policies allow
the underwriter to cancel the war
risks insurance on seven or fourteen
days' notice, subject to
reinstatement within the notice
period at a new (invariably higher)
rate.
The firm pointed out that owners
have a discretion as to the
insurances they take out, it was
only the cost of those which the
owner acted reasonably in covering
that could be recovered from the
charterer.
In the current climate, therefore,
both owners and charterers should be
anticipating possible change in the
Iraq situation.
One of the main issues facing
traders in the event of military
action will be one of frustration if
the contract is silent on these
issues.
Will the war or warlike operations
or inability to ship goods as
intended under the contract or a
prohibition on trade with Iraq
constitute a 'frustrating' event?
If so, a performing party may be
excused performance or given an
extension for performance, the firm
said.
The firm also said most contracts
will have express "force majeure" or
"prohibition" clauses.
However, these tend to be rather
narrow in application -for example
they usually only protect the
seller, and often require the seller
to demonstrate that performance was
prevented.
Again this is onerous, the statement
added.
Richards Butlers said as a result,
traders should consider their
specific needs for particular trades
-should there be a cancellation
clause, extension of shipment or
wider force majeure clause?
As well as allocation of risk,
traders should consider allocation
of costs -freight and insurance may
increase in case of military action.
Traders should not trust the law to
reach a 'fair' result once the
problem occurs: in general the law
will assume the contract must be
performed according to its terms and
will not fairly reallocate the
losses or increased costs if war
interrupts.
The firm also warned that a further
trade embargo on Iraq will also
raise questions of legality.
Any business which flouts UN imposed
sanctions is 'illegal'. Additionally
under old English law it is a
criminal offence to deal with an
'Enemy' subsequent to a declaration
of war.
The effect of a contract being
illegal is that it will be
completely unenforceable; disastrous
if your counterparty defaults!
Because of recent anti-terrorism
legislation it is now not just
illegal to trade with certain
countries, but with certain
individuals and organisations.
"It is therefore imperative that
traders look closely at the identity
of their counterparties," the firm
advised.
The list of individuals and
organisations which are banned from
trading is available on the
internet; for example on the Bank of
England website and on the American
OFAC website. |
