Risk of War and the Shipping Industry
October 9, 2001
James "Jim" Hohenstein- New York
Chester D. Hooper- New York
The risk of war may increase insurance rates, cause charter parties to be
cancelled, and change the ports of discharge or places of delivery designated in
charter parties, bills of lading, and service contracts. It will probably
increase freight rates. A carrier may have questions regarding whether its
vessel may avoid certain ports or whether it may increase its freight rates to
cover the additional war risk insurance premium. This article will briefly
summarize the principles involved. Please contact us directly for more
particular information.
Insurance Coverage and the Risk of War
A Shipowner will generally insure his vessels for Hull War Risks at the value
of the ship, and this hull policy traditionally includes a protection and
indemnity (P&I) endorsement for an independent value, which again is the
ship value. Where this cover is in place, the P&I Clubs in the International
Group have traditionally offered an excess P&I War risk cover of $100
million, which cover acts as an excess to the traditional hull and P&I
cover, not as a primary cover.
As an example, let us assume that a vessel had the traditional Hull war risks
policy with the P&I endorsement, and that both elements carried independent
limits equivalent to the ship's value, say $25 million. If the vessel paid $60
million for cargo lost due to war, the Hull war risks P&I endorsement would
pay it's limit of $25 million and the P&I war risk cover would then pay the
balance of $35 million.
War risk cover is provided world wide at one base rate - but underwriters
will exclude the more dangerous areas. These "excluded zones" can then
be insured for an additional premium - usually at an enhanced rate - for the
periods ships enter the zones and as declared by the shipowners. The
"excluded zones" are subject to change as decided by the underwriters
and instantly applicable as soon as declared by the underwriters. They have
recently been expanded as a result of the attack on the World Trade Center in
New York City and the Pentagon in Washington, D.C.1 Carriers traveling within
these excluded zones must declare each voyage in the excluded zone and purchase
extra war risk coverage for that voyage.
The effects of war risk are not, however, limited to an increase of insurance
premium. War risks may cause charter parties to be cancelled, voyages to be
frustrated and cargo to be discharged and declared delivered at alternate ports.
Carriers may wish to avoid certain ports and to increase their freight rates to
ports excluded from the usual war risk coverage. The general doctrine of
"frustration" may allow a carrier to avoid certain ports, while the
terms of carriers’ contracts and tariffs may allow a carrier to increase
freight rates.
Frustration
The leading United States decision on the issue of frustration is Transatlantic
Financing Corp. v. United States, 363 F.2d 312 (D.C. Cir. 1966). In Transatlantic,
the vessel had been chartered to carry grain from the United States to Iran. The
usual and customary route of the voyage was through the Suez Canal. Given the
outbreak of hostilities there, the vessel was required to transit around the
Cape of Good Hope, and the owner subsequently asserted a claim for the increased
costs. In considering the issue of the impossibility of performance, the court
set forth the guiding principles:
When the issue is raised, the court is asked to construct a condition of
performance based on the changed circumstances, a process which involves at
least three reasonably definable steps. First, a contingency – something
unexpected - must have occurred. Second, the risk of the unexpected
occurrence must not have been allocated either by agreement or by custom.
Finally, occurrence of the contingency must have rendered performance
commercially impracticable.
Id. at 315-16 (emphasis added).
In that case, and in many other cases, the owner was denied the extra costs
incurred by traveling around the Cape of Good Hope. The owner could have
provided for the contingency in the charter party or other contract of carriage.
The court did not consider the extra expense to have made the voyage
"commercially impracticable."
Tests similar to the frustration test are used to determine whether a vessel
should refuse to load cargo for a port at which the carrier should realize a
dangerous situation would develop, or whether a vessel should deviate from her
intended voyage if the carrier should realize, during the voyage, that a
dangerous situation would develop. If the carrier should have realized, before
the voyage, that the dangerous condition would develop during the voyage, the
contingency would not be unexpected. In that case, the carrier should refuse to
accept cargo for that port or make special arrangements, including war risk
coverage, to call at the port.
If a dangerous situation were to develop during the voyage, and thus an
unexpected contingency were to occur, the carrier could treat the voyage as
frustrated. The different kinds of contracts of carriage handle these risks in
different ways. It could discharge the cargo at an alternate port and declare
the contract completed and the freight earned. The case of United States of
America v. Waterman Steamship Corp., 1981 AMC 82 (1979) provides good
examples of unexpected and expected contingencies. There, the United States
Department of State's Agency for International Development (AID) contracted with
Waterman for the carriage of goods to Saigon near the end of the Vietnam War.
The vessel loaded cargo during April 1975. On April 29th, after
loading cargo and while en route from New York , to Houston to load more cargo,
Saigon fell to the Viet Cong. When the vessel reached Houston on April 30th,
AID directed Waterman to discharge all AID cargo loaded for Saigon. Waterman
claimed that the freight for the cargo loaded had been earned. AID argued that
Waterman should have realized that Saigon would fall and should not have loaded
the cargo. The court examined what Waterman should have realized at the various
times it loaded cargo, and determined when Waterman should have realized that
Saigon would fall. Waterman was entitled to keep the freight for the cargo
loaded before Waterman should have realized that Saigon would fall, but had to
return the freight for the cargo loaded after Waterman should have realized that
Saigon would fall.
Charter Parties
While charter party issues primarily involve the close interpretation of the
relevant clauses, it must be remembered that, regardless of the presence (or
absence) of any clauses related to war and similar activities, a voyage may be
abandoned if there is a state of war and a vessel would have been required to
enter enemy territory. The KRONPRINZESSIN CECILIE, 244 U.S. 12, 22
(1917).
However, in practical terms, what must be considered are the terms of the
particular charter party – as in the clauses in the standard forms of charter
parties that deal with the risk of war, as well as increased insurance premium.
However, given the typical clauses in charter parties, in which the risk of
war has been allocated and addressed, including those circumstances justifying
the termination of the contract, this extra-contract doctrine of frustration is
largely academic.
Concerning the safe port issue: the essence of the question is factual --
that is, is there a real, current threat to the vessel, its crew and the cargo?
The simple fact that tensions in an area have markedly increased does not render
a port unsafe. In illustration of such principles is M/T TRADE FORTITUDE,
SMA 1139 (Bauer, Stam and Blackiston, 1974). In that case, the owner claimed
that the charterer had breached the contract by failing to name an alternate
port to the Persian Gulf around the time of the Yom Kippur War of 1973, a
situation that, according to the owner’s argument, would allow the owner
properly to withdraw the vessel. The panel observed:
Each case turns upon its own particular facts; yet three guiding
principles seem evident from the decided cases: (1) The fact situations to
be considered in construing a war risk are those which are known and
believed at the time in question, even if these are not the true facts, and
if later knowledge changes their significance, (2) An owner who refuses to
go to a port, relying upon the provisions of a war risks clause must have
reasonable grounds to believe that one or more of the fact situations
described in the clause actually exists, and (3) a charterer is not in
breach of the charter if at the time its orders are given to go to a
specified port, there are no reasonable grounds to believe that any of the
fact situations described in the clause actually exist.
Thus, after a detailed examination of the chronology of the conflict in
relation to the movements and position of the vessel (which was relatively far
from the conflict and at a time when the hostilities had ceased), the
arbitrators concluded that owner's claim should be rejected.
Nor does the fact that Hull War Risk Underwriters have designated Pakistan
(as well as Egypt, Algeria, Syria and a number of other countries listed in note
1) as areas requiring increased war risk premiums render the ports in those
countries unsafe. The insurance action is to be expected and normally should not
provide an owner the right to refuse to proceed to any port within those areas
on that basis alone. Indeed, in TRADE FORTITUDE, the panel noted that
such premiums had been increased by the London underwriters, but this was not a
fact that was much emphasized in the decision.2
As to increased insurance premiums: it is a basic principle that insurance
premiums on the hull and for P&I cover are for the account of the owner.
Thus, in the absence of a specific clause, increased insurance premiums cannot
be shifted to another party. METEORA, SMA 2955 (Connell, Nichols and
Arnold, 1993) (certain increased insurance premiums arising from OPA-90 could
not be allocated to the charterer in the absence of a clause to that effect). On
the other hand, in many charters it is typical to find a clause that shifts to
the charterer the responsibility to pay for such increased war risk premiums. See,
e.g., M/V THORSAGA, SMA 2018 (Arnold, Cederholm and Busch, 1984) (ASBATANKVOY).
Thus, the terms of the particular charter must be consulted to determine this
issue.
Bills of Lading
A deviation from a port of discharge or place of receipt will be examined in
the same manner it would be in a charter party. The deviation from a bill of
lading voyage will be considered reasonable if a condition that did not exist
when the bill of lading was issued would cause a carrier exercising
"reasonable judgment" not to call at a port or place. This condition
does not need to be a "war," but it does need to be serious enough to
cause a reasonable carrier, in the exercise of "reasoned judgment," to
avoid the port. Merely adding a port to the "excluded" area requiring
a higher war risk insurance premium would probably not, in and of itself,
justify a deviation to avoid a port. If the condition in question existed when
the bill of lading was issued, the carrier could not deviate to avoid the port
call. In that event, the carrier should have refused to trade with the dangerous
port or should have charged a higher freight to cover the extra expense,
including insurance premium, of calling at the port.
The courts, in applying the "reasoned judgment" test, use a test
very similar to the doctrine of frustration. Some examples may help explain the
test used by the courts.
The U.S. Supreme Court articulated the "reasoned judgment" rule in The
Styria v. Morgan, 186 U.S. 1, (1902). In that case, upon learning that
sulphur was considered a contraband article of war, the carrier discharged a
cargo of sulphur that was loaded in Sicily and bound for New York. The Court
held that the carrier exercised reasoned judgment in discharging the cargo,
stating, "[t]he good faith of the master and his reasonable exercise of
discretion must be considered and determined in the light of the facts in each
particular case." 186 U.S. at 9. Forty-one years later, in The Wildwood;
American Foreign S.S. Corp. v. Amtorg Trading Corp., 133 F. 2d 765 (9th
Cir. 1943), the Court of Appeals for the Ninth Circuit held that a carrier had
exercised reasoned judgment in abandoning its carriage of copper bullion bound
from Jersey City to Vladivostok. Following the vessel’s departure from
Honolulu, the vessel learned that the British were asserting their right of
"contraband control" of "war material cargoes in neutral vessels
which they suspected ultimately might reach Germany," and that a Russian
steamer, also carrying copper bullion, had been seized by the British. 133 F.2d
at 766. The carrier abandoned the voyage, and proceeded to Tacoma, Washington,
and returned the cargo to the shipper. Emphasizing that the reasonableness of a
carrier's perception of increased hazard of war is not determined by subsequent
events, the court held that in these circumstances, the carrier "had a
reasonable apprehension of a real danger of the seizure of the Wildwood by the
British naval vessels on her voyage" and that the carrier was entitled to
abandon the voyage and return to Washington. Id. at 767, 771.
De La Rama S.S. Co., Inc. v. Ellis (149 F. 2d 61 (9th Cir.
1945) concerned an American carrier of glassware bound for Far Eastern ports.
The bill of lading provided that prepaid freight was to be considered earned on
shipment of the goods and was to be retained if there were a "forced
interruption or abandonment of voyage at a port of distress or elsewhere."
149 F. 2d at 62. During loading of the cargo, on December 7, 1941, the captain
in charge of loading received information by telephone of the attack on Pearl
Harbor. After news of the attack, no changes in voyage plans for the ship were
made, and loading of the ship was completed on December 8th. On December 31st,
the ship was requisitioned for the government and ordered to discharge her cargo
and abandon the voyage. The court held that the carrier had exercised reasoned
judgment in loading the vessel, because at the time of loading, the
circumstances were not so dire as to give a reasonable carrier notice that the
vessel would be unable to complete the voyage.
Finally, an Ohio Appeals court held that where a voyage was frustrated due to
Iraq's invasion of Kuwait, resulting in the carrier failing to deliver goods to
Kuwait and returning the cargo to the port of Rotterdam, the carrier was
entitled to collect the entire freight charges. The court held, as a matter of
law, that "the invasion of Kuwait constituted a sufficient hindrance, risk,
delay, or disadvantage to justify appellee's decision to abandon the voyage to
Kuwait." 641 N.E. 2d 794, 798 (Ohio App. 1994).
Increasing Freight Rates
Carriers should be able to increase their freight charges to cover the
increased costs of war risk insurance. Whether charter hire may be increased
depends, of course, on the charter party terms and the doctrine of frustration.
Whether freight may be increased in the liner trade with the United States
depends on the tariff filed with the United States Federal Maritime Commission.
The terms of the tariff may permit the carrier to impose a surcharge to cover
increases such as war risk insurance.
The carrier also may file a new tariff to raise the freight rates. Normally,
a carrier may not charge the higher rate until the tariff has been filed for 30
calendar days. The carrier may, however, request special permission from the FMC
to charge the higher rate before the expiration of 30 days. We understand that
the FMC is processing those applications quickly. The carrier also may be able
to establish a freight rate for a new commodity for which the carrier has not
filed a tariff.
If the carrier’s service contracts incorporate by reference the terms of
its tariffs and if the terms of the tariffs permit a surcharge for increased war
risk premium, the carrier should be able to pass on the increased charge to its
service contract customers.
Loss or Damage to Cargo
Loss or damage to cargo due to war will be covered by war risk insurance.
Loss or damage to cargo due to causes other than war should be covered by other
insurance of the vessel.
For more information please contact us at 212-513-3200 or if you wish to
speak to one of our attorneys directly, they can be reached at the following
mobile telephone numbers:
Chet Hooper: 917-287-9756
Brian Starer: 917-331-2307
Jim Hohenstein: 917-873-2528
1 The following exclusions were announced on September 27, 2001:
(A) Persian or Arabian Gulf and adjacent waters including the Gulf of Oman
North of 24ºN.
(B) Angola (including Cabinda)
(C) Israel
(D) Lebanon
(E) Libya (including Gulf of Sidra/Sirte)
(F) Eritrea
(G) Somalia
(H) Congo, Democratic Republic of (formerly Zaire)
(I) Liberia
(J) Sri Lanka
(K) Sierra Leone
(L) Yugoslavia, Federal Republic of (Serbia & Montenegro)
(M) Gulf of Aqaba and the Red Sea
(N) Yemen/People’s Republic of Yemen (North and South Yemen)
(O) Pakistan
(P) Oman
(Q) Syria
(R) Algeria
(S) Egypt
return to article
2 However,in S/T ARIETTA VENIZELOS, SMA 733 (Murphy, Nash and Augenti, 1972), the
arbitrators concluded that the owner's assertion that Libyan ports were
dangerous was justified. There, the panel referred to the exclusion of Libya
from the Institute Warranty limits in support of the conclusion. That having
been said, the approach of TRADE FORTITUDE is more prudent: each port and
each contract should be considered on its own facts -- especially the actual
conditions at that port.
return to article