The COVID-19 epidemic is by now well known to all around the world and has caused significant disruption to our everyday lives.  To a commodities trader, apart from inconveniences to his daily routine, COVID-19 may have also caused disruptions to his commercial operations.  In this edition of Notes from the Bar, we examine some of the issues that may arise during COVID-19’s outbreak.

Free pratique

In the case of the Eagle Valencia [2010] 2 Lloyd’s Rep 257, the English court adopted the definition of “free pratique” as follows;

… official permission from the port health authorities that the ship is without infectious disease or plague and the crew is allowed to make physical contact with shore, otherwise the ship may be required to wait at quarantine anchorage for clearance.

Free pratique is commonly regarded as something that is just a formality, and almost all vessels will obtain free pratique as a matter of course, unless there is something wrong with the cargo like pest infestation, or a crewman being down with some infectious disease.

In recent weeks, because of the COVID-19 epidemic, ports around the world have imposed an additional requirement that the crewmen be tested before being granted free pratique.  Reports have also surfaced where vessels are ordered to be quarantined because a crewman on board has fever on arrival and that crewman needs to be tested if he is suffering from the virus.  As a result, the vessels in question would not receive their free pratique until all the crew on board are cleared from the virus.

Validity of NOR tendered

The aforementioned situation throws up the question of whether the NOR that was tendered by the vessel before obtaining free pratique is valid.  At common law, free pratique is regarded as a mere formality and that obtaining free pratique is not a condition precedent to the tendering of NOR.

In the case of The Delian Spirit [1971] 2 WLR 1434, Lord Denning MR held as follows:

There is only one small point remaining. It was only taken at a late stage before the umpire. It was said that the vessel was not ready to load until free pratique was given: that free pratique was not given until the vessel was at berth on February 24: and therefore her notice of readiness on February 19 was not valid. In support of that proposition The Austin Friars (1894) 10 T.L.R. 633 was cited. I do not think that case warrants that proposition. It was a very special case. 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 lay time will begin to run….

The case of The Delian Spirit must be compared with another decision of Lord Denning, MR in The Tres Flores [1974] QB 264 where the vessel hold was found to be infested and required fumigation.  In this case, it was held as follows:

“In order to be a good notice of readiness, the master must be in a position to say ‘I am ready at the moment you want me, whenever that may be, and any necessary preliminaries on my part to the loading will not be such as to delay you’ . Applying this test it is apparent that notice of readiness can be given even though there are some further preliminaries to be done, or routine matters to be carried on, or formalities observed. If those things are not such as to give any reason to suppose that they will cause any delay, and it is apparent that the ship will be ready when the appropriate time arrives, then notice of readiness can be given. In the present case there were pests in the hold such as to make the ship unready to receive cargo. Fumigation was not a mere preliminary, nor a routine matter, nor a formality at all. It was an essential step which had to be taken before any cargo could be received at all. Until the vessel had been fumigated, notice of readiness could not be given. It has always been held that, for a notice of readiness to be given, the vessel must be completely ready in all her holds, to receive the cargo at any moment when she is required to receive it. It was said by Lopes J. in Groves, Maclean and Co. v. Volkaret Brothers [1884] 1 T.L.R. 92 , and accepted in Noemijulia Steamship Co. Ltd. v. Minister of Food [1951] 1 K.B. 223 by Devlin J., as a clear rule, at p.227, and by Tucker L.J. at p.235. So on this ground also the condition of the holds meant that the notice of readiness could not be given.”

The above holding raises the question – what happens if during the voyage, the master becomes aware that one or more of the crewmen had fever before arrival?  Does this mean that the master should not tender NOR?  Alternatively, if the NOR is tendered, whether the NOR is invalid as there would be a reasonable suspicion that the vessel may not have a clean bill of health, or that there is a real risk of the vessel being quarantined pending the investigation by the health authorities at the next port?

Laycan

The other issue that arises, which is related to the above, is the contractual laycan in both the charterparty as well as the sale and purchase agreement.

Ordinarily, a FOB sale and purchase agreement will have a laycan where the seller is entitled to terminate the contract if the vessel nominated by the buyer is not ready to load by the end of the laycan period.

An situation that occurs frequently in the recent months is where the vessel arrives on the last day of laycan and tenders NOR but is not granted free pratique due to health regulations and measures taken to combat COVID-19.   The issue that arises consequently is whether the seller is entitled to terminate the contract as the vessel is not ready to load within the laycan period.

This is a situation where the validity of the NOR that was tendered becomes important.  If the NOR is regarded as invalid, then the seller may argue that it is entitled to exercise its rights to cancel the contract.  If the NOR was regarded as valid, then the vessel would be regarded as having arrived within laycan and hence the seller’s right to cancel would simply not arise.

Force majeure

The third aspect to consider is COVID-19 falls within the force majeure clause in both the sale and purchase agreement as well as the charterparty.

The effect of force majeure depends on the wordings of the clause itself.  In some contracts, the force majeure clause provides for the other party to terminate the contract upon the occurrence of a force majeure event.  Therefore, for a seller, if the vessel nominated by the buyer needs to be quarantined due to COVID-19 infection on board, and if this is covered by the force majeure clause, one option that may be available to the seller is to declare force majeure and terminate the contract, assuming the clause permits termination.

This is a situation where the buyer may be somewhat at a disadvantage.  Unless the force majeure clauses in the sale and purchase agreement and the charterparty are identical, the FOB buyer runs the risk where his upstream seller is able to invoke force majeure to terminate the contract, but the buyer might not enjoy the same right vis-à-vis the shipowner.

Our comments

The COVID-19 outbreak continues and is not expected to end in the coming weeks. The final impact of COVID-19 on the commodities trading and shipping communities remains to be seen. What has become evident is that potential disputes will arise from the delays in shipments due to the implementation of testing and quarantine measures taken out by countries keen to keep COVID-19 at bay.

Please feel free to contact us if you have any queries arising from the above. 

In the meantime, we would like to express our heartfelt gratitude and support to the healthcare professionals around the world for their dedication and courage during this trying period.

Photo by Macau Photo Agency on Unsplash

One thought on “Notes from the Bar – COVID-19, commodities and charterparties

  1. My sincere condolences to the bereaved families. The virus will soon be DEFEATED by the gallant medical forces of your great county China.

    Edward Obbo
    Advocate
    M/s Obbo & Co. Advocates
    Kampala – Uganda
    East Africa.

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