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Strike! The impact on shipping of industrial action at port terminals

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Scott Pilkington

Scott Pilkington

Strike! The impact on shipping of industrial action at port terminals by Scott Pilkington, Associate, Holman Fenwick Willan Hong Kong

Strikes and industrial action at port terminals can  occur suddenly and can cause severe disruption,  even preventing a terminal from working  completely.

This Briefing identifies some of the issues  affecting shipowners, charterers, managers and  their customers in these circumstances. We  focus on charterparties, but similar issues will  arise under other contracts of affreightment and  bills of lading.

Introduction

The Port of Hong Kong is the world’s thirdbusiest by volume. As a major export and  transhipment port for cargoes on the lucrative  Asia-Europe routes, the port and its customers  depend on quick and reliable service. In fact,  some industry sources estimate that container  handling time in Hong Kong is nearly a third less  than that at nearby mainland Chinese ports.  However, when terminal operations suffer  significant disruption, such as the recent and  much publicised 40-day strike, a reduced rate of
cargo operations means vessel waiting times will  rise, potentially affecting shipping and logistics  across an entire region. In addition to the Port  of Hong Kong, these issues could affect any  international terminal experiencing industrial  action.

Force majeure and frustration

Are the parties entitled to refuse to perform a  charter by reason of force majeure or frustration? Depending on the specific provisions in the  charterparty, parties may be able to argue that  performance has been discharged by force  majeure and/or Act of God provisions.
However, force majeure is not a free-standing  principle of English law. The English courts have  consistently stated that commercial parties are  expected to know that the future is uncertain and to make their agreements accordingly. “Strikes” are referred to as a force majeure event in many standard clauses, but not universally: parties will need to carefully consider whether the industrial action affecting them falls  within the parameters of the clause.

If there is a force majeure event and notice of force majeure is required to be served on counterparties, the notice and documentary provisions should be complied with strictly.A contract will be frustrated where there is an unforeseeable change of circumstances which either makes a contractual obligation incapable of  being performed, or which renders performance radically different from that which was undertaken. Mere inconvenience, hardship or financial loss will not amount to frustration, and, generally speaking, it is very difficult for a party to establish that a contract has been frustrated. Strikes, closure or significant disruption at a port is unlikely to amount to frustration of a time or voyage charterparty on grounds of increased cost or delay.

Off-hire

If there are delays to shipments to or from ports because of strikes or industrial action, then the question arises as to whether owners or charterers must pay for those delays.  Time-charterers, faced with the prospect of long waiting times outside  an affected port or paying for the extra time and bunkers needed to steam to an alternative, may seek to argue that the vessel is off-hire. The specific off-hire clause will need to be very carefully considered, but if the charterparty incorporates one of the
usual off-hire clauses (such as NYPE 93 clause 17) then charterers will find it very difficult to argue that the  vessel is off-hire. If there has been an  unlawful refusal to pay hire, owners  will need to consider whether they can  terminate the charterparty (especially if rates have increased in response to the disruption).

Unsafe ports

Issues may arise as to whether ports  suffering from disruptions are safe,  whether ports fall within the trading  limits in the charterparty and whether  owners are entitled to deviate to  another port. A port suffering disruption to operations caused by strikes or similar  action is unlikely to be unsafe in a  legal sense. A port is safe if a ship can reach the port, use it and return from
it without, in the absence of some  abnormal occurrence, being exposed  to dangers which cannot be avoided  by good navigation and seamanship.
Where a port is legally safe, but  ongoing disruption is taking place,  owners may seek to argue that they  do not need to call there by reason of  the trading limits set out in the charter. If the port does not fall outside the  express trading limits, then the  parties need to consider whether  the port, whilst safe, is excluded  from the trading limits for any other  reason. In this respect, parties should consider whether the industrial action falls within the definition of riot or insurrection, if these are named exceptions in the charterparty.

Deviation

Owners will have to review the charterparty carefully to decide  whether they are entitled to deviate  to an alternative port. If permitted,  they must do so in good faith  and not arbitrarily, capriciously or  unreasonably. Particular care must be  given to ensure that: a) the carrier is  entitled to deviate; b) the cargo may  be safely discharged at the alternative  port and; c) the cargo is only delivered  to an entity entitled to delivery. If there  is no express right to deviate, owners  may seek to rely on an argument that  this is a “reasonable deviation” under  the Hague Rules (if applicable). Any  additional costs or losses incurred
by owners as a result of following  charterers’ orders to deviate from the  agreed route may also be recoverable  under an express or implied indemnity (or by way of a claim for damages if  orders were illegitimate and followed  under protest). However, deviation  can have serious consequences if  done unlawfully or in breach of the  charterparty, including repudiation  of contract and loss of insurance  cover. Therefore, parties should seek  guidance from their insurers and legal  advisers before deviating.

Where cargo is re-routed, carriers  will also have to decide whether  they are entitled (and whether they  feel commercially able) to pass any  additional terminal handling charges,  transhipment costs and freight costs  incurred onto their customers.

Voyage charterparties

For a voyage charterer, the main  concerns will be whether Notice of  Readiness was validly tendered,  whether laytime has commenced and,  if so, whether charterers are able to  rely on any interruption or exception  to laytime (failing which, the vessel
is liable to be on demurrage). Where  the vessel is already on demurrage,   charterer’s position will be more  difficult, as exceptions to time running  will need to be very clearly drafted in order to be effective. Parties who have chartered ships to load at an  affected export terminal may incur  significant demurrage liabilities or even cancellations if the laycan period  passes without loading.
A force majeure clause will usually not interrupt the laycan period or the running of laytime or demurrage unless it uses clear words to that effect (both in the force majeure clause and the laytime and demurrage clauses). Any interruption of laytime or demurrage will only last whilst the specific force majeure event applies. Accordingly, there may also be dispute over the timing of the cessation of the force majeure event – i.e. whether continuing delays are caused by the “aftermath” or consequential effects rather than  the defined force majeure event itself.

Liner operators

For liner operators operating a  scheduled liner service, the main  threat from port disruption is the risk  to their carefully-optimised schedules.  For some time operators have been  facing severe downward pressure on  rates. Reliability is also a key factor  for customers. The features that make  modern liner services responsive  to customers’ needs (multiple ports  of call, weekly services, hub-andspoke configurations) also make such  integrated services vulnerable: delays  in one port can cascade throughout  the entire liner service and ultimately  affect other ports, causing congestion  at ports other than the port initially
affected. Therefore, delays caused by  unexpected strikes or industrial action  pose a serious business risk. Parties  need to be fully aware of their rights  of recourse under the charterparties  and other connected contracts which  form part of the agreements for the  liner service. Liner operators’ bills of  lading will typically contain clauses  allowing flexibility in terms of routing,  transhipment, ports of call and transit times and to limit or exclude liability  in accordance with international
conventions.

Manufacturers

Some modern manufacturing systems rely on sophisticated “just in time”  logistics management to maintain  their lean supply chains – i.e. parts  are delivered only shortly before  they are used, cutting down on storage costs. Accordingly, strikes or industrial action at a port which delays delivery of the parts needed to continue the manufacturing process can cause significant disruption to the manufacturing and supply chain. Fabricators, suppliers and assemblers need to consider carefully the business interruption provisions in their contracts to see who bears the risk of delays to shipments.
A serious concern may be the duration of disruption: unlike, say, severe weather, strikes or industrial action can continue indefinitely and/or have lasting after effects. Alternative supply routes or even expensive airfreight  may have to be considered.

Recovery  under business interruption insurance may be another option.

Conclusion

Although most agreements will have some business interruption provisions, port disruption caused by strikes or industrial action is unlikely to frustrate the contract. Therefore, the contracts usually will have to continue to be performed.
An interruption to cargo operations at a port can quickly “snowball”, causing significant and undetermined delays to vessels and shipments. This presents risks to charterers, vessel owners, managers, cargo interests and their customers.
Even though shipping industry participants are used to dealing with such disruptions practically, as the  contractual arrangements are key to  determining who ultimately will foot  the bill, a careful review is essential.
For more information, please contact Scott Pilkington (pictured below), Associate, on +852 3983 7651 or scott.pilkington@hfw.com, or your usual HFW contact.

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