The shipping community is still coming to terms with the disruption following attacks by Houthi rebels on merchant vessels transiting the Red Sea, in particular when passing the Bab al-Mandab Strait, one of the most frequently used sea passages and a “chokepoint” for international trade.
We consider below some of the important charterparty implications arising out of the unrest in the area for vessels transiting the Red Sea and provide some practical guidance both to owners and charterers.
What route must the vessel take?
The starting point is the charterparty itself: the vessel will generally be obliged to proceed via any route stipulated in the contract.
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Often however no provision is made as to the route to be taken to a particular port and in such cases, a “usual” or “customary” route must be used. The “usual” route is presumptively the most direct route, although it is open to the parties to adduce evidence that there is an alternative “usual route”.
The route to be taken by the vessel is a matter of her employment and, subject to contractual restraints, an Owner / Master is obliged to comply with, for instance, a time charterers’ legitimate employment instructions as to the route taken and to proceed with utmost despatch.
An unjustified, non-contractual deviation is a breach of contract and an off-hire provision in the charterparty may also put the vessel off-hire during such deviation.
Ordinarily, a voyage from the west coast of India to Europe, for instance, would be via the Red Sea / Suez Canal. Proceeding instead via the Cape of Good Hope adds approximately 3,500 nautical miles to the voyage.
The “evolving” Red Sea situation
The first widely-reported attack on merchant shipping in the Red Sea by the Houthis was the seizure of the Bahamian flagged vehicle carrier “GALAXY LEADER” on 19 November 2023, which was taken to Hodeidah. Spokespersons for the Houthis claimed the group was targeting only those vessels with Israeli connections in response to the conflict in Gaza between Israel and Hamas. In the early stages of the unrest, there was indeed a spate of missile and drone attacks on vessels either owned or managed by prominent Israeli nationals or corporations. Since then and as of 1 February, there have been in excess of 30 reported attacks or attempted attacks on merchant ships of varying types and flags and it is clear that a number of the attacked vessels in fact have no conspicuous connection to Israel. The means of attack employed by the Houthis has been increasingly varied, with the reported use of a range of ballistic missiles, drones and autonomous underwater vehicles. In view of this, as well as the volume of traffic in the area, the risk of misdirected or misinformed attack is clear.
On 19 December 2023 a coalition of state partners, including the US and UK, launched Operation Prosperity Guardian in which naval forces were sent to the area to protect merchant shipping from the Houthi threat. Despite the multinational effort, however, Houthi attacks continued.
On 12 January, the US and the UK, in response to further attacks on merchant shipping, launched missile strikes on Houthi targets in mainland Yemen. There have been further Houthi attacks and US/UK air strikes since then and it is understood that US and UK vessels are considered as targets by the Houthis.
Since the attacks in the Red Sea began, there has, predictably, been a reduction in vessels transiting the Red Sea and an upturn in vessels proceeding via the Cape of Good Hope although precise and accurate figures are difficult to obtain publicly.
Can Owners refuse orders and / or re-route?
There are a number of contractual and common law grounds for refusing to comply with a charterer’s order to proceed through the Red Sea or otherwise deviating from the “usual” route which should be considered.
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War Risks Clauses
The starting point should be to consult any war risks provision in the subject charterparty and to see if it is engaged.
Is the war risks clause engaged?
The first question is whether the Red Sea situation actually constitutes a “war risk” as defined in the relevant war risks clause. Some clauses define the war risk narrowly whereas others define the war risk more broadly.
Many war risks provisions refer to “warlike” areas and / or operations and it was particularly unclear at the beginning of the series of Houthi attacks to what extent these could be said to be “warlike”. For clauses such as CONWARTIME 2013, which define war risks more broadly so as to include e.g. “acts of terrorists; acts of hostility or malicious damage”, their engagement by the Red Sea situation is much clearer.
What does the war risks clause permit?
This will depend on the particular wording of the clause in the charterparty.
CONWARTIME 2013, for instance, gives owners the right to refuse to proceed or continue to or through any port, place area or zone or any waterway or canal where it appears that the vessel, her crew or cargo in the reasonable judgement of the master or owners may be exposed to War Risks. If the vessel refuses to proceed to a loading or discharge port, having first given notice to charterers, owners may request an alternative port nomination and if no such nomination is received within 48 hours, owners may discharge the cargo at any safe port of their choosing, with the costs and expense of doing so being for charterers’ account.
Under VOYWAR 2013, owners may discontinue loading operations or otherwise cease to proceed to or remain at any place at which the vessel is exposed to a war risk. Owners may also require an alternative port nomination, and discharge at a safe place of their choosing if no alternative nomination is forthcoming within 48 hours (and also recover extra discharge expenses as well as additional freight if the extra distance exceeds 100 miles ). VOYWAR 2013 also deals with the situation where the usual route becomes dangerous. In such cases, owners may give notice that a different route will be taken and can also recover additional freight to the extent the extra distance exceeds 100 miles.
Owners’ Assessment of Exposure to War Risks
The entitlement of owners to refuse orders under many war risks provisions is based on some form of assessment of the likelihood of the vessel’s exposure to such risks.
The previous CONWARTIME 2004 clause, for instance, permits refusal to proceed if the vessel, cargo or crew “in the reasonable judgement of the Master and / or the Owners, may be, or are likely to be, exposed to War Risks”. Owners’ judgement under the clause must be exercised in good faith and be objectively reasonable, while the exposure must be “a real likelihood” or a “serious possibility”. It will assist owners in this regard if all necessary enquiries are made to assess the degree of exposure. Such enquiries could include, for instance, an appropriate (independent) voyage risk assessment; liaising with flag state representatives and / or consideration as to any additional safety measures which may be employed on the vessel.
Owners are generally not permitted, however, to refuse orders to trade in areas in respect of which they have, by the terms of the charterparty construed in its factual context, accepted the risk, unless they can establish that there has been a “qualitative change” in the risk since the date of the relevant charterparty. Acceptance of the risks associated with a certain trade may be inferred in cases where, for instance, owners must have known upon entering the charterparty that the vessel would be employed in that particular trade, or if a clause stipulates, for example, that a particular route is “always allowed”. Also important will be the knowledge that may reasonably be attributed to the parties when the contract was agreed. For instance, an owner is more likely to be deemed to have accepted at least some of the “war risks” now associated with Red Sea passage in a charterparty entered into on 1 December (after there had been numerous reported Houthi attacks on vessels) than one entered into on 1 November (before any such attacks had occurred). Note, however, that the revised 2013 CONWARTIME clause may be engaged “whether such risk existed at the time of entering into [the charterparty] or occurred thereafter”.
Overall, a refusal to proceed through the Red Sea will likely be deemed more reasonable for a vessel with Israeli connections or if it has connections with the US or UK (in particular) or any state participant in Operation “Prosperity Guardian”.
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It will be more difficult for vessels with no such connections to justify refusing to proceed through the Red Sea in the absence of an independent risk assessment confirming that there is a real risk to the particular vessel in attempting such passage.
What if there is no applicable war risks clause?: the Common Law position
Entitlements to refuse to comply with charterers orders and to deviate also exist at common law in the absence of an express clause, although the level of danger (and its imminence) required to engage such entitlements are considerably higher.
For instance, at common law there is an entitlement to deviate for the purposes of saving lives at sea. Further, if an order is given, compliance with which exposes the vessel to an imminent peril or otherwise to a risk which its owner or crew has not agreed to bear, the master is entitled to refuse to obey it.
Clauses Paramount and other Liberty Provisions
In respect of cargo claims, if the charterparty incorporates the Hague or Hague-Visby Rules with an appropriate paramount provision, this will include Article 4(4) which provides that any deviation in saving or attempting to save life or property at sea or “any reasonable deviation” will not amount to a breach of the contract of carriage. “Reasonable deviation” has been held to refer to such departure from the contract voyage as a prudent owner would make having regard to all the relevant circumstances.
The charterparty may also contain a standard or bespoke provision entitling the vessel to deviate in certain circumstances. The latest BIMCO liberty and deviation clause, for instance, permits deviation for any “reasonable purpose”, with a non-exhaustive list of examples.
Potential Remedies for Charterers for Unjustified Deviation
To the extent the vessel either deviates or fails to comply with, for instance, a time charterers’ orders without justification, this will amount to a breach of contract on the part of owners. Charterers should, in principle at least, be able to recover damages for losses caused by such a breach to the extent the type of loss claimed is not too remote.
In cases of deviation, an off-hire provision in the charterparty may also put the vessel off-hire until, for instance, such time as she is in a position not less favourable to charterers. In this regard, charterers may not be obliged to give credit for savings made on e.g. canal fees and AWRP.
Proceeding through the Red Sea
To the extent the vessel does indeed proceed through the Red Sea, a number of consequences follow.
Additional War Risks Premiums
In response to the Houthi attacks and the risk posed to vessels transiting the area, the JWC has widened the areas in the Red Sea considered as “high risk”. This has in turn led to an increase in additional war risks premiums (AWRP). In mid-October 2023 war risks premiums for Red Sea passage stood at around 0.07% of the vessel’s value, whereas by the end of December the figure jumped to 0.7%.
Under CONWARTIME 2013, if the vessel indeed proceeds through an area exposed to war risks, charterers are obliged to “reimburse to the Owners any additional premiums required by the Owners’ insurers and the costs of any additional insurances that the Owners reasonably require in connection with War Risks.”.
Potential Remedies for Owners if the vessel incurs loss / damage
To the extent a charterer’s order to proceed through the Red Sea is not legitimate, this is a breach of the charterparty. Such a breach will not automatically be repudiatory, but may become repudiatory to the extent charterers persist in their illegitimate orders.
If the vessel is damaged as a result of charterers’ breach of contract, owners should generally be able to recover damages to the extent their loss is caused by the breach and the loss claimed is not too remote.
The implied indemnity
If the vessel is damaged as a result of complying with, for instance, a time charterers’ order to proceed through the Red Sea, Owners may be able to recover under the implied indemnity, e.g. in clause 8 of the NYPE 1946 form. For such an indemnity claim to succeed however, the charterers’ orders must be an “effective cause” of the owner’s loss, and no indemnity will be recoverable in respect of risks which owners are deemed to have agreed to bear under the relevant charterparty.
Can the Charterparty be terminated?
The Charterparty may contain an express clause permitting cancellation of the contract e.g. if the vessel cannot be delivered into the charterparty within a certain period or in other stipulated circumstances.
Under VOYWAR 2013, for instance, if at any time prior to the commencement of loading it appears in the reasonable judgement of the master / owner that the performance of the contract of carriage may expose the vessel to war risks, owners may give notice to charterers to cancel the charterparty.
Frustration will have the effect of mutually discharging the parties from their respective contractual obligations. The potential for unrest in the Red Sea to frustrate a charterparty will depend on the nature of that charterparty and the voyage(s) to be performed thereunder
It is well established that frustration of a contract occurs in cases where a change of circumstances, not attributable to the fault of either party, so radically changes the nature of performance that it would be unjust to hold the parties to their contractual obligations. It is equally well established that merely because performance has become more expensive or time consuming will not, without more, frustrate a contract. In at least one case it has been held that the need to reroute a voyage via the Cape of Good Hope did not frustrate the contract. However, the need to reroute via the Cape may conceivably frustrate a contract of carriage where, for instance, the contractual cargo cannot possibly endure such an extended voyage.
Five practical steps moving forward …
1. Safety First!
The safety of the vessel and her crew is paramount.
Quite apart from any applicable war risks provision, the vessel is not obliged to proceed to any place where she will face imminent peril or a risk which has not been assumed under the charterparty.
2. Take the time necessary to assess the risk
It should be emphasised that owners are not obliged to comply with any order from a charterer immediately and without pause for thought: owners are entitled to a reasonable period of time to consider the relevant order given and its legitimacy.
The reasonable period of time afforded to owners should be used, wherever possible, to gather evidence and to conduct an appropriate voyage-specific risk assessment for the relevant vessel so as to make as informed a decision as possible as to whether or not it is safe to comply with instructions.
3. Co-operation and agreement wherever possible
Owners and charterers are under an implied duty to cooperate with each other as far as the safe and effective prosecution of the voyage is concerned. In this regard, communication lines should always be kept open and the parties should cooperate to the fullest possible extent to see if solutions can be reached to mitigate any risks to the vessel or her crew.
It may also be the case that once savings to be made on, for instance, canal fees and AWRP are taken into account, the cost difference between proceeding via the Red Sea / Suez and, on the other hand, diverting via the Cape is relatively modest. In such a case, it may be easier for owners and charterers to agree swiftly and amicably on the vessel’s route in light of the prevailing circumstances. This option should always be explored.
4. Notice requirements
Should owners elect to refuse orders on the strength of one of the BIMCO standard war clauses, for instance, note that many of owners’ entitlements under such provisions are contingent on the provision of minimum amounts of notice to charterers. Where these apply, it is important that such notice requirements are complied with strictly.
5. Additional clauses
In respect of new charterparties pursuant to which it is foreseeable that the vessel will proceed via the Red Sea, owners and charterers should consider whether an additional charterparty provision is needed to safeguard or strengthen their respective positions and to avoid some of the uncertainties with the current suite of standard war risks provisions.
Such a clause might address, for instance, the extent to which Red Sea passage (as well as deviation via the Cape) is permissible and allocate the foreseeable expense and liability risk inherent in either course.