War Clauses – the Ukraine situation

As the situation in Ukraine develops, there is understandable concern on the part of shipowners with vessels operating in the Black Sea, the Sea of Azov and possibly the Baltic Sea. A frequent question that is being asked is whether or not owners have the right to cancel the charterparty. 

This article will try to give some general guidance (but not an answer) to that question. It is divided into three sections – (1) a general overview of how English law interprets the word(s) “war” or “warlike situation” (2) some examples of what could or could not be considered “war” and what lessons can be learnt; and (3) a brief overview of two different types of war clauses.

Overview

It will come as no surprise to those familiar with the subject of the English law on interpretation of contracts that the English court will adopt an approach to the meaning and construction of the terms “war” and “warlike situation” through the prism of what would be understood by the reasonable commercial man (see KKKK v Bantham [1939] 559).  The Court will be less interested in applying rules of public international law. The definitions of what is “war” by influential public international lawyers will therefore have little or no relevance.

Some guidance from the Court can also be found in the judgment of Mustill J (as he then was) in Spinney’s v Royal Insurance [1980] 1 Lloyd’s Rep. 406.  It is important however, to bear in mind that that decision was made in the context of whether there was a “civil war” in the Lebanon. The judge in Spinney’s case said:

“I do not propose to attempt any general definition of a civil war.  It does, however, seem to me that a decision on whether such a war exists will generally involve a consideration of three questions:

(1) Can it be said that the conflict was between opposing “sides”?

(2) What were the objectives of the “sides”, and how did they set about pursuing them?

(3) What was the scale of the conflict, and of its effect on public order and on the life of the inhabitants?”

The third of those questions may provide some useful guidance on the Ukraine situation. The scale and effect of the conflict are bound to inform the reasonable commercial man as to whether or not the events in question amount to “war”.  It accords with the purposive, business common sense approach to what amounts to “war”.

Examples and lessons learnt

(1)  Although the conflict in the Falklands has been popularly described as “The Falklands War”, the British government did not actually consider that a state of war existed between Great Britain and Argentina. Throughout the conflict, British ships traded into Argentinian ports and vice versa and the nationals of each state were not treated as enemy aliens nor was there any seizure of assets. Although the local severity of the conflict in the Falklands amounted to a war there, elsewhere the limited scale of the conflict and the low order of severity of its repercussions may not have sufficed so as to amount to a war between the two countries.

(2) In The Northern Pioneer [2003] 1 Lloyd’s Rep. 212, a dispute arose as to whether the  cancellation of a time charter with a clause providing a right of cancellation “in the event of the outbreak of war between any two or more of … Federal Republic of Germany and any country of the EEC ...” in the context of what occurred in the former Yugoslavia.  It was held (by a majority, the dissenting arbitrator being the distinguished former appeal court judge, Sir Christopher Staughton) inter alia that

(a) the events in Kosovo did not constitute “war” within the meaning of the war cancellation clause; and

(b) even if the events were “war”, Germany was not involved in that war.  Members of NATO participating in a NATO operation are not “involved” in the operation as a nation. 

It should be noted, however, that although the Court of Appeal dismissed the appeal on different grounds, it indicated that if it had considered the above two points, it may have been prepared to come to a different conclusion as to whether the events in Kosovo constituted a “war” for the purposes of the cancellation clause.

What lessons can be learnt from the above cases?  It is perhaps easier to say what is not required in order to be “war” than what is required: there does not have to be a declaration of war, there does not have to be a suspension of diplomatic relations and there does not have to be any formal government statement that a state of war exists.

As to what is required, we should return our attention to the third of Mustill J’s requirements in Spinney’s case, namely the scale and severity of the conflict.  Is the closure of ports to vessels flying the flag of another country a requirement? – no, but if it happens it would be a strong pointer.  Is the seizure of state assets or those of nationals of the other state a requirement? – no, but again it would be a strong pointer.  Is the internment of nationals of the other state as ‘enemy aliens’ a requirement? – no, but again it would be a strong pointer.

It may be noted that none of these indicators were present in the Banthem case and yet in that case there was “war” within the meaning of the cancellation clause.

Two examples of war clauses

A typical example of a war cancellation clause commonly found in the riders of a charterparty may say:

“In the event of war or warlike situation, whether declared or undeclared between any two of the following: U.S.A., C.I.S., United Kingdom, Greece, Norway, France, Japan, Germany and China either party to have the right of cancelling this Charter Party or any remaining portion thereof.”

There are several notable observations arising from the above:

(1)        There must be a “war” or “warlike situation” between the countries named in the clause;

(2)        The phrase “warlike situation” has no clear meaning, yet a reasonable person might be expected to recognise one when it arises.  Taken at face value, “warlike” could mean something less in scale and severity than “war” itself (but if so, how much less?); or it could mean the imminent threat of war rather than the actual and widespread outbreak of hostilities; or it could mean so serious a collapse and cessation of diplomatic and commercial links (including breaking diplomatic relations, sequestration of assets and internment of citizens) as to amount to “war” even though there may have been no physical acts of war.  In contrast, the word “situation” is relatively easy to construe: it refers to the circumstances or status and is to be contrasted with words such as “operations” or “activities” which are concerned with the actual events themselves (which, cumulatively, may amount to “war or warlike situation”);

(3)        The fact that the term “warlike” is so uncertain probably indicates that  where it is difficult to say whether or not events qualify as “war”, that doubt should be decided on the basis that they do so qualify. If the parties had intended that only a formally declared “war” should be capable of triggering cancellation, they would not have added the phrase “warlike situation”.  In other words, if the status of the events, the “situation”, does not quite amount to a “war” it may nevertheless be regarded as “warlike” because the reasonable commercial man would recognise it as such.

The BIMCO CONWARTIME 2013 clause is, strictly speaking, not a “war cancellation clause”.  It should be noted that the commonly used NYPE 1946 form and the NYPE 2015 form do not contain a standard war cancellation clause (unlike the NYPE 1993 form, which does contain one). These forms, like the CONWARTIME clause, make no mention of the parties cancelling the charterparty in the event of “war” or “warlike situation”.  Rather, in the event of the application of the clause, the owner shall amongst other things, “not be obliged to proceed or required to continue to or through, any port, place, area or zone, or any waterway or canal…”.  

To consider the application of the CONWARTIME clause, it is useful to note the following phrases in that clause:

“……“War Risks” shall include any actual, threatened or reported:

war, act of war, civil war or hostilities; revolution; rebellion; civil commotion; warlike operations; laying of mines…… which, in the reasonable judgement of the Master and/or the Owners, may be dangerous or may become dangerous to the Vessel, cargo, crew or other persons on board the Vessel.”

The definitions in the CONWARTIME clause appear to be wider than the typical war cancellation clause. It is arguable that the term “warlike operations” is, like “warlike situation”, sufficiently uncertain that it could be open to interpretation, so that what would not normally be considered a “war” is nevertheless, to an ordinary commercial person, to be considered within the meaning of a “warlike operation”.  Clearly, however, a “warlike operation” requires more than a “warlike situation”: it seems that there must, at least, have been some organised act, rather than just the threat of one. Similarly, the standard NYPE 1993 clause refers to “outbreak of war”, which seems to restrict it to a situation formally recognised as “war”, rather than just “warlike”.

It should also be noted that, unlike the typical war cancellation clause quoted above, the CONWARTIME clause is not limited to a war between specific countries.  Thus, as the conflict is currently between Russia and Ukraine, it might be said that the example quoted above may not apply.  However, the  CONWARTIME clause could apply, as could a clause which referred to a warlike situation “involving” named countries which included Russia or Ukraine. Given the current developments, it is becoming more likely that the situation will be recognised as an “outbreak of war”, thus potentially triggering the standard NYPE 1993 clause. 

Finally, under the CONWARTIME clause, there must be the exercise of “reasonable” judgement of the Master that the “war” or “warlike operation” may be dangerous or become dangerous to the vessel, cargo and crew.  This will be a mixed question of fact and law that is beyond the scope of this article to examine but will require very careful consideration.

Conclusion

As always, there is no clear answer for owners and charterers. In summary:

(a)        Be aware of which “war” clause applies to the charterparty.  They will have different effects.

(b)        The term “war” is strictly applied, albeit there is no precise definition.  However, the term “warlike situation” or “warlike operations” may be more loosely interpreted.

The situation in Ukraine is continuously evolving.  An egregious application of a typical war cancellation clause could have very serious consequences for either side of a charterparty.  If the CONWARTIME clause applies, do not assume that either side has a right of cancellation. The consequences of application of the clause are set out in detail in paragraphs (b) to (j) of the clause.

Should you have any questions on the matters covered above, please contact Nicholas Woo or another member of the Shipping Team.