Red Sea crisis causes serious legal headaches

Red Sea crisis causes serious legal headaches | BDM Blog | BDM Law

Back in 2021 there was huge focus on the closure of the Suez Canal due to the grounding of the ultra large container ship Ever Given. The canal had to close for six days and hundreds of ships had to deviate around the Cape of Good Hope. That incident caused serious losses and spawned a series of legal cases which are yet to be resolved. Now the shipping industry is faced with something far more serious. The latest problems in the Red Sea and the decision of certain ship operators to deviate via the Cape of Good Hope is likely to cause far more serious disruption than a six day closure.

Financial loss is of course a pre-requisite to a legal claim. The route via the Cape is two weeks longer and requires more fuel. Spot rates have risen dramatically particularly in the container market. Container operators are now asking up to US$2,500 per TEU for Asia to Europe trade which is about 150% up on the rates before the Houthi’s started firing rockets at ships heading into the Red Sea. Those operators who are still transiting the canal are asking for substantial additional payments to cover the increased insurance and operational costs. All that has an impact on freight rates.

In terms of the legal issues, these are the typical questions being asked. In what circumstances can a ship owner deviate from the optimal route? Can the ship owner charge additional freight to cover the deviation cost for a voyage already underway? Can the ship owner terminate the voyage by delivering the cargo elsewhere? The answers are not easy and much depends on the terms of the charter or the liner bill in the case of container shipments. Most charters contain some form of war risk clause but this ranges from CONWARTIME (which is more recent) to the CHAMBER OF SHIPPING WAR RISK CLAUSES (which originate from the 1930’s). Most standard war risk clauses allow owners to refuse charterer’s instructions if the vessel may be exposed to hostilities. However, the Owner’s judgement must be made in good faith and must be “objectively reasonable” (The Triton Lark). The position under each charter is different and that creates legal difficulties where there are chains of charters with different war risk provisions in each.

The extra costs associated with deviation are also an issue. Whilst there is a saving on the canal costs, the extra cost of fuel is significant. Furthermore, the increase in the numbers of ships going via the Cape has led to issues with bunkering and a spike in the price of all types of marine fuel oils. Can the ship owner recover these costs where there is a deviation? Some liner bills deal expressly with this issue but others do not. That has led to conversations between operators and customers about termination of the voyage absent an amicable agreement to cover the extra deviation costs around the Cape. Again, we have been involved in several of those issues and they remain ongoing.

The legal questions have now died down a little simply because those ships destined to go through the Red Sea and Suez have now largely completed their voyages either through the canal or around the Cape. Some container operators are now refusing to transit via the Red Sea/ Suez and/or if they do so are demanding substantial increased freight to cover the insurance and other costs. There are ongoing issues however as regards longer term charters with much debate over the legitimacy of voyage orders to proceed through the Red Sea/ Suez. The position is not helped by the ever changing geopolitical situation in that region. For example, does the recent step up in military aid to commercial shipping make a material difference to the perceived risk? These are just some of the issues that we are contemplating when advising our clients.

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Nick Burgess
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