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Sailing Through The Pandemic: Impact Of Covid -19 On The Shipping Industry In India

The topography of the Indian sub-continent has helped the country emerge as one of the largest and the most coveted players in the shipping industry. With 12 major ports and about 200 minor ports, India has served as the back bone of the transport network between countries contributing to world trade and world economies.

India has been re-elected to the IMO Council for Biennium 2020-2021 as one of the states with the largest interest in International sea trade, reinforcing its contribution to international trade and commerce.

The outbreak of COVID 19 has undoubtedly transcended geographical boundaries, affecting the movement of men and material by air, water and land, in addition to posing grave threat to human life. The outbreak of the pandemic has devastatingly impacted global economies, business operations and finances with sea ports and maritime players being no exception.

Steps By The GOI:

The Government of India, Ministry of Shipping, (MOS) had as early as on the 25th of January 2020 communicated to all major ports, the screening, detection and prevention systems to be implemented for disembarking seafarers and/or cruise passengers, followed by further directions being issued on the 27th January 2020. The MOS had vide letters dated 20th and 24th March 2020, accepted, recognised and declared the pandemic a force majeure event or a situation.

The MOS had further on 31st March, 2020 provided various exemptions and remissions on penalties, including by way of waiving any penalty, demurrage charges, fees and rentals and also granted extension of time and deferment of performance obligations, on a case to case basis. Continued relief of such nature has been granted by the MOS even on 21stApril, 2020.

Bearing in mind the global nature of the shipping industry and with almost the entire world grappling with ways to combat the economic impact of the pandemic, its impact on the industry is multifold. The pandemic has caused unprecedented disruption of supply networks and carrier schedules, drastic drop in volume of cargo handled, inability to engage multimodal transportation and risk posed by foreign vessels plying.

The entire industry being compelled to radically scale down business operations has resulted in the depletion of revenue streams consequent to which discharge of independent financial and monetary obligations by various players in the industry have become questionable.

Legal Recourse:
The importance and significance of Force Majeure clauses have taken precedence to ascertain whether they protect performance obligations during pandemics and viral outbreaks. Force Majeure clauses which have been effectively drafted, enabling its applicability to such pandemics may be able to reduce the financial burden on parties which invoke the same as a defence. In the absence of a Force Majeure clause, section 56 of the Indian Contracts Act, 1956 could be invoked which render agreements to perform an impossible or unlawful act, void.

With time bound transportation agreements entered into between parties in respect of temperature sensitive, perishable and emergency cargo and in the absence of all international ports operating as they did before the outbreak of COVID -19, majority of such contracts have become impossible to perform compelling parties to terminate the same on the ground of frustration. Parties can therefore seek exemption from performance by invoking the said section, while mitigating their losses, subject to the terms contained in the respective contracts.

Apart from invoking the arbitration mechanism available under independent agreements, the filing of petitions under the Insolvency and Bankruptcy Code, 2016 proved to be meritorious. However, the increase of the threshold of default under the Code would impact smaller creditors.

Further, the Ordinance, suspending operations of Sections 7, 9 and 10 of the said Code, for a period of 6 months from 25th March 2020 would further hinder recovery of dues that have fallen due during the relevant period, paving way for the filing Civil Suits /Summary suit under the provisions of the Civil Procedure Code, 1908 or commercial suits under the Commercial Courts Act, 2016 which may be an alternative to proceedings under the Code. In conclusion, apart from there being economic drain, the disruption of economics due to the pandemic would only swell litigation and recovery proceedings.

Potential Issues:

  1. What would be status of the consignment which had departed prior to the Lock Down being imposed? Would parties be permitted to invoke Force Majeure and avoid payment or delivery? What would happen to costs incurred by the ship on account of delays in discharge?

    Assuming that the consignment had been loaded on the Vessel and a force majeure event occurs while the Vessel is at its destination port, ready to discharge, and such discharge being impacted directly on account of the occurrence of a force majeure event, the parties shall be entitled to invoke the Force Majeure clause, provided the terms of contract provide respite in such situations.

    Relief may be either in terms of postponement in delivery or deferring paying the cost of the consignment. In the absence of the, the sovereign law then prevailing or the governing law of contract shall come into play while resolving disputes between the parties.

  2. Can the COVID pandemic be deemed an event of force majeure in the absence of any specific reference in the charter party or any other contract?
    The question of whether a particular event would qualify as a force majeure situation would be dependent on the manner in which the force majeure clause is worded. Force Majeure clauses contained in charter parties, which are all exclusive and wide-ranging, are best choices, particularly since the outbreak of COVID 19 pandemic was unforeseen.

    However, should the force majeure clause contain a list of instances, while restricting invocation of the said clause only on the happening of one such listed event, a claim of force majeure under that pretext may fail.

    For instance, different sovereign jurisdictions seek particular mention of an event in a force majeure clause. It is also relevant to understand whether the occurrence of the said event actually rendered performance impossible or only led to postponement of performance and the affected party's compliance to notice requirements contained under the charter party was duly fulfilled and was within time.

  3. Whether nonperformance was due to a direct result of the pandemic?
    This is a question of pertinence. The mere fact that a force majeure clause mentions the word pandemic or any other event that would cover the present situation does not entitle a counter party to vary or postpone its contractual obligations, when such obligation(s) even in the light of the pandemic could have been performed.

    Additionally, steps taken by a party, to mitigate effects of the pandemic are also of interest particularly since an event of force majeure ought to be the cause and not an excuse for non-performance.


Importance Of Governing Laws, Marine Insurance Policies And Combining Force Majeure Clauses

Charter parties or carriage contracts are generally entered between parties belonging to different nationalities. A neutral country's law is generally chosen as the law governing the contract and more specifically in certain contracts, law that governs interpretation of force majeure clauses.

Bills of lading contain specific governing law clauses, incorporating provisions of concerned carriage by sea acts and in the event of the contract not containing a force majeure clause, principles of impossibility of performance and frustration of contract under the said governing law would determine the rights and liabilities of parties.

The importance of having chosen the right governing law shall guide a party in seeking refund of consideration on account of non-performance or breach, cancellation of contract, postponement of obligations etc.

The situation has also emphasized the need for a comprehensive marine insurance policy to include its coverage during outbreak of a pandemic, particularly in case of goods that are perishable and for technology and temperature specific commodities. Other matters like choice of policy, coverage's, exclusions, general average also gain prominence in these times.

The BIMCO infectious or Contagious Diseases Clause is a classic example of a clause containing comprehensive protection to voyage and time charter parties to safe guard interests during the outbreak of a disease. This was drafted in the wake of the Ebola outbreak. Likewise, off-hire is triggered, under clause 15 of the NYPE 1946 on account of deficiency in men which situation the COVID 19 posed with some of the crew being ill onboard.

The Hague and Hague Visby Rules exempt a carrier or the ship from any loss or damage arising or resulting from quarantine restrictions. A careful analysis and study of various standard form clauses can be adopted before drafting and/or incorporating a force majeure clause which deals with matters like laytime, demurrage, off hire etc. while customizing it to contractual needs and balancing the interest of all parties to the contract.

Possible Way Forward
With extensive investments being made by the GOI in modernising port operations, propagating port linked industrialisation, development of coastal communities, enhancement of port connectivity, owing to over 95% of its trade movement being by sea, the outbreak of the pandemic will undoubtedly preclude its players from wholly enjoying the fruits of such investments, considering the rough waters which lie ahead.

With over 22% drop in cargo volumes handled by the Country's major ports and steeper business losses, unless force majeure clauses are invoked strictly as per the contractual intention with which they had been drafted, and effective rehabilitation schemes are brought , attempting to strike a balance between business volumes and business demands by grant of exemptions and financial aids, any effort towards the revival will be futile considering the complex nature of the industry.

General Schemes of revival may not effectively help the marine industry due to its extensive and intrinsically woven operational setup. Specific economic measures ought to be implemented through dedicated economic study and analysis, failing which, staring inequalities and imbalances in business scales are inevitable.

While staying afloat should be the objective, sinking ought not to be even a distant eventuality.

Written By:

  1. Pawan Jhabakh Advocate, practicing at the High Court of Judicature at Madras and
  2. Sharanya Vaidhiyanathan Advocate, practicing at the High Court of Judicature at Madras

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