UK: The Japanese Natural Disaster And Its Consequences: Legal Issues Arising For The Shipping And Trade Industries

Last Updated: 5 April 2011
Article by Nick Burgess

The earthquake that struck off the northern Pacific coast of Honshu, Japan's largest main island, in the early hours on Friday 11 March was the fourth largest recorded in the world since 1900. It caused extensive damage to property within several hundred kilometres of its epicentre. However, the greatest impact of the earthquake was from the resultant tsunami which swept through many coastal towns causing significant loss of life and human suffering.

The tsunami also affected the ports and coastlines of Fukushima, Miyagi, Iwate and Aomori, collectively known as the Tohoku region. In addition to tsunami damage to ports, shipyards and the regional fishing fleet, there were various reports of ships and ferries running aground and suffering damage.

Furthermore, the nuclear power station at Fukushima was damaged and this has caused considerable concern over the risk of uncontrolled radiation leaking from the damaged nuclear reactors. The authorities have evacuated the immediate area and are monitoring radiation levels to ensure that those in the area do not suffer the effects.

The tsunami has proven to be the biggest natural disaster to affect Japan since an earthquake levelled Tokyo and Yokohama in 1923. The Japanese Cabinet Office reported on Wednesday 23 March that direct losses of between 16 trillion yen (US$198 billion) and 25 trillion yen (US$309 billion) have been incurred as a result. If this estimate is correct, the resultant losses will exceed those resulting from Hurricane Katrina in New Orleans in 2005, which the insurance industry assessed to be in the region of US$125 billion.

Beyond the unimaginable human cost of the disaster, there has been and will continue to be significant impact on the Japanese economy and widespread repercussions for the shipping and international trade industries. This briefing aims to set out some of the issues that have been encountered by these industries as a result of the tsunami and that will continue to be faced in the immediate future.

Shipping

The principal effects of the tsunami on the shipping industry relate to port infrastructure and the flow of import and export cargoes. Japanese ports, which handle about 7 percent of the country's industrial output, were badly hit. The ports in the northern part of Japan were severely damaged, although the Japanese transport ministry reported on 23 March that most key ports (12 out of 15) had re-opened and were usable for recovery efforts and general use. Only the ports of Ofunato, Ishinomaki and part of Ibaraki remained too damaged to be used, although the ministry stated that it was working to re-open the sea routes at those three ports. It has further been reported in the press that grain cargoes are reaching Japanese ports after disruptions at terminals, the shipments having been transferred to southern Japanese ports without much difficulty. Nonetheless, there remain a number of concerns for ship-owners and charterers.

Safe port issues

Various safe port issues arise, including as a result of damage to port facilities and equipment, the risk of damage to vessels, the possibility of aftershocks and potential radiation risk from the Fukushima nuclear plant. Owners might also be concerned that if they call at a Japanese port, they may subsequently not be allowed to trade in another country for fear of radiation risk.

Ship-owners may be reluctant to call at particular Japanese ports in case they have become unsafe. Parties to charterparty contracts which provide for loading or discharging at a Japanese port should review the terms of the charterparty carefully before deciding on which course of action to take.

Where the charterparty contains a safe port warranty, the warranty will be prospective. This means that at the time of nomination, the port should be prospectively safe to approach, use and depart from for the period of the vessel's likely visit, in the absence of some abnormal and unexpected future event.

In the case of a time charter containing a safe port warranty, where the Japanese port was nominated prior to the earthquake but the port is likely to have become unsafe by the time the vessel is due to load or discharge there, then the time charterer may be obliged to give new voyage orders, so long as the vessel can effectively comply with those new orders. In the case of a voyage charter, the position is less clear and a detailed review of the terms of that charter will need to be undertaken before any conclusion is reached.

Regarding radiation risk, it is not at present clear how wide this risk is in physical terms. A ship-owner may be reluctant to sail near the plant and especially within the exclusion zone for radiation, arguing that the risk of radiation makes the port unsafe. However, if the radiation risks prove to be exaggerated and unjustified, an owner may find himself in breach of charter for refusing orders to go the relevant Japanese port, particularly if it is out of the "immediate" risk zone. Ship-owners should therefore not refuse voyage orders to call at any Japanese port lightly, because many ports outside the earthquake and tsunami area are operating normally. The fact that grain shipments have been successfully diverted to southern Japanese ports supports this view.

It is recommended that potentially affected ship-owners keep a close eye on developments and update themselves in terms of the prevailing conditions at the relevant port before taking any decisions as to whether charterers' orders are legitimate or illegitimate. Port authorities and local agents should be consulted for updated reports relating to the situation on the ground and Japanese government website consulted in respect of radiation risks.

Deviation

Parties to the charter party should also consider whether it contains any liberty to deviate to a different port although, absent such an express provision, the ship-owner (in the guise of the Master) has an implied right to deviate in order to avoid danger to the vessel, cargo or those on board. As to whether the risk of radiation will be deemed sufficient justification for a deviation, this will depend on the relevant facts in the particular circumstances.

It may be that the parties to a voyage charter party wish to come to a new agreement and vary their charterparty to allow discharge at a different port. Any such variation should, among other things, also allocate responsibility for any additional expenses arising out of the deviation.

Where a decision is made to tranship cargo, consideration must be given as to who bears the costs of such transhipment.

Bills of lading

Where the cargo is going to be delivered at a substitute port, then the bill of lading terms should be examined to see whether the bill incorporates the terms of the charterparty in question. Alternatively, the bill of lading may contain its own liberty clause, which permits deviation in these circumstances to another port. In the absence of such a provision, it may be that discharge at a port other than the one named in the bill amounts to a breach of the owner's / carrier's obligations under the bill of lading. Clearly also, the owner must make sure that even where there is a liberty to deviate, any delivery of the cargo at an alternative port is made only to a party entitled to take such delivery.

Any additional expenses incurred by the owner as a result of the deviation may be recoverable from cargo interests but this will depend on the terms of the relevant liberty clause in the contract of carriage.

Frustration / Force Majeure

The parties to the charterparty should check whether their contract contains a provision that allocates risk as between the parties in the case of supervening events. If so, such a provision would specify where responsibility lies in the case of such an event. However, where there is such a provision, but it does not expressly cover the earthquake / tsunami scenario, then one or other of the parties might seek to rely on frustration of the contract.

Under English law, it is rare for a party successfully to demonstrate that its contract has been frustrated. This will require the party alleging frustration to establish that circumstances have changed to such a radical extent since the contract was concluded that the contractual obligation in question can no longer be performed or, if performed, would be very different to the obligation which was originally undertaken. Mere inconvenience, hardship, additional expense or delay will not generally amount to sufficiently frustrating factors. However, where the vessel itself is damaged as a result of the tsunami, there may be an argument for frustration. Furthermore, in certain circumstances, a delay may be such as to amount to frustration and this will depend in part on the length of delay as against the length of the charterparty, although this is not a conclusive factor. By way of example, in The Sea Angel [2007] EWCA Civ 547, the Court of Appeal held that a delay of three or so months towards the end of a short (20 day) time charter caused by the unlawful detention of the vessel by the port authorities did not frustrate the charter.

Whilst there is no general concept of force majeure in English law, there may be a force majeure clause in the charterparty and it is arguable that an exception such as "Act of God" would cover the Japanese disaster. Again, however, the relevant provision and the prevailing circumstances would have to be considered closely by the party seeking to rely on force majeure before concluding whether or not there was a force majeure event.

Delay

The congestion at Japanese ports (and possible damage to equipment / facilities) that will have resulted from the disaster will mean that any vessels already at Japanese ports, or due to call there, are likely to experience delays in loading or discharging their cargoes. Time charterers might seek to argue that the vessel is off-hire in such circumstances but, generally speaking, hire will continue to run unless the charterparty is frustrated or the vessel is ordered to an alternative port pursuant to any relevant charterparty provisions. However, the wording of the off-hire clause in the charterparty will need to be reviewed carefully. For example, the standard un-amended clause 15 of the NYPE time charter lists specified off-hire events and ends with the words "or by any other cause". The amended (and expanded) version adds the word "whatsoever" to the end of that phrase. It is arguable that, in the case of the former un-amended wording, the off-hire clause will not cover a port closure, whereas the latter amended wording might. On the other hand, damage to the vessel resulting in a loss of time might arguably be covered by the unamended wording.

As regards a voyage charterparty, where notice of readiness has been validly tendered and laytime has already commenced, then the vessel is liable to be on demurrage unless the voyage charterer can rely on any exception or interruption to laytime.

Dangerous goods

The radiation from the damaged nuclear reactors has been known to have affected food and water within the surrounding area. There arises therefore the possibility that certain cargoes on board vessels may have been affected by the leaking nuclear radiation. This may give rise to subsequent cargo claims. Alternatively, there may be claims that affected cargoes are dangerous cargoes entitling owners to refuse to load them. Again, parties need to review their contractual provisions carefully and assess the actual exposure to radiation before deciding how to proceed.

International Trade

Japan is the world's third largest oil importer and the largest purchaser of thermal coal and LNG in the world. Japan also has a large steel industry, ranking second only to China in steel production. Japan is furthermore a major importer of commodities, including agricultural products. It was reported on 24 March that Japan has secured enough extra LNG supplies to compensate in the short-term for reduced power generation capacity as a result of a number of coal-fire and nuclear power plants going offline. Furthermore, as stated above, shipments of grain have been rerouted to alternative Japanese ports in the South. Nonetheless, there remain a number of legal concerns for traders and others in the commodities business.

Frustration / Force Majeure

As outlined above, frustration of contract is a difficult argument to advance successfully under English law. The fact that a sale contract may have become more expensive or burdensome to perform, for example, because of difficulties in production or transportation issues, will not generally amount to frustration. By way of example, in the case of The Mary Nour [2008] EWCA Civ 856, the Court of Appeal held that the seller of a cargo of cement was liable to the buyer for failure to supply the cement as required under the sale contract, notwithstanding that this was due to the commercial pressure exerted by a third party, a state-owned company that operated a cartel in the relevant area. The fact that the original supplier chose not to make the goods available did not amount to an event frustrating the sale contract.

Traders who anticipate problems in fulfilling any contractual obligations should check their sale contracts for any force majeure provisions to establish whether any such provisions cover the Japanese disaster.

Payment for goods

To date, there have been no reports of major disruption to the Japanese banking system. Therefore, payment under sale contracts by letter of credit should not have proved problematic.

Shipment of goods

Traders who are also charterers of the ship nominated to transport the goods under a sale contract may find themselves liable for demurrage. The charterparty should be reviewed carefully to check whether its provisions expressly provide for the interruption of laytime or demurrage in the case of a force majeure event. Alternatively, traders may face cancellations where the laycan period expires without loading having commenced. Again, contractual provisions should be considered carefully to assess the legal consequences.

Condition of goods

It should also be noted that some concerns have arisen with regard to cargoes becoming affected by radiation, so that they may no longer meet their specifications under the sale contract. The buyers may consequently refuse to pay for and / or take delivery of the goods. The sellers may be required to provide alternative goods from another source, depending on the terms of the sale contract. Alternatively, there may be countries which refuse to allow the discharge of goods which may have been affected by radiation even though the goods might in fact be perfectly sound.

Insurance

Traders should check whether their cargo insurance covers the type of risks being encountered in Japan, including additional forwarding costs and the potential damage or deterioration to any goods, for example stored in warehouses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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