COVID-19: Implications to International Sale of Goods Contracts

Can owners deny charterers' instructions to proceed to a certain port of call? Can a seller deny or delay shipment? Is Covid-19 a force majeure case and how is this proven in terms of the performance of the contractual parties' obligations?

Some thoughts below.

The current outbreak of the novel coronavirus (Covid-19) has spread far and wide in recent weeks. In order to try to contain the outbreak, many countries have implemented various restrictions and procedures for vessels calling at their ports and among these many port authorities in various countries have implemented temperature screening at all sea checkpoints and have also required, among other measures, all arriving vessels to submit Crew/Passenger list, Ship Sanitation Certificates, Last 10 Ports of Call list and list of all passengers and crew members with temperature above 37.5 degree Celsius.

The current situation has given rise to implications in charterparty, time charterparty in particular, and sale of goods contracts especially with force majeure clauses and the charterers’ instructions to proceed to a certain port.

One of the most common questions facing vessel owners who charter out their vessels is whether they are obligated to follow vessel charterers’ instructions to proceed to a nominated port where there may be a risk of contracting Covid-19. Under a time charterparty’s express/implied safe port warranty, charterers will be obligated to order a vessel only to ports which are expected to be safe at the time when the vessel is estimated to reach there. Assuming that the nominated port is still operating and not closed by government decree, there must be strong and clear evidence of such uncontrolled outbreak at a particular port, lack of or insufficient preventive measures being taken by local port authority, and/or partial/ complete closure of a particular port due to an outbreak before concluding that a port is not “safe” and therefore the charterers; instructions are in breach of the safe port warranty. Possible blacklist of the vessel or ban from calling other ports after having berthed in such unsafe port can be strong evidence that the nominated port has been rendered unsafe and in such a case, charterers will indeed be under an obligation to re-nominate an alternative safe port. There are clauses that can be used in such cases such as, namely, the BIMCO Infectious or Contagious Diseases Clause released in 2015 as a response to Ebola outbreak (incorporated into some standard form charterparties such as Clause 25 of the SUPPLYTIME 2017), and Clause 46 of the BIMCHEMVOY 2008 for tanker vessels.

The outbreak of Covid-19 has also impacted a large spectrum of sale of goods contracts. Parties may attempt to vary the terms (e.g. price) of contracts, to exclude/limit liability for breach or non-performance, or to terminate their contracts altogether, due to increase in costs or loss of demand for goods or loss of seasonality of the products caused by Covid-19. Whether parties can do so will depend on the actual terms of the sale contracts and the applicable contract laws.

Across the EU among businesses the applicable law is very much likely to be the Vienna Convention for the Sale of Goods as most countries have ratified it and incorporated its dispositions in their national laws.

In any way and so much if the terms do not contradict a public order provision of the applicable law of the contract, if a sale contract contains a “price adjustment” clause, then parties may wish to vary the sale price of goods due to increase in costs of transportation caused by Covid-19.

Exclusion and limitation of liability clauses, if contained in a sale contract and should they escape contradiction with the applicable laws, are also useful when a contractual party is in breach of the sale contract partly/wholly due to the impact of Covid-19 but where a force majeure clause is not expressly provided for in the sale contract or not applicable under the circumstances. These liability clauses have the legal effect of either excluding (in total) liability of the party in breach or limiting its liability to a certain fixed amount, provided always the breach falls within the ambit of the clauses.

Some standard form international sale of goods contracts contain a force majeure clause in the form of a “prevention of shipment” clause. For example, Clause 18 of the GAFTA Contract No. 88 (2018) provides for performance of the contract to be suspended if seller’s performance is prevented partially or otherwise by a force majeure event subject to specific notice requirements. If the force majeure event continues for “21 consecutive days after the end of the shipment period”, the buyer then has the option to cancel the unfulfilled part of the contract by serving a notice on the next business day after expiry of this 21 days’ period. If the buyer does not exercise the option, any unfulfilled part of the contract “shall be automatically cancelled” upon expiry of an additional period of 14 consecutive days. The burden of proof again lies upon the seller and the parties shall have no liability to each other for delay and/or non-fulfilment under this clause, provided that the seller has provided to the buyer (if required) satisfactory evidence justifying the delay or non-fulfilment.

Other than contractual clauses, governments may be taking proactive measures to declare Covid-19 as a force majeure event in appropriate circumstances and localities. For example, the China Council for the Promotion of International Trade (CCPIT) announced on 30 January 2020 that it would issue what is effectively “force majeure certificates” to assist affected businesses in minimising losses and/or avoiding liability arising from the Covid-19 outbreak in China. Such certificate might probably be effective and conclusive within Chinese jurisdiction and in respect of sale contracts governed by Chinese law.

However, if a sale of goods contract say between a Chinese seller and a foreign buyer is governed by English law and it contains a force majeure clause, the same requirements dealing with the clause would apply. In such a case, the CCPIT-issued force majeure certificate might well be treated as persuasive evidence for the Chinese seller in establishing the Covid-19 outbreak as a valid force majeure event under the contract. If the contract does not contain a force majeure clause, the certificate might be of no assistance to the Chinese seller.