BIMCO rounded off 2019 by releasing an overhaul of the BIMCO Sanctions Clause. Owners previously held the right to ignore charterers’ orders based on owners’ “reasonable judgment”. That right is removed. This will be of some comfort to charterers, who will be pleased to see the back of a subjective test in owners’ favour.
The new regime now provides an objective test. There is also revised relief for innocent parties, including a right to terminate the charterparty and claim damages. For the first time, BIMCO has created a voyage charterparty specific companion clause.
An express right of termination
The key addition to the new BIMCO Sanctions Clause is an automatic right to terminate the charterparty and claim damages where a sanctioned entity forms any part of the charterparty chain. Owners warrant that they, the vessel, the registered owners, the managers and any intermediate disponent owners are not a ‘Sanctioned Party’. Charterers, in turn, warrant the same on behalf of themselves, subcharterers, shippers, receivers and cargo interests.
Effectively, Owners warrant that nobody up the chain is a sanctioned entity. Charterers warrant that nobody down the chain is sanctioned.
These obligations are absolute and continuing. As a result, if at the time of entering into the charterparty, a party is not subject to a sanction, but later becomes sanctioned whilst the charterparty is on foot, the sanctioned party will immediately be in breach. Moreover, a situation could arise where a future sub-charterer, with no involvement whatsoever in the vessel at the time the initial charterparty is entered into, later takes a sub-charterparty and later still becomes subject to a sanction. In those circumstances, charterers would be in breach of their warranty to owners.
As to relief, under the new proposed clauses, the innocent party has an immediate right to terminate the charterparty and to claim damages. This termination mechanism is a new feature of the BIMCO Sanctions Clause. This introduces a threat of termination and damages claims both up and down the chain. This is a noteworthy change to the clause. The effect is particularly important in a political world where sanctions are a go-to weapon in the diplomatic arsenal.
Consistency is king
Contractual consistency is key to this regime working effectively. Parties in the middle of charterparty chains must ensure that they maintain a back to back contractual position both up and down the chain.
Additionally, any party sitting in the middle of a charterparty chain should be cautious of counterparty risk. In a chain of charterparties (all including the BIMCO Sanctions Clause) the buck should ultimately stop with the sanctioned entity. That makes sense in theory. In practice, the party seeking to claim against a sanctioned entity is likely to face a more complex recovery than the other parties in the chain. Everyone should be confident of securing their own recovery in the meantime from their contractual counterparty.
Finally, the increased clarity and certainty may come at a cost. The due diligence burden is now more onerous than ever. Sanctions checks are increasingly common as part of compliance procedures for all counterparties. However, the effect of the new BIMCO Sanctions Clause is possibly to extend that best practice to ship managers, the registered owner and any intermediary charterers.
Voyage charterparty cancellation right
For the first time, BIMCO has included a separate clause catering specifically to voyage charterparties.
The voyage charterparty specific provision allows owners to cancel the charterparty where a sanctioned party becomes involved in the performance of the charterparty. If a sanctioned party is involved before loading, owners have a straightforward right to cancel. If the voyage is underway, owners can simply refuse to proceed with the voyage and instead discharge the cargo at a safe port of their choice. Owners are not expressly entitled to damages from charterers if exercising this cancellation right.
This is an additional right of cancellation in voyage charterparties under the new BIMCO Sanctions Clause. Owners’ under a voyage charterparty still enjoy the right to terminate and claim damages (discussed above).
Points to consider
The express right to terminate and claim damages is a significant change to the liability regime under the BIMCO Sanctions Clause. This change, combined with the broad use of sanctions in modern international politics, means that nearly any party involved in international trade is at risk of being affected by sanctions.
Whenever this clause appears in contract discussions, parties should consider it closely. We recommend seeking guidance from legal counsel. In certain circumstances it may be acceptable, in others (and where commercial leverage permits) it may have to be modified. Where it is included, parties must ensure that they are back to back throughout the charterparty chain.
Finally, the BIMCO Sanctions Clause 2020 again emphasises the sweeping effect of sanctions on the world of international trade. Sanctions are an issue for every market participant. The effect of sanctions is something that should be discussed on an ongoing basis with experienced sanctions attorneys.
We specialise in providing focused sanctions advice, tailored to your specific needs. We have expertise dealing with both English law and US law sanctions issues. Edward Floyd and Luke Zadkovich are both experienced sanctions lawyers. Please contact either of them directly with any queries.
To see more on the world of sanctions, please see Jonas Patzwall’s recent article on Exxon Mobil Corporation v. Mnuchin.
This article is to be considered general commentary only. This is not to be relied upon as legal advice for any particular circumstances.