Introduction

In one sense, war resembles a contract of employment – easy to recognize but hard to define. Likewise, its nature can evolve, and familiar wording may yield uncertainty when it comes to interpretation.

That task could prove trickier still amid the murky geopolitics of this hugely complex region, in which there are in operation a multitude of policy, charterparty and sales contract clauses designed to address various troubles and their aftermath. Contracts involving trade require precision and contextual focus, especially where evidence may be circumstantial or scarce. Indeed, it is quite possible that the organization(s) which directed the recent attacks were aware that vagaries with respect to financial responsibility for losses could yield legal uncertainties within international trade, thus driving up costs, which perhaps was the goal in the first place.

Facts

The following, but probably little else, is indisputable:

  1. Regional tension, involving the US, Iran, the Gulf States, and others, is very high;
  2. On April 15, 2019, the US designated the Islamic Revolutionary Guard Corps as a terrorist organization;
  3. On May 12 June, 2019, 13 a total of five tankers and also a bunker barge were damaged in attacks using explosive devices of some kind; and
  4. Iran has rejected responsibility, and no other state or body has claimed it.

Even today, on July 11, 2019, the British Ministry of Defence has claimed that Iranian boats tried to impede a British oil tanker near the Gulf.

Commentary

This is not another 1980s overt tanker war waged largely via radar-visible fighters. Its hallmark is stealthy operation, probably from small seaborne craft.

The Lloyd’s JWC observes that “Very little information is to hand about the explosions at Fujairah … on 12th May and the circumstances and methods employed remain unclear.”

However, regardless of the alleged recovery of materials since the events occurred, damage analysis should fix with sufficient certainty on the method used to inflict the damage on the vessels, though identifying the culprit(s) may require material possessed only by those who are unlikely to share it.

Issues

Parties and their advisers alike should be considering applicable H & M, P & I, war risk, fixture and other contract clauses, which prescribe and limit in various ways. As always, wording is key.  (Not to mention the fact that war risk premiums have skyrocketed.)

For example, take standard clause 34.1 (b) in BPVOY5, which states:

“War Risks” … include any war … , act of war, civil war, hostilities, revolutions, rebellion, civil commotion, warlike operations, the laying of mines … acts … of terrorists, acts … of hostility or malicious damage, …”.

This specifically covers the laying (and the attaching, too?) of mines, and also terrorist acts. Moreover, the likely breadth of “warlike operations” and “malicious damage” might make these protective provisions relatively easy to invoke.

By contrast, common P & I clausing bars recovery:

“ … in respect of any liabilities … incurred as a result of … [1] war, civil war, revolution, rebellion, insurrection or civil strife … or [2] any hostile act by … a belligerent power, or [3] any act of terrorism;”

This [1] more narrowly defines warring conduct but also [2] carries a wider exclusion if the involvement of “a belligerent power” is sufficiently proved, and [3] will not respond to terrorism.

So, where [1] might not be established here, [2] would require only the originator – of a plainly “hostile act” – to be shown. Further, if a US-designated terrorist organization was somehow identified, [3] arguably comes into play, subject to counters that (a) a US designation is not a binding definition and perhaps (b) not everything done by a terrorist body is an act of terrorism.

Starting point

These issues are also likely to arise under an H & M policy, which will typically carry war exclusions with a similar structure.

Almost always, the very first question is the construction trinity involving the H & M and P & I covers and the specialist war risks insurance now routinely (and often contractually) carried.

Other matters

See for example Sucden v Yagci (the “MUAMMER YAGCI”) ([2018] EWHC 3873 (Comm)), as already briefly posted on Floyd Zadkovich’s LinkedIn page.

Under the fixture’s “Strikes and Force Majeure” clause, the issue was whether cargo seizure on suspicion of fraud came within “government interferences”. Owners failed in their efforts to confine that definition to a capricious and invalid exercise of power.

Many charterparties and other contracts contain similar exceptions for activity by various authorities. Proven state involvement under recent circumstances might establish, for example, wrongful intrusion in international trade. An opposing side may then argue with force that establishing an exception for government interference requires  (i) a clear-cut case of government interference and (ii) that recent acts were not acts of government at all absent a proper ordering of affairs by authority and due process. In short, the argument would be that the exception for government interference does not apply to the use of violence by shadowy operators to harass international shipping.

Burden of proof

Unless the contract states otherwise, a party relying on a contractual provision such as clause 34.1 (b) of BPVOY5 must show that, more likely than not, the facts come within it. Given recent developments, there is likely to be great difficulty in securing credible direct evidence, with plenty of reliance on general background, nefarious circumstances, inference, impression and innuendo. Parties may also have to grapple with a developing notion of terrorism and other broadening concepts, though the established concept of a proxy war may prove significant in making such case.

Our experience has been that clients are seeking legal guidance early on, so wording can be examined, key terms identified, evidential burdens assessed and fact-finding and creative thinking brought to bear in an effort to mitigate against potential problems before they arise.

 

If you would like to discuss anything arising from this article please contact Ed Carlson at edward.carlson@floydzad.com and +1 (917) 714 0189 or Luke Zadkovich at luke.zadkovich@floydzad.com and +1 (917) 868 1245 / +44 (20) 8068 6844.

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