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Shipping And International Trade In An Age Of Disruption – Export Controls & Trade & Investment Sanctions



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When 2020 began, the key challenge which faced the shipping
industry was the implementation of the Fuel Standards of IMO 2020
mandating lower Sulphur Fuel Content. Looming ahead was the massive
global tragedy which was the COVID-19 Pandemic, which spared no
nation, no industry. The Pandemic ravaged lives, decimated
businesses and forced a rethink of how much we can prepare.
Shipping was badly affected in many ways.

We are certainly in the middle of a perfect storm – we
were just getting out of the Pandemic. China is still closing
ports, grappling with increase in Oil prices, drastic rise in
shipping costs and adapting to the effects of the Trade Wars, and
now the war in Ukraine.

Covid

At the height of the Pandemic in 2020, the plight of the
passengers and crew on board Cruise ships and the cruise industry
came into stark focus. Cruise ships – with large numbers of
passengers and crew and an emphasis on communal dining and group
activities – became incubators of the COVID-19 virus. The
crews on board merchant vessels could not sign off as ports did not
allow. The closure of businesses and ports also created disruption
to supply chains.

Where ports close because of the pandemic or where the crew of
the vessels are infected, this affects the contract of carriage.
The effect depends on the terms of the Charter, whether the
particular disrupting event is covered. A vessel with infected crew
will mean that the vessel will not be granted free pratique or
clean bill of health by the port authorities and this may prevent
the readiness of the vessel, owners time for loading or discharge,
and the consequent effects of running of laytime and demurrage.

This disruption caused multi-fold increase in freight costs,
shortage of containers, congestion in ports. In turn, this resulted
in shortages of key components in the supply chain halting or
delaying production of automobiles, smartphones. Even the
ubiquitous McDonald’s was not spared, with shortages of fries.
The multi-fold rise of freight costs had caused considerable price
increases in all manner of consumables. Now the Pandemic in the
form of the Omicron variant is once again resurgent and has caused
a massive and comprehensive lockdown in Shanghai, more extensive
than other ones in China.

Shanghai is a key Trade and Manufacturing base for global supply
chains. This effects of this lockdown reverberate as globalization
has made key supply chains inter-connected and what happens in key
locations affect the whole chain.

Ever Given and the Suez Canal

The Mega Containership Ever Given ran aground while transiting
the Suez Canal on March 23, 2021, lodging herself against both
banks of the waterway. The blockage caused vessels backed up in the
Mediterranean to the north and the Red Sea to the south. It is
estimated that the costs to global trade was about $400 million per
hour. The fragility of trade routes were exposed when the incident
caused knock-on effects on the movement of cargoes globally, as 12
percent of global trade is carried on board ships using the
canal.

For six days, the world watched as a multi-national team of
salvors, tug operators and the Suez Canal Authority (SCA)
coordinated a race against time to free the ship and unclog the
canal. A year later, the sister ship of Ever Given, Ever Forward is
in April 2022 now stuck in Chesapeake Bay near the port of
Baltimore, USA. This incident exposes the navigation risks faced by
large merchant vessels.

Trade Wars

President Donald Trump launched a Trade War with China resulting
in tit for tat imposition of tariffs on each other countries
exports. This caused traders to devise ways to overcome them by
disguising the origins of the cargo. China and Australia also
cooled its trade relations, after Australia pushed for an
international probe into the origin of the coronavirus without
diplomatic consultations beforehand. China has targeted Australian
barley, beef, wine, lobsters and coal over the past year after
Canberra called for an inquiry into the origins of the coronavirus
pandemic. The acts included China calling Chinese parties not to
import the products from Australia and imposing high duties.

Ukraine

Putin’s invasion of Ukraine in March 2022 is bringing the
World to the brink. The world was not prepared for this conflict.
Countries reacted by imposing trade sanctions, cutting off Russia
from international financial system and trade globally. Russian
vessels, and sanctions implemented by major trading nations and
disruption of Agriculture products. Ukraine is a key producer of
wheat, barley, sunflower, corn, soybeans.

A force majeure clause typically excuses parties from the
performance of the contract following the occurrence of certain
events. A company affected by the Russian sanctions must determine
whether its contracts include force majeure provisions and whether
the Russian sanctions are an event that excuses full or delayed
performance under the contract.

If sanctions are not explicitly mentioned as a force majeure
event, a broad definition of war, hostilities, or conflict or act
of government could cover the consequences of sanctions. From
record low prices of Crude Oil, the Ukraine War has made oil prices
to climb to record levels.

Legal Effects

Parties to shipping and related contracts e.g. Charterparties,
FOB, CIF Contracts, bills of ladings and contracts of
affreightment, fix their agreed price, provide for price adjustment
clauses, force majeure and defences in the event of specified
events arising. The allocation of risks is essentially a
contractual one. If the purchase or transaction has become more
difficult or more costly to perform, then one party will have to
bear the increased costs of the transaction. Force Majeure Clauses
or the common law principle of frustration will apply only if the
transaction becomes impossible to perform, not more difficult or
costly.

If parties rely on standard contracts, it is highly likely these
contracts do not adequately provide for the shocks that had hit
shipping post 2020. To enter into the contracts without adequately
considering the contract terms in the light of known and potential
risks would be indeed foolhardy. Likewise, Insurance can protect to
a certain extent. Parties should also seek advice from their broker
or insurance intermediary as to whether the existing coverage
adequate covers their transactional risks in the light of the
current situation. For instance, most forms of marine cargo
insurance do not cover delay or the insolvency of the carrier. The
insurance cover is for transit risks and not transactional default
or failure.

Originally published May 10, 2022

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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