The legal implications of a crisis in the Red Sea

The Suez Canal was experiencing another booming year in 2023, facilitating more international trade between the Mediterranean and the Red Sea than ever before; and was predicted to achieve a 40 per cent increase on its record-breaking revenue of 2022.

But passage numbers have dwindled since November 2023, when Houthi rebels in Yemen began launching attacks on commercial shipping transiting the Red Sea. The attacks, mostly effected through drones and anti-ship missiles, and benefit from Iranian backing, were originally claimed to be directed towards Israeli-linked vessels in response to the ongoing Israel–Gaza conflict. However, a significant proportion of the vessels attacked have no links to Israel and vessels with US and UK links are now being targeted. Despite the US and UK initiating a series of targeted air strikes against the Houthis from 12 January 2024 and, thereafter, participating in the 20 nation strong US-led naval coalition ‘Operation Prosperity Guardian’ to secure transit through the waterway, the attacks on commercial shipping persist without an end in sight.

Ordinarily, around 15 per cent of global trade, including 30 per cent of container volume, would pass through the Red Sea. The majority of that number still continue to use the Red Sea, including Chinese-linked vessels, which thus far have not apparently been the focus of the attacks. However, many major shipping companies, including CMA CGM, Hapag-Lloyd, MSC and Maersk, together representing 53 per cent of global container trade, have suspended passage through the route and are instead transiting around the Cape of Good Hope, thereby adding 10 to 14 days to voyages. Similarly, Japanese enterprises Ocean Network Express, and its joint owners Mitsui OSK Lines, Nippon Yusen and Kawasaki Kisen Kaisha, are also diverting vessels, including container ships and car and truck carriers. The alternative transit around the Horn of Africa brings dilemmas of its own over where to refuel among the increasingly congested African ports, which do not currently have the infrastructure to meet this excess demand.

Charterparty disputes

Most legal disputes immediately arising out of the danger to commercial shipping are expected to occur under charter parties for the hire of the ships in question. Existing charter parties entered before the commencement of the crisis are less likely to have an express clause addressing whether the vessel is obliged to transit the Red Sea or owners are free to go around the Cape, meaning legal advice must be sought. Owners will often be obliged to proceed under their charter party with ‘the utmost despatch’, requiring them to take the shortest, quickest route to the nominated destination, while the circumstances in which owners may deviate from this route may be ambiguous.

For vessels that do transit the Red Sea and suffer harm, the question of whether the charterers are obliged to indemnify their owners for any damage is likely to turn on whether there has been an increase in the risk of such harm since the charter was agreed, otherwise owners may be deemed to have accepted the contractual risk. Commercial charterers would be prudent to keep appraised of the situation as it develops, and approach the matter more cautiously if their charter party contract pre-dates the commencement of hostilities.

Most charter parties also provide that the vessel may only be directed to call at ‘safe ports’: a term ripe with common law jurisprudence. An order to an unsafe port is, therefore, a breach of charter and a port affected by war would normally be deemed unsafe. Charterers would, therefore, be similarly prudent to exercise caution before ordering the vessel to call anywhere in the vicinity of Yemen. Indeed, the UK Maritime Trade Organisation recently reported that unidentified individuals claiming to be ‘Yemeni authorities’ have attempted to commandeer vessels sailing in the southern Red Sea by issuing radio commands instructing the vessels to alter their course for Yemen.

War risks clauses and cover

Following the advent of the Ukraine conflict, charterparties are increasingly likely to contain a war risks clause as a matter of course. Such clauses tend to define war risks broadly, say, as an ‘act of war, civil war, hostilities; warlike operations; … acts of piracy and/or violent robbery and/or capture/seizure … blockades (whether imposed against all vessels or imposed selectively against vessels or certain flags or ownership…) by any person, body, terrorist or political group, or the Government of any state’; a definition that appears to encompass the dangers now being experienced in the southern Red Sea.

More recent versions of war risk clauses tend to confer on the vessel owners a broad discretion to avoid such danger. For example, the VOYWAR 2013 clause provides that if at any stage of a voyage it appears in the reasonable judgement of the owners that the vessel may be exposed to war risks on any part of the route, the owners may opt for another, longer route. The clause also entitles the shipowner to charge extra freight if this longer route exceeds the original voyage by more than 100 miles.

For vessels that do transit the Red Sea, the passage inevitably necessitates war risks insurance cover, for which the additional premium cost has now increased to approximately 1 per cent of the value of the subject vessel. This has made the transit less plausible for more modern highly-valued vessels, while those constructed prior to 2010 are generally finding the increased insurance cost less prohibitive. Charter party clauses stipulating that charterers are obliged to meet the cost of owners’ additional war risks cover are a common occurrence and are expected to be a focal point of new charter party negotiations in view of the scale of this expense.

In a convenient fortuity, a recent decision by the Supreme Court in Herculito Maritime Ltd and others v Gunvor International BV and others (The Polar) [2024] UKSC 2 deals with whether such clauses affect the insurer’s ability to bring a subrogated claim against the charterers who ultimately met the cost of the insurance premium. The case concerns a historical piratical seizure in the nearby Gulf of Aden in 2010 and clarifies that charterers do not automatically take the benefit of owners’ additional risks cover merely by virtue of having funded the premium cost. Charterers wishing to protect against any possibility of a subrogated action from the very war risks insurer they have paid for must, therefore, ensure their charter contract wording makes this outcome abundantly clear; although this is also likely to be a point of contention with insurers, who would certainly expect to be made aware of this limitation to their rights of subrogation in advance of agreeing the cover.

Supply chain disruption

In the long term, supply chains will generally adapt to the extra delays around the Cape of Good Hope. While freight costs are yet to spiral to the level experienced during the covid-19 pandemic, the increase is notable. A corresponding increase in the cost of goods to the end-consumer is expected to follow. As of early March 2024, the cost to send a container from Shanghai to Europe is approximately $3,000, compared to a mere $700 in mid-November 2023.

The international carriage of goods ordinarily necessitates a series of connected contracts, including charter parties for the use of the ship, but also contracts of sale for the goods and bills of lading for the contractual carriage of goods onboard the ship. Admittedly, commercial parties do not always make a point of ensuring their inward and outward obligations are back-to-back. For example, a time charterer may find that their shipowner is entitled to deviate around the Cape under the terms of their head charter, but there is no such right under the time charterer’s sub-voyage charter, meaning the time charterer, who stands in the shoes of the shipowner under the sub charter, is caught high and dry. The same may be true of a shipowner who has a right to deviate under the head charter party, but discovers that the bills of lading incorporate the terms of a sub charter in which there is no such right.

In such circumstances, if the Cape route is taken, claims might be brought by consignees or receivers whose products have been delayed by the extra journey time. In the case of just-in-time manufacturing, unanticipated delays to key supplies could lead to temporary production line shutdowns and cancelled orders, meaning legal advice must be sought on the viability of claims for lost revenues. Perishable cargo may be less fit for use after unexpectedly having to endure the additional weeks of confinement at sea, which may lead to claims for damages for deterioration and loss of value.

Effect on carbon emissions

The crisis is indirectly acting as a drag on global sustainability objectives. A longer journey around the Cape of Africa necessitates burning more fuel to cover the additional thousands of nautical miles and vessels taking this route are often seeking to make up lost time by increasing their speed, thereby making them less fuel efficient.

There are limits on how much time can realistically be clawed back, however, as vessels are required to meet emissions targets. The International Maritime Organisation’s ‘Carbon Intensity Indicator’ scheme demands that shipowners limit their annual CO2 output relative to the vessel’s deadweight. The EU Emissions Trading System has also recently been applied to vessels trading to and from EU ports, meaning that shipowners must purchase EU emissions allowances to enable such trading. Inevitably, modern charter parties will contain one or more clauses designed to push some of the responsibility of meeting these targets on to the charterers who have use of the vessel.

In the majority of cases, a hybrid approach to transiting the Cape is being adopted, whereby vessel operators make a modest increase in speed while accepting some delay to the overall journey time. However, even a small increase in speed from 14 to 16 knots is estimated to result in as much as 70 per cent more fuel being consumed overall for a voyage from Shanghai to Rotterdam around the Cape compared to using the Suez Canal.

Adapting to the new seascape

Looking to future business, all these considerations make for some novel negotiations, as potential counterparties must learn to factor in these constraints and make commercial deals in the light of ongoing political developments and stories of contractual oversights gone wrong. Somehow, new vessel fixtures and sales of goods must price in the cost of the crisis, whether that be in the form of a longer costlier transit around the Cape or the insurable physical risk of running the Red Sea gauntlet. Some shipowners are simply not willing to go via the Red Sea for the time being and have the market standing to stick by their resolve. Some charterers are pushing for the deletion of war risk clauses from their contracts altogether. Others are insisting that they be added as co-assureds to the additional cover they are being required to fund, to help ensure that they do not have to pay both for the cost of insuring the war risk and the cost of indemnifying the war risk insurers in the event of damage.

As the Houthi rebels continue their attacks, the end of the Red Sea crisis is nowhere in sight. Economic competition continues in full sway, however, with Chinese companies apparently banking on immunity from attacks by reason of China’s alignment with Iran, as the largest importer of Iranian oil. Chinese-linked container ships accounted for less than 15 per cent of Red Sea transits in 2023, but this share had nearly doubled by mid-January 2024. More imminently, recent press indications suggest Britons may soon have to brave a shortage of some lines of tea! Let us hope any crisis in the supermarkets is short lived.

Alex McIntosh is a partner at Penningtons Manches Cooper
penningtonslaw.com