The ongoing tensions in the Middle East have put international shipping companies on tenterhooks as tit-for-tat missile strikes have turned the Red Sea into a high-risk zone for transit, clogging global trade and snarling supply chains.
The United States and the United Kingdom have been heating up retaliatory attacks against the Iran-backed Houthi rebels, which continued to target cargo ships going through the Red Sea as part of an escalation of the ongoing Israel-Hamas conflict in Gaza.
These deepening hostilities have essentially strangled the crucial waterway, which is responsible for some 15 per cent of international trade. And to avoid the missile-plagued Red Sea, shipping companies are being forced to go around the southern tip of Africa to commute between Europe and Asia – lengthening their journey by about 25 percent – which is resulting in soaring transportation and operational costs.
Joel Cockerell, a commodities and shipping partner at Squire Patton Boggs in Singapore, has observed “a significant number of vessel operators and owners re-routing their ships, where possible” while some of the largest ship owners in the world “have stopped sending their ships through these areas, citing crew and vessel safety concerns.”
Under these extraordinary circumstances, detouring seemed to be a logical choice. But that might not be an option for some ships due to the terms of the charterparty and/or the load or discharge port location for the particular voyage, according to Cockerell.
“This is a challenge for shipping companies as the threat is constantly evolving,” says Toby Stephens, a Singapore-based shipping partner at HFW. He tells ALB that the legal remedies of these situations “depend upon the precise contractual wording in their charterparties and their insurance policies.”
Cockerell’s team has been advising clients transiting and discharging/loading in these contested areas on the obligations of owners and charterers, which he points out will be governed by the terms of the charterparty.
Those include obtaining a letter of indemnity from charterers “in relation to any and all costs, losses and/or expenses that may arise or be incurred as a result of complying with charterers’ orders, including in connection with transiting the Red Sea and/or Gulf of Aden,” he says.
Ship managers and the master or crew should also carry out a voyage-specific risk assessment and implement appropriate measures having regard to the finding of that risk assessment. “This can result in changing the vessels route, the timing of passages through specific areas, the use of armed guards and making the ship more difficult to attack,” adds Cockerell.
The soaring danger of transit through the Red Sea and significant risk exposure have also fuelled the price of war risk insurance premiums and hardened terms for war risk quotes for shipments through the choke point.
“War risks insurance is currently still available for vessels transiting the Red Sea and the Gulf of Aden. However, the cost of obtaining such insurance has increased, and continues to increase,” says Cockerell, while noting that it could be more “problematic” for vessels with links to Israel, including those from the U.S. and the UK, to obtain such insurance.
The premiums had risen to around 1 percent of the value of a ship from around 0.7 per cent as the Houthi attacks on merchant vessels increasingly grew indiscriminatory, according to Reuters. The additional costs may justify a route deviation through southern Africa if permitted by the charterparty as “war risk costs are usually passed to charterers under the war risks clause, where incorporated into the charterparty,” notes Cockerell.
As the threats on international vessels show no immediate signs of receding, lawyers believe one of the ongoing core cruxes confronted by shipping companies is whether a vessel can deviate after being given orders to proceed through the Red Sea and/or Gulf of Aden.
“For vessel owners, the question they are concerned about is whether they can refuse those orders without the vessel being placed ‘off-hire’ and/or facing a claim for damages,” says Cockerell. Stephens of HFW also anticipates that “disputes will develop” based on prior experience in similar situations.
While gaining a clear understanding of the terms of the charterparty, commercial discussions and agreements with charterers at an early stage could very well avoid costly disputes down the line, lawyers concede that there’s only so much they can do.
“Should Operation Prosperity Guardian (the U.S.-led military operation) fail to achieve its goals, it may result in a situation where shipping in the Red Sea and Gulf of Aden essentially ceases,” Cockerell warns.
