This article is written by Radhika Ghosh, a law student pursuing B.A LLB (Hons.) from Hidayatullah National Law University (HNLU). The article explains how and why the shipping industry is facing challenges during this pandemic. It also talks about the laws and enactments that regulate the industry and lastly provides steps that are being used to curb the present crisis.
As the whole world has come to a standstill coping with the deadly pandemic, the effect of the same is observed in everything we do. Everything that we do or abstain from doing at this hour has a direct or indirect reason for COVID-19. Economies all over the world, and in all industries have been affected gruesomely due to this. The present crisis has a massive effect on globalisation too. The maritime domain, which is one of the root enablers of globalisation, is the medium via which 90% of world trade is transported, is also facing significant shock-waves. Since the pandemic requires everyone to maintain a social distance, as an effect, the border restrictions have got tighter day by day. Countries have also imposed various measures to cease the spread of the virus and minimise their impact. Travel is being curtailed, ports are being closed and ship entries being restricted all over the world. In a nutshell, the main artery of conducting and transferring business and supplies has been facing a terrible situation through this period. Even the aftermath of the pandemic shall have a bleak effect on the maritime industry, and the world needs to be prepared for the worse.
Shipping industry could resiliently be called the backbone of economics all over the world. It is mainly used to transfer a heavy quantity of goods from one place to another via water routes. Ships usually follow the same routes to transport bulks of goods.
Goods are usually transported through liner ships, which are capable of transporting huge loads of cargoes over one voyage. Additionally, there are Ro-Ro services that are usually meant as a roll-on, and roll-off journeys. It usually carries pieces of machinery. Container shipping is different from linear shipping because it uses standard “containers” of different sizes to load, transport, and unload goods. The containers are all built to an international standard so that other machinery of international companies can be used together. Container shipping easily is tagged to be the world’s first global industry. Hence, global trades and markets also function depending on this industry. Globalisation has seen a change of colours with this industry blooming. It connects countries, businesses, markets, clients, and people.
Since the 1900s, the Indian shipping industry has registered a remarkable growth. The outlay and expenditure on the shipping industry have drastically increased over time. Alongside, there had been numerous attempts by the governments collaborating with other private and public sector firms to advertise and bloom the sector in the country. The growth in global trade and opening up boundaries has made the developing countries concentrate more on the improvement of their infrastructure, like seaports, water vessels, sea-routes, minimising cargo traffics, marine engineering technology, etc. which played a prime role in the development of the economy.
Shipping industry during the pandemic
Shipping industry transports 90% of the goods all over the world and has a crucial impact on business and global economy, and due to the pandemic, it has already been affected. The next few years will face foul effects on the economy.
As the pandemic manifests itself deadlier day by day, the commercial shipping industry is facing worse repercussions. COVID-19 is likely to result in real global economic distress; the WTO calculates that world trade is expected to fall between 13% and 32% in 2020. The maritime sector, that has played a crucial role in bringing people together by opening up a business and connecting countries, hence providing an economic backbone is facing a setback now. For the next 12-18 months, the rating agency, Moodys has changed its forecast of the outlook for the shipping sector from stable to negative.
The United Nations Conference on Trade and Development (UNCTAD) Maritime Transport estimates 2019 had already suffered a decline in global maritime trade due to rising trends of protectionism, world-politics and sanctions, trade tension, cargo traffic, tariff escalation between China and the United States. The COVID-19 on top of all this is likely to give a massive blow to the industry, and stabilising the industry back will be difficult.
The entire maritime operations from shipyards and ports to carrying of bulk commodities have been affected. Fall in demand and reduction of the workforce has pushed freight rates even down. Additional sanctions by countries at the sea-ports like the ban on the crew is disrupting the change in which the shipping services were carried out. Commodities in the transits are being delayed, rerouted, or discharged because of safety measures. As different countries are operating under different rules and phases of lockdown, the issue of port congestions with cargo and containers lying unattended has surfaced. Offshore drilling has also been affected due to the crisis in many countries. Related industries like fisheries, seafood, marine engineers, etc shall also suffer consequences.
The international organisations urge that amidst the prevailing crisis, it is critical for maritime trade to supply chains and remain functional. Kitack Lim, the Secretary-General of the International Maritime Organisation (IMO) said, “In these difficult times, the ability for shipping services and seafarers to deliver vital goods, including medical supplies and foodstuffs, will be central to responding to and eventually overcoming this pandemic,” while recognizing the challenge at this hour. He also stated that member states should realize that catering to the ceasing of the spread of the virus is important but global trade must be able to continue. Similarly, UNCTAD also emphasised primarily on the world’s ports being open for ship calls and the movement of crews with few obstacles even during the lockdown. International bodies like IMO, UNCTAD and International Maritime Health Association (IMHA) have issued guidelines to ensure the safety of mariners and staff working in port communities of the industry.
Laws regulating the Shipping Industry
The Ministry of Shipping (MoS) centrally controls and regulates the shipping sector in India. The MoS has a partially autonomous statutory body, which is known as the Directorate General of Shipping (DG Shipping) whose powers are monitored by the Indian Merchant Shipping Act, 1958 (MSA). It tackles all issues regarding the shipping policy and enactments, execution of various other international conventions of the International Maritime Organization. The MSA is a parent body that regulates acts that deal with merchant shipping. The MSA allows the DG Shipping to promulgate further legislation, for example, circulars and notifications so that it can deal with all problems relating to the shipping sector. The DG Shipping further constitutes the Mercantile Maritime Department, a body that involves the registration of Indian-flagged vessels, surveillance of ships and enactments of international regulations such as the SOLAS and Load Line Conventions.
The MoS also has a chartering wing (Transchart) for the movement of government-owned and government-controlled ships. While giving preference and support to Indian-flagged vessels without any difference in freight rate, trans chart also creates shipping arrangements at competitive freight rates of international level, sometimes at a service charge of 1%. Transchart generally finalises long-term charter parties. It also draws agreements of affreightment for several Indian government-owned entities, such as for the Steel Authority of India, Rashtriya Ispat Nigam Ltd, the Department of Fertilizers, and so on.
Most of the major ports in India have ownership and are regulated by state and union governments. The state governments of Gujarat, Maharashtra and Tamil Nadu have also legislated acts to carve out autonomous maritime boards to not only own and operate ports but also to formulate parameters. It is also observed that in many instances that port authorities have entered into public-private agreements with private entities under the ‘Build, Own Operate and Transfer’ (BOOT) Policy which is solely designed for the participation of private sectors in the building of Indian ports. The Tariff Authority for the Major Ports (TAMP) is a quasi-judicial regulatory body, that deals with the levy of port tariffs or tools such as berthing charges and anchorage charges.
India allows all foreign direct investments under the generic route in the shipping industry, however, there have been only a handful of global players who want to invest and promote their vessels in India. Generally, foreign investors can set up special purpose vehicles that own an Indian flagged vessel. This is to take advantage of the cabotage policy in India.
An Indian shipping company can always opt for the tonnage tax system such as the maintenance and training of Indian seafarers and also making financial clauses for new vessel ownership by abiding certain guidelines laid down by the government. The Indian indirect tax regime has undergone a dynamic overhaul in bringing effect to the goods and services tax regime. The Indian government has also brought in an amendment by its notifications informing that the ocean freight export will be exempted from goods and services tax.
i. Satellite devices and ammunition banned in Indian waters
There have been incidents where crew members from foreign lands were using satellite devices, like Thuraya or Iridium phones, inside the Indian territorial waters. They were subsequently arrested. The use of such satellite devices has been banned from India by the DG Shipping. The Indian authorities always have the right to deny permissions to use such satellite phones even if a foreign-flagged vessel board with all the valid documents permits them to carry those. However, these satellite phones could be used only after a ‘no objection certificate’ is issued from the Department of Telecommunications. Incidents have been observed where otherwise it invited a full-fledged trial of the offence. In the past, there were vessels that were detained for their failure to provide proper declarations from beforehand. The Madurai Bench of the Madras High Court arrested many foreign crew members on the MV Seaman Guard Ohio, a foreign-flagged floating vessel because they entered in India for entering Indian waters. Carrying of arms and ammunition have posed additional complications for vessels staying in an Indian port after the incident with the MV Seaman Guard Ohio.
India does not have a regulation that stops foreign actors from operating in the Indian markets or ship business unlike some other countries like China. On the other hand, India can rightfully refuse the regime. In many circumstances it is observed that Indian ship owners are given the prior opportunity when making contracts with a foreign shipowner under the Indian charter. The DG Shipping would initially look into the matter with the Indian National Shipowners Association (INSA), which is a private body of Indian shipowners, as to if an Indian ship owner could be assisted with a vessel having similar criteria at the same or at a lower freight rate which was asked by the foreign shipowner. And only when INSA issues a ‘no objection certificate’, a licence can be obtained by the Indian party to charter a foreign-flagged vessel. As far as coastal trade is concerned, a no-objection certificate needs to be issued by the Indian Coastal Conference (ICC).
In an attempt to bloom the ‘Make in India’ policy of the Government of India and also to add a spur growth to the shipbuilding sector in India. The government in the recent past has also issued a circular on 13th February, 2019 along with a consequent circular on 22nd March 2019 wherein, for the first time, an Indian-built foreign-flagged vessel would have a preference over foreign-built Indian-flagged vessels.
Before the release of the Proposed RoFR Regime was drafted, the order of priority among various categories of shipowners was as follows:
- Vessels which have an Indian flag.
- Vessels that have a foreign flag, but are owned by India.
- Vessels that have a foreign flag, and do not belong to India.
Under the Proposed RoFR Regime, the order of priority that must be followed:
- Vessels that are built in India – irrespective of the flag it has.
- Vessels that are not built in India, but owned by India, and have an Indian flag.
- Vessels that are not built in India, and do not have an Indian flag, however, it is Indian chartered.
In the case of The Great Eastern Shipping Company Limited v. Union of India [AIR 1971 Cal 150], the Delhi High Court, had passed an order stating that the operation of the proposed RoFR Regime would be subject to the outcome of the proceedings and, or any further appellate proceedings. There would likely be a dynamic shift in the Indian cabotage regime, which is bound to have a far fetched effect for all stakeholders that are involved in it.
Ways in which COVID-19 affecting the shipping industry
Crew sign-on/offshore leave
Crew changes may lead to noticeable delays due to travel sanctions in several other countries. Problems may not only follow crews and travellers sailing from specific countries of origin (for example, a city of origin during lockdown) but also others using transit countries areas due to the effect of the virus. They also may be facing a possible quarantine period upon arrival. In practicality, operators must try to avoid crew changes in COVID-19 affected areas and use direct flights to avoid further restrictions. Shore leave period must also be restricted during this time. In affected countries, shore leave could also be stopped in order to avoid any such issues of grave nature.
Similar challenges may occur in case of a seafarer after disembarkation and returning to its own country which is put to quarantine. Full assistance should be provided by local agents in order to ensure that these crews will finally repatriate.
Medical handling of suspect cases on board
This can reliably be said to be one of the most difficult and rampant issues to face. Suspected cases on board must be provided hospitality in accordance with an effective COVID-19 contingency plan. Medical facilities on the ship are to be kept with several other instruments of related medical items which are quintessential for the treatment of patients affected by the coronavirus, example fever and pain medications, face masks, hand gloves, sodium lactate solution, alcohol-based hand rub, chlorine, and so on. Facilities for quarantining the patients must be available in order to keep the patient, or suspected people under observation and also to maintain a healthy distance from them. Transferring the affected patients ashore is also a challenge because many countries may not accept affected seafarers or even if they hospitalize them the additional costs are taken.
Ship attendance for certification and statutory purposes
The issue lies with the certification as there might be a gap related to the transportation of personnel (e.g. superintendents, class/club surveyors visiting ships, inspectors, vetting officers, etc). A proper and prior arrangement on a concrete discussion for all affected activities is to be done (crew change, audits, inspections etc) including the stakeholders and the countries involved.
Operational related issues
There may arise potential issues as ports/terminals might be locked down for operations and hence, further delays may occur due to it. This may also delay the time schedule of operation, sometimes more than 15 days. In many cases, disruption might occur to container operators. In addition to that challenges may occur, in case humans are on board, which increases the health risk factor. For container managers, a reschedule of initial operations can be drawn beforehand considering all kinds of hazards that can occur in order to avoid delays or additional costs for rearranging containers on board.
It can be estimated that bunkering and non-bunkering operations are minimally affected due to COVID-19, as proper distancing could be maintained during such operation. The use of appropriate machinery during hooking/unhooking the hoses and handling of documents between crew and bunker provider must be maintained in order to curb the spreading of any kind of disease.
Stores, Supplies, Spares
For the time being, all inspections and supplying procedures are focused on quantity and quality confirmations on received items. Further problems may surface if the port facilities or store providers deny providing the required items due to local trade restrictions or lockdown situations due to the virus. Hence, prior planning and time-table in storing and supplying could be done to curb this issue. Hence, operators of the vessels, stakeholders, and crews must be informed about all restrictions prior to engaging in such operations.
Delays due to pilot shortage/refusal to board
Firstly, lowering the number of pilots available due to COVID-19 is causing traffic and delays in operations of the vessels, and secondly, the denial of the pilot to operate the vessel due to her previous port time-table is further causing business hazards. Both these important issues are causing delays or changes to the ship’s schedule. However, operators during the voyage planning stage should ensure that pilots will be available upon the ship’s arrival and following the port regulations, through local agents. Such delays must also be documented for future references.
Ships which are already within shipyards, or under repair are sure to face problems due to work restrictions from the shore side. Hence, it will lead to holding back on time-schedules and future contracts of vessels. Operators must be reassured on the facilities, and restrictions from shipyards (or recycling facilities) prior to the journey to have a smooth operation.
Finance related issues
Insurance covers and claims due to delay
Even though this is unknown, there are remedies available in the market due to this abrupt and uncertain outbreak of the virus-infections. Therefore, no proper due diligence to predict the kind of challenges that are needed to be faced at any time can be evaluated. The shipping community copes up with what is going on in order to survive, as it seems that the virus outbreak will prevail for the next forthcoming months.
Steps that were taken to ensure smooth functioning during pandemic
‘Force majeure’ and ‘rebus sic stantibus’ could be taken as possible legal remedies
When faced with the described circumstances, parties can seek to rely on the existence of:
- Force majeure, when an unforeseeable event occurs due to which the contractual obligations could not be performed, in that case, force majeure clause can be applied to get excused from performing the same; and
- The rebus sic stantibus case law doctrine is to try to change contractual obligations in matters of a completely unforeseeable, extra-ordinary and supervening alteration of circumstances that have occurred since the contract was concluded.
In some circumstances, several types and forms of contractual obligations under different and extreme circumstances have been studied and the application of the above-mentioned clauses have been seen. An elaboration of how the frustration of the contract has been done, and for which risks of each of the actors involved are seen from the perspective of compensation for the breach, damages or delay covenanted between the contracting parties.
Potential ‘force majeure’ and ‘rebus sic stantibus’ cases/circumstances in shipping sector
In principal, the parties who have, or will be suffering loss, or in extreme circumstances cannot afford to perform an obligation can take pleas of ‘force majeure’ and ‘rebus sic stantibus’ principles in order to amend the obligations, or get free from performing such clauses that are impossible. In general, the scenarios that could arise in order to take pleas are:
- Deviating vessels or places of refuge for the seafarers at ports/berths that were not initially planned, or where the operators feel unsafe to anchor their container vessels.
- Unloading and leaving carried goods at ports or terminals that were not originally scheduled because they are no longer considered safe.
- Delays and demurrage.
- Breach of the minimum safety measures or because maybe one of the crew members is under the weather due to the pandemic (which could also result in the ship’s crew having to be quarantined), together with other potential infringements of maritime safety rules.
- Prolonging seafarers’ enrolment periods beyond the initially programmed length due to being prevented from changing ships’ crews for different reasons or issues. Special compensation will also involve due to any prolongation of enrolment time-periods to which seafarers are entitled in each particular circumstance (shipowner company, law and applicable collective labour agreement, etc.).
- Delays in the carriage of goods by sea caused due to the chain of effects in the loading or operating with or distribution of the goods that the containers are going to carry, because of various reasons (stock shortages in production, the supply of spare parts, logistics, etc.).
- Suspended, froze or retarded shipbuilding operations and off-shore projects that are in operation during the time.
- Revision of the monetary provisions in various shipping contracts such as:
- Various contracts for hiring, chartering, carriage under bills of lading, COAs, etc;
- Insurance on mechanics and cargos and the membership fees that are payable to P&I Clubs;
- Loading and unloading of ships’ fuels; and
- Handling of cargoes (storage, demurrage, movements, etc.).
- ‘Ad hoc’ committees to study the impact of the pandemic on specific shipping and port-related matters are being summoned in several countries to cope up and balance out the crisis situations due to the pandemic.
Steps that were taken by India
Considering the present situation because of COVID-19, the Indian Ports Association (IPA) operating under the umbrella of the Ministry of Shipping has taken steps into digitising some of the trade-related processes through the implementation of Port Community System (PCS). The PCS has already been managing and digitised a big part in port-related operations like e-invoice, electronic delivery order (e-DO), and e-payment.
Bill of lading (BL), another critical component has linked the IPA initiative of electronic Bill of lading and recognised providers like CargoX, the letter mentions.
The ministry is also planning into issuing suitable guidelines and advisory consistent with international conventions. The stakeholders will also be required to further consider and use such mediums for ‘electronically generated trade documentation’ including Bill of Lading (document of title) across stakeholders and nations.
India believes that such measures shall also help to ease the economic and humanitarian challenges. It might also uplift continuity of trade and also allow trade revival in cases in the future. The ministry also requested considering CargoX, a public blockchain medium that allows streaming of the eBL solution and added that other solution providers of eBL like Tradelens, Wave, Bolero, etc. must also be explored for the same.
The most important thing is to recognise and cater to the solutions of the bottleneck situations due to COVID-19 pandemic and try to ensure and protect both the existing contracts (by analysing contractual rights and obligations and mitigation measures) and make new contracts now as per the new solutions and remedies. As the COVID-19 pandemic is being recognised worldwide, and the abrupt effects are normalising, we cannot rely upon the force majeure clauses and create excuses while going forward. Keeping the extreme situations in mind, a readymade ‘corona clause’ should, therefore, be considered for all new contracts.
To conclude, we can definitely predict that the pandemic will inflict structural damage on the international economy. Although the precise impact of the COVID crisis is still unfolding, it has created a chain effect on global supply chains and hence there is a possibility of the economies turning inward. The effect, as a result, will obviously fall on the shipping industries. The crisis shall also slow down the reassessment of globalisation’s costs and benefits. With consumption and demand rates falling, and GDP contraction all over the world, it can be well estimated that the bulk carriers will continue to suffer in the coming months, if not years. One of the aftereffects of the pandemic could also be seen in the operational changes in the shipping sector. On the bright side, the COVID crisis may act as a catalyst for digital and technological intervention in the industry. This shall also make the sector more resilient to such abrupt shocks in the future. The actors in the current situation would be willing to consider smart technologies like port digitisation, artificial intelligence, Internet of Things (IoT), or even blockchain technologies. Even though the use of these things has come to vogue, however, it shall become mainstream via the rampant use.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: