Companies worldwide, including shipping companies, have been impacted by the outbreak of the Coronavirus, referred to as COVID-19.
The shipping industry in particular has been affected a great deal. China is the world’s largest importer of crude oil, iron ore and soybeans and a very large steel exporter and therefore the impact of the virus outbreak on shipping has been significant.
Many companies are already relying on contractual provisions to suspend their performance under various shipping contracts. There have also been numerous reports that many yards in China have declared force majeure due to the delays encountered. It should be noted here that provisions for force majeure events are not included in many of the charter party contracts.
Force majeure events are unexpected events that are outside the reasonable control of the parties which allow the parties to either suspend performance or extend the time for the performance of the contract. If the outbreak continues, (and the signs unfortunately show that it will), ship owners and charterers may need to incorporate in their contracts more specific clauses providing for the effects of the virus and for force majeure clauses. Also, under time charter parties, where there is a delay caused by a quarantine or the vessel needs to deviate because a member of the crew has been infected, the vessel may be placed off-hire, depending on the specific provisions of the charter party.
There is also an issue of shortage of crew or shipyard workers that needs to be addressed. Due to the travel restrictions or the quarantines imposed in many Chinese cities, many seafarers or workers are unable to travel to ports or may be placed into quarantine, resulting in shortage and disruption of vessels’ operations as well as yard operations.
On the ship finance side, one needs to take into consideration the “loan to value” provisions that exist in shipping loans and that may be affected if, for example, the vessel values reduce as a result of the virus, further resulting in breaches of the loan provisions by the ship owners. Weaker markets in most shipping segments are already a reality due to the outbreak.
Lastly, for shipping companies that are listed in the US capital markets, the Securities and Exchange Commission has provided guidance for disclosures that will need to be made by issuers advising their investors on the potential effects of the coronavirus, and how it may negatively affect their business. This will lead to additional disclosures being made by shipping companies.
Currently we are seeing numerous negative outcomes due to the outbreak of the coronavirus in the industry, but it is still early days to ascertain the overall impact it will have on the shipping industry.