War wounds

The blockade of Lebanese ports during and after the Israel-Hezbollah war left around 50 ships stranded. Charles Weller highlights the legal implications for insurers, owners and operators

On 13 July, in response to the capture of two of its soldiers by Hezbollah the previous day, Israel announced an air/sea blockade of Lebanon, with warships enforcing a full naval closure of access to and from Lebanese ports – apparently because these were perceived as a conduit for incoming weapons – particularly in containerised cargoes.

The situation quickly escalated. Israel mounted air strikes on the port cities of Beirut, Tripoli and Tyre. On the other side of the border the Israeli port of Haifa was closed due to retaliatory rocket attacks, missiles reached Nazareth, 33 miles into Israel, and, with threats by Hezbollah to attack Israel “beyond Haifa”, Tel Aviv was placed on missile alert. Evacuation of foreign citizens from both sides of the border followed.

The commercial consequences were serious and echoed those grappled with during the Iraq wars. The blockade was particularly significant given Beirut’s recent rise as a commercial trading hub. It handled more than 3,000 ships last year and is capable of handling 700,000 containers a year.

Initially around 50 cargo ships were trapped on the inside of the Israeli blockade, with a similar number on the outside, and numerous more on their way with the prospect of their voyages being suspended by the blockade.

The hostilities meant an 80-fold increase in insurance premiums for ships due to call at certain Lebanese ports.

This initial phase created various legal issues in respect of shipping contracts for commodities destined for Lebanon and Israel, the sale contracts for the commodities being carried and hull and cargo insurance policies for the carrying ships and their cargoes. Most of those shipping, trade and insurance contracts would have been governed by English law and, given the exigencies of international trade, most will have legislated for the impact of war, hostilities or terrorism by clauses which, when engaged, redefined the parties’ obligations or excluded the consequences altogether.

The force majeure clause
Shipping contracts often include ‘war risk’ clauses, usually of a standard form. Contracts for the international sale of goods usually deal with war and associated risks in a force majeure clause. In marine insurance policies, war risks are usually excluded from standard hull and cargo cover, and where covered they are usually accompanied by a cancellation clause allowing the underwriters to cancel at short notice, often with an offer of reinstatement at higher premiums. Because of this specialist war cover is purchased frequently and many shipping contracts will provide for the increased hull insurance cost to be passed on to the charterers; this will often be mirrored in the commodity sale contract, with the increased cost being passed from sellers to buyers, but sadly for sellers this is usually restricted to extra premiums on cargo insurance, not hull insurance.

Several oil tankers were among the ships either trapped on the inside or blocked on the outside of the Israeli blockade. Many of these were carrying petroleum products traded internationally. These ships are mentioned in particular because:
– many were carrying fuel for the Lebanese power plants, so the cargoes soon came to be characterised as ‘aid’ by the UN, as the consequences of both the blockade and air strikes on oil storage facilities conspired to create an acute shortage;
– the consequences of a missile hit on a fully laden oil tanker could be catastrophic for crew, ship, cargo and local environment;
– the rates for the use/earnings of these ships is high by comparison with the other types of commercial ships; and
– the value of the commodities is also comparatively high.

Depending upon the terms of the shipping contract, typically the conflict might have impacted upon the charterer’s rights to insist that the ship wait to proceed to the original destination; alternatively, it might have triggered rights of the shipowner to instead require that the charterer give fresh orders to proceed to an alternative, safer destination. It also might have impacted upon the responsibility for paying for the daily use of the ship in the interim and for paying for the extra insurance cost as a result of trading to that area, and possibly even triggered rights of cancellation of the contract itself. Only in limited circumstances may the facts have given rise to issues of frustration.

For commodities contracts, the facts may mean that the contract is discharged if war, warlike activities or the inability to ship goods to Lebanon constitute a ‘frustrating event’, so excusing the performing party from further performance. Given the duration of the blockade, a delivered Lebanon contract was impossible until at least early August, although this did depend upon the commodity. For that type of contract to be ‘frustrated’, the blockade would have to continue throughout the contract shipment/delivery period. However, most commodities contracts will have a force majeure clause that is usually considerably wider in application than frustration. The effect of such a clause is usually to excuse non-performance, so no damages are payable. Much like the application of a typical war clause in a shipping contract, the application and operation of a force majeure clause depends on its terms and the particular facts, but such clauses typically provide for a suspension of performance for a period, not immediate termination. Unlike war risk clauses, examples of ‘one-off’ clauses intended to deal with force majeure issues are common.

Resolving many of the above issues will therefore be dependent upon whether there is a war relevant to the contract. It will be of no surprise that the exact meaning of the word ‘war’ depends upon the presumed intention of the parties, but guiding factors as to whether a state of war exists were set out in Spinneys (1948) Ltd v Royal Insurance Co (1980). The factors are:
– whether one can identify a conflict between opposing ‘sides’;
– the existence of objectives of these ‘sides’, and the means of pursuing them; and
– the scale of the conflict, its effect on public order and the life of the inhabitants.

Applying this test to the facts of the 34-day conflict in Lebanon, and specifically Israel’s objective in eliminating the political and military power of Hezbollah, the latter’s objective of eliminating the state of Israel, the scale of the forces actually deployed by Israel in the Lebanon, the attacks in either direction, the blockade of Lebanese ports, the casualties and the extent to which life in Lebanon was impaired and disrupted, there could be no doubt that a state of war existed; but it was still for the lawyers to determine the impact of that conclusion on the terms of the particular contract, as well as the precise factual circumstances that prevailed at the relevant time.

Then came the peace, albeit still a fragile one. UN Resolution 1701 brought the ceasefire that came into effect on 14 August, and indications are that it has generally held. However, Israeli fears of arms supplies resuming to Hezbollah meant the Israeli blockade continued until 8 September, a month after the ceasefire, when monitoring of sea traffic was handed over to the UN peacekeeping authorities.

In that second phase came new uncertainties for the lawyers, with some important elements of typical war and force majeure clauses disappearing in the absence of actual or threatened hostilities, but with the continuation of the blockade, which in many cases still prevented ships and cargoes proceeding to destination.

Charles Weller is a partner at Richards Butler