Running out of options

Manfred Arnold offers some personal observations on terrorism and armed conflict

SHIPPING people have lamented in the past that this industry in certain aspects is lagging behind other commercial sectors, that it uses outdated terms and phrases which, even under the best of circumstances, may not even have had application thirty years ago. Likewise, ICMA speeches seemed to gravitate to the same old topics of speed and consumption, overlap, delivery/redelivery disputes. At ICMA X in Vancouver in 1991, I observed a change - a number of papers were submitted on war risk and safe ports.

Many of the statements made are still germane, but lack the drama of 2001. ICMA XIV in New York was held just five weeks after the September 11 terror strike against the free world, and New York in particular. But strangely enough, even without these horrific events, war, security or terrorism were not on the list of scheduled topics, but they were part of the Cedric Barclay Memorial Lecture. At the recent ICMA XV in London, considerable time was dedicated to the topics of security, war and terrorism, and rightfully so, as there is currently hardly any news coverage without reference to acts of terrorism against people and property.

In 2002, I gave a paper before the Association of the Bar of the City of New York (Symposium – Shipping at Risk) on Charter Parties – The Impact of Terrorism and Armed Conflict on Risk Allocation, which provides the opening point of this article.

War risk and security cases have dealt with the allocation of risk and payment of premiums during wars or similar military conflicts and the inability or refusal to trade to certain ports, which also would include safe ports/safe berths issues pertaining to the port call itself. The events of September 11 created an environment in which the expectations and concerns for commercial ventures, including shipping, have been raised to extreme levels. The impact of war, hostilities, civil unrest or commotion or warlike operations no doubt need to be rethought and redefined because it now has reached proportions previously unimaginable.

War and terrorism are events, which, when viewed in the context of economics, have the same ultimate results – destruction and damages, loss of life and property. The difference, however, is that war can usually be more readily identified and localised. Countries can be named and provisions can be made either to exclude them from permissible trading areas or provide for compensation to cover the economical/personal risks. It has been stated that it is not necessary to have formal declarations of war, but what is needed for the definition of war is an international conflict. The absence of the international aspect would render the confrontation to be a civil war or unrest or commotion. The terms of hostility and warlike operations presuppose an existing war situation.

Terrorism, on the other hand, is without boundaries - one never knows where and when it will strike. Terrorist attacks, by their nature and in the context of charter parties, might be viewed as more in the nature of force majeure, events which are sudden, unforeseeable and due to natural causes, without human intervention. On the other hand, terrorism by its nature is not without human intervention. In fact it is a very personalised act. It nevertheless has the overwhelming and dramatic impact of a natural disaster. Whereas some have referred to the activities of September 11 as a war against the US, it was not a conventional act of war. Wars are fought between nations with rules, for example, the Geneva Convention. Terrorism, in contrast, is based on lawlessness and the disregard of protocol and conventions.

In my review of arbitration cases, one reported decision referring to terrorism was the Trade Fortitude, where the arbitrators stated:

‘There was, as before, the possibility of terrorist acts by Palestinian guerillas, but this possibility was no worse on October 29 than it had been before the war began on October 6. No incidents of sabotage or terrorism occurred in the Persian Gulf during any time which is relevant to this arbitration.’

Today the nomenclature is still the same even though the scope, ferocity and tempo of terrorist acts have dramatically eclipsed the earlier threats. These are the concerns which shipping people must deal with in today’s charter parties/contracts.
War and warlike conditions are nothing new and have been dealt with in different ways. Some of the older charter parties I reviewed did not even have clauses addressing these perils. Other charters subsequently adopted existing war risk clauses, which ultimately did not meet the need of the parties.

The New York Produce Exchange form of 1946 has been one of the most frequently used forms for period employment. Despite later revisions (a partial revision was made in 1977, with the latest re-issue in 1993), the old form is still around and does not contain a printed War Risk Clause. The options under War Risk Clauses are fairly clear and limited pursuant to which an owner can get paid for the risks it takes, can cancel the charter prior to commencement of loading, can decline to complete loading and return any cargo loaded or can complete loading, however, insist on another discharging port i.e., one not subject to the risk of war. Disputes resolved in arbitration usually addressed the question of whether or not it was a war and who should pay in the end for the extra risk.

Under the newly adopted Security Clauses, the parties try to agree to the allocation of certain risks, including the loss of time and cargo-related expenses. Similarly, the ISPS Clauses delegate responsibilities and establish parameters for liabilities between owners and charterers. This seems to be an orderly approach to potential problems to ensure continued operation and fiscal responsibility for contemplated events.

But how does one address the issue of terrorism? Considering that I have compared it to a vis major situation, neither owners nor charterers can guard against it, and specifically neither party can individually insure against it. A potential solution may be that owners and charterers collectively insure the venture, taking the vessel, the cargo and freight into account and then, under an appropriate accounting scheme, share in the cost of the premium. This coverage could only address the physical assets (ship/cargo), but can at no time cover the potential target. Running a daily business with disaster insurance is not going to be easy.

In a recent book, The Outlaw Sea, William Langewiesche covers various stories relating to shipping in a world of freedom, chaos and crime. In Chapter II (The Wave Makers), he describes what the oceans used to be and what they have become. Even though, for obvious reasons, no one wants to be involved in groundings, collisions or oil spills, they must be viewed as inherent risks of maritime transportation. They are also events which can be addressed by the contract partners in a pro-active manner and, on occasion, can even be prevented. Not so, however, with terror attacks. The ease and swiftness with which acts of violence and destruction can be carried out is frightening indeed. The author refers to the aborted attack against the USS The Sullivans in January 2000, the ‘successful’ attack against the USS Cole in the same year, and the attack against the French tanker Limburg in 2002. In 1985, the Archilles Lauro was hijacked and a passenger was brutally executed. It was described as an act of terrorism. Even though it involved the loss of an innocent life, the hijacking and hostage situation was resolved by negotiations and subsequently ended with ineffective legal proceedings. In contrast, the subsequent attacks by boats or planes were suicidal in nature and executed for the purpose of destruction of properly and lives, to create economic turmoil, instability and a lasting fear factor that similar atrocities can be repeated at any time, in any place.

I recall a 2003 article by the ICC stated that terrorism risk to shipping can be reduced. The title of the article was High Seas Terrorism Alert in Piracy Report. What has piracy to do with war on terrorism? Piracy has been with us as long as shipping exists and involves acts of taking goods and lives for personal gains. I do not think that Jean Lafitte cared much about political or religious conflicts, but was more concerned with filling his treasure chests. Pirates were even romanticised in the arts. Modern day pirates continue to commit their crimes for financial gains. Ships and cargoes are hijacked and sold. There is no indication that the motivation for these acts is anything else but the search for enrichment. Langewiesche relates in detail such an episode, describing the travails of the Alondra Rainbow.

The shipping industry is faced with a tremendous challenge of having to operate within the parameters of tradition, progress and now the ever-present fear factor created by terrorists. The ICC article concluded that “the risk of terrorists attack can perhaps never be eliminated, but sensible steps can be taken to reduce the risk.” If ships become weapons like the planes used in the attack on the World Trade Center, more needs to be done than take sensible steps. But what? Have we run out of options?