North Korea and the US – War Cancellation Clauses
Most if not all charterparty “War Cancellation Clauses” will include the USA, Russia and China in their lists of potential protagonists. For owners and charterers trading in the Far East those clauses may also include Taiwan, North and South Korea and Japan. The prospect of armed conflict is not unusual but often countries are acting in coalition or are wrapped in the mantle of the United Nations (UN), the North Atlantic Treaty Organisation (NATO), or indeed ad hoc coalitions as seen with the Arab states against the Houthi militia in Yemen. The rhetoric between the US and North Korea has reached alarming levels. North Korea are seemingly undeterred from continuing a programme of missile testing to ever greater distances and with more sophisticated munitions. The Trump-led US government threatens an overwhelming response if North Korea does take action against US territory, the most likely being Guam. There are commercial reasons why parties may not want to consider cancelling contracts even if war does break out but this article looks at what kind of military exchange constitutes “war” for the purposes of standard cancellation clauses.
Typically, the cancellation clause will give the parties an option to cancel the charterparty “…in the event of the outbreak of war (whether declared or not)…” between one of the listed countries “…or in the event of the nation under whose flag the vessel sails becoming involved in war…”.
Three questions arise:
- What is “war”?
There have been very few cases where the definition of war has been considered in this context. Even in those cases, the Courts struggled to reach a technical definition. The Court had a go in 1937 when they were asked to resolve the dispute between the charterers and owners of the Nailsea Meadow fixed as war broke out between China and Japan in 1937. In that case, the Court had to determine whether a state of war existed in circumstances where there had been no formal declaration of war and the relevant clause made no reference to whether the war had been declared or not. The Court accepted that force was being used on a vast scale between two countries and there was a “war”, which they distinguished from internal revolution or civil conflict. Key was an armed conflict between competing nations.
This came up again more recently in the Northern Pioneer. In that case Germany (the flag state of the owners) had become involved in supporting NATO operations in the conflict in Kosovo in 1999. Their involvement was limited to providing 14 aircraft in support of operations to suppress Yugoslav air defences. The matter came before the Court of Appeal on issues of procedure. No guidance was given on the definition of war, but it summarised the findings of the majority of the Arbitrators who had found that war must be distinguished from “warlike activities and hostilities short of war”. Further, that ultimately whether a state of affairs amounted to war was a matter of commonsense. The Tribunal found by a majority only that there was no war although the third arbitrator (who was Sir Christopher Staughton) disagreed finding that anyone asking themselves whether there was a war in Kosovo would have answered “yes”. This matter is therefore not settled law.
North Korea have fired missiles at South Korea before and common sense suggests that this did not amount to a war. Something more than a limited and isolated missile attack may be needed (although it may well lead to a war) and that is likely to be so even if the US responds in kind. Common sense suggests that “war” needs to involve ground troops on a “war scale” leaving little doubt in the mind of a reasonable business man that two countries were at war.
- What does “involved in war” mean?
As we said above, the context of the Northern Pioneer was the NATO operations in Kosovo. The Arbitrators found that the NATO operations were not a war because war needed to be between nation states. That meant that participating in a limited way in a NATO operation did not make a country “involved” in the operation as a nation. Again, there was a majority decision on that point.
- When does the option to cancel arise?
One of the key questions is when the option arises. Most cancellation clauses will have no time limit. It therefore follows that a party has a “reasonable time” within which to cancel if that is what they are going to do. That gives rise to a more fundamental question which is does the option arise at all, if the vessel’s trading pattern is not actually effected by the war? Logically a party will only want to exercise the option if it makes commercial sense to do so and/or (certainly for the owner) if a party wants to avoid trading into a country at war. In the case of the latter there may well be overlap with other War clauses within the charterparty that allows the owner to refuse to go to an area where the vessel may be exposed to the dangers of the war or hostilities.