COVID-19 / Coronavirus and Superyacht Charter - What's my Legal Position?

Introduction

The global outbreak of the Coronavirus (COVID-19) is having a significant effect on the superyacht industry, in particular the yacht charter market.

Many yacht owners and charter guests will have entered into charter contracts with one another many months in advance of the anticipated charter date and long before the Coronavirus had been identified in China. Some of these charters will have been booked for corporate and hospitality events such as MIPIM 2020 which was due to take place in March but has been cancelled, the Monaco Grand Prix which was scheduled for May and has also been cancelled and the Cannes Film Festival which was also scheduled for May and which at the time of writing has been postponed, as well as for family vacations and other special occasions.

With all of the uncertainty around how long the effects of the Coronavirus will last and what it means for global travel, many yacht owners and charterers will be wondering what their legal position is in the event that the charter cannot take place, whether as a result of borders being closed, travel being impossible or an event, such as the Monaco Grand Prix, being cancelled.

This note is intended to offer some guidance to owners and charterers alike on the position they are likely to be in under the most prominent form of yacht charter agreement, namely the Mediterranean Yacht Brokers Association Charter Agreement (the “MYBA Charter Agreement”) in the event that either of them need to cancel the charter or are unable to perform their obligations under the agreement.

It is worth just minuting the fact that the correct analysis of any situation is fact dependent. So, the position set out below will not necessarily universally apply. Albeit, it should be a good guidepost.

Owner’s Cancellation Rights

Clause 9 of the MYBA Charter Agreement separates an Owner’s cancellation rights and the remedies associated with such cancellations into two categories, namely (i) cancellation for reasons of force majeure and (ii) cancellation for all other reasons.

The term force majeure has no specific definition within English law and accordingly, in order for the clause to be understood, contracts must specify the events which are to be deemed force majeure events. Thankfully, the MYBA Charter Agreement does not leave the parties to speculate about the term. Clause 18(a) provides a definition which states that force majeure means:

“…any cause directly attributable to acts, events, non-happenings, omissions, accidents or Acts of God beyond the reasonable control of the OWNER, the CREW, or the CHARTERER (including, but not limited to, strikes, lock-outs or other labour disputes, civil commotion, riots, acts of terrorism, blockade, invasion, war, fire, explosion, sabotage, storm, collision, grounding, fog, governmental act or regulation, contaminated fuel, major mechanical or electrical breakdown beyond the Crew’s control and not caused by lack of maintenance and/or OWNER’s or Crew’s negligence). Crew changes and shipyard delays not attributable to the aforementioned causes, do not constitute force majeure.”

Whether or not any particular act / event etc. falls within the scope of the contractual definition of force majeure is, of course, always going to be a question of fact. However, it is clear that clause 18 requires the cause of the cancellation to be (a) directly attributable to an act, event, non-happening, omission, accident or Act of God; and (b) for the same to be beyond the reasonable control of the Owner, Crew or Charterer.

In terms of COVID-19, it is highly arguable that, in respect of any charters booked prior to the global outbreak of the disease, the spread of the virus and the closing of borders is something which is beyond the reasonable control of the Owner, Crew or Charterer. Accordingly, where a yacht Owner finds him/herself unable to perform their obligations and carry out the charter directly as a result of the outbreak of COVID-19 that Owner is likely to be able to cancel the charter on the grounds of force majeure.

However, it is worth pausing here to note that for any charters which are booked after the date on which it had become apparent to the parties that COVID-19 could interfere with the charter, a yacht owner may find it harder in any resulting arbitration to successfully assert that any cancellation was as a result of an act of force majeure. Accordingly, for any yacht owners who are currently booking charters for the months ahead, care must be taken to ensure that an appropriate addendum to the MYBA Charter Agreement is drawn up amending the terms of the agreement and fully providing for what should happen should the charter have to be cancelled for reasons relating to the Coronavirus.

If an owner is able to demonstrate that it is required to cancel the charter for reasons of force majeure, clause 9(d) of the MYBA Charter Agreement provides that upon tendering notice of cancellation, the Charterer’s exclusive remedy will be to receive immediate repayment without interest of the full amount of all payments made by him under the terms of the agreement. In short, the Owner is obliged to provide the Charterer with a full refund.

Where the Owners need to cancel is not based on force majeure reasons, the situation is however very different. Pursuant to clause 9(e), where the cancellation is for any reason, other than force majeure, the Charterer shall be entitled to immediate repayment without interest of the full amount of all payments made by him under the terms of the agreement and shall additionally be entitled to liquidated damages from the Owner based on a percentage of the Charter Fee and calculated on a sliding scale which increases depending upon how close to the commencement of the Charter Period the notice of cancellation is given. If cancellation is given fourteen days or less before the commencement of the Charter Period, the MYBA Charter Agreement provides that the Owner is to pay an amount equivalent to 50% of the Charter Fee.

Charter’s Cancellation Rights

Curiously, the MYBA Charter Agreement does not provide the Charterer with any right to cancel which does not involve the Charterer forfeiting monies that have been paid to the Owner. In other words, once the Charterer has signed the MYBA Charter Agreement and paid its deposit, that deposit is at risk. There are no provisions in the MYBA Charter Agreement which allow the Charterer the right to invoke the force majeure provisions of the agreement in the same way that the Owner can.

Accordingly, were the Charterer to find themselves in a situation where, say, they were unable to travel out of their home country due to their government having closed the borders, the MYBA Charter Agreement does not offer the Charter any relief from its obligations or any ability to obtain a refund.

Does this therefore mean that the Charterer simply loses out and loses the money paid for the charter? – not necessarily. English law evolved in 19th century to recognise that there are certain events which, if they occur after the formation of the contract, render further performance of the contract impossible, illegal or something different from what was contemplated by the parties when entering into the contract. As lawyers, we call these events “frustrating” events.

Frustration is not a straight forward doctrine to rely on. It is reliant on the correct construction of the terms of the contract taking into account the context in which the contract was made and the wider circumstances. If there is a significant difference between the original contractual obligation and the performance that is possible due to the change in circumstances, it may be possible to rely on the doctrine of frustration. Successful reliance however will be dependent upon the parties having not made provision in the contract for the specific circumstances that are allegedly preventing the contract form being performed – in our case, the outbreak of disease. Equally, the doctrine of frustration only applies where the supervening event is beyond the control of both parties. It cannot be relied upon by a party who simply wants to try and escape what they now view as a ‘bad’ deal.

So, is the Coronavirus a frustrating event?

As helpful as it would be to answer that in a binary way, the legally correct position is that answer will vary on a contract by contract basis, as it impacts different contracts in different ways. In essence, it depends upon whether the existence of COVID-19 renders the further performance of the MYBA Charter Agreement impossible, illegal or something different from what was contemplated by the Owner and the Charterer when they signed the contract.

As we are all too aware, the coronavirus pandemic has resulted in quarantines, travel restrictions, governmental decrees, the cancellation of major events and the introduction of a suite of emergency legislation in many different countries. Each of these things have been considered by the courts as frustrating events. Whilst it would be beyond the scope of this note to look at all of the developed case law in relation to frustrating events, two cases merit mention in the context of the superyacht industry:

1. Ralli Bros v Compania Naviera Sota y Aznar - In 1920 the English courts had to grapple with the question of whether an agreement for the payment in Spain of chartered freight beyond the maximum permitted by Spanish law was enforceable or not. The courts held that such an agreement was not enforceable in England as where the contractual place of performance is abroad, and under the foreign law governing that place, performance becomes illegal after formation of the contract but before performance, the performance will not be enforced in England. In the context of superyacht charters that were booked to take place somewhere where travel and/or gathering in public is illegal, this case is of significance.
2. Krell v Henry – In 1903, the English court was asked to resolve a dispute relating to a contract for the hire of an apartment on Pall Mall in London which was rented for the purposes of viewing the coronation of King Edward VII. The court held that the contract was frustrated when the coronation procession was cancelled due to the illness of the King. The take away for the yacht industry is that where yacht charters have been booked for a specific purpose (e.g. a major sporting event) and it was clear to the parties that this was the purpose of the charter, the subsequent cancellation of that event could very well be a frustrating event.

As a charterer, if you are able to demonstrate that the contract has been frustrated, the contract will be set aside and neither party will be required to perform. In other words, the charter fee will not be due (and where it has been paid in advance, it will become refundable) and the Owner will not be required to make the yacht available for the charter.

Conclusions

COVID-19 has come as a shock not only to the superyacht industry but to the whole world. For yacht owners who need to cancel charters as a direct result of COVID-19, the MYBA Charter Agreement provides a contractual mechanism to cancel the charter, provided that the contract was not entered into in circumstances where the outbreak of the virus was no longer beyond the contemplation of the parties. As a charterer, if you find yourself with a charter booked that you might not be able to attend, look carefully at the wording of your contract. Was the charter booked for a specific event? Was that event known to the other party? If so, the doctrine of frustration may offer relief. For anything else, we are here to help.