The Japanese natural disaster
and its consequences:
legal issues arising for the
shipping and trade industries
The earthquake that struck off the northern
Pacific coast of Honshu, Japan’s largest main
island, in the early hours on Friday 11 March
was the fourth largest recorded in the world
since 1900. It caused extensive damage to
property within several hundred kilometres of
its epicentre. However, the greatest impact of
the earthquake was from the resultant tsunami
which swept through many coastal towns causing
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significant loss of life and human suffering.
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The tsunami also affected the ports and coastlines
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of Fukushima, Miyagi, Iwate and Aomori,
collectively known as the Tohoku region. In
addition to tsunami damage to ports, shipyards
and the regional fishing fleet, there were various
reports of ships and ferries running aground and
suffering damage.
Furthermore, the nuclear power station
at Fukushima was damaged and this has
caused considerable concern over the risk of
uncontrolled radiation leaking from the damaged
nuclear reactors. The authorities have evacuated
the immediate area and are monitoring radiation
levels to ensure that those in the area do not
suffer the effects.
The tsunami has proven to be the biggest natural
disaster to affect Japan since an earthquake
levelled Tokyo and Yokohama in 1923. The
Japanese Cabinet Office reported on Wednesday
23 March that direct losses of between 16
trillion yen (US$198 billion) and 25 trillion yen
(US$309 billion) have been incurred as a result.
If this estimate is correct, the resultant losses will
exceed those resulting from Hurricane Katrina
in New Orleans in 2005, which the insurance
industry assessed to be in the region of US$125
billion.
Beyond the unimaginable human cost of the
disaster, there has been and will continue to
be significant impact on the Japanese economy
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and widespread repercussions for the shipping
and international trade industries. This briefing
aims to set out some of the issues that have been
encountered by these industries as a result of the
tsunami and that will continue to be faced in the
immediate future.
Shipping
The principal effects of the tsunami on the
shipping industry relate to port infrastructure and
the flow of import and export cargoes. Japanese
ports, which handle about 7% of the country’s
industrial output, were badly hit. The ports in the
northern part of Japan were severely damaged,
although the Japanese transport ministry
reported on 23 March that most key ports (12
out of 15) had re-opened and were usable for
recovery efforts and general use. Only the
ports of Ofunato, Ishinomaki and part of Ibaraki
remained too damaged to be used, although the
ministry stated that it was working to re-open
the sea routes at those three ports. It has further
been reported in the press that grain cargoes
are reaching Japanese ports after disruptions at
terminals, the shipments having been transferred
to southern Japanese ports without much
difficulty. Nonetheless, there remain a number of
concerns for ship-owners and charterers.
Safe port issues
Various safe port issues arise, including as a
result of damage to port facilities and equipment,
the risk of damage to vessels, the possibility of
aftershocks and potential radiation risk from the
Fukushima nuclear plant. Owners might also be
concerned that if they call at a Japanese port,
they may subsequently not be allowed to trade in
another country for fear of radiation risk.
Ship-owners may be reluctant to call at particular
Japanese ports in case they have become unsafe.
Parties to charterparty contracts which provide
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for loading or discharging at a Japanese port should
review the terms of the charterparty carefully before
deciding on which course of action to take.
Where the charterparty contains a safe port warranty,
the warranty will be prospective. This means that at the
time of nomination, the port should be prospectively
safe to approach, use and depart from for the period
of the vessel’s likely visit, in the absence of some
abnormal and unexpected future event.
In the case of a time charter containing a safe port
warranty, where the Japanese port was nominated
prior to the earthquake but the port is likely to have
become unsafe by the time the vessel is due to load or
discharge there, then the time charterer may be obliged
to give new voyage orders, so long as the vessel can
effectively comply with those new orders. In the case
of a voyage charter, the position is less clear and a
detailed review of the terms of that charter will need to
be undertaken before any conclusion is reached.
Regarding radiation risk, it is not at present clear how
wide this risk is in physical terms. A ship-owner may
be reluctant to sail near the plant and especially within
the exclusion zone for radiation, arguing that the risk
of radiation makes the port unsafe. However, if the
radiation risks prove to be exaggerated and unjustified,
an owner may find himself in breach of charter for
refusing orders to go the relevant Japanese port,
particularly if it is out of the “immediate” risk zone.
Ship-owners should therefore not refuse voyage orders
to call at any Japanese port lightly, because many
ports outside the earthquake and tsunami area are
operating normally. The fact that grain shipments have
been successfully diverted to southern Japanese ports
supports this view.
It is recommended that potentially affected ship-
owners keep a close eye on developments and update
themselves in terms of the prevailing conditions at the
relevant port before taking any decisions as to whether
charterers’ orders are legitimate or illegitimate. Port
authorities and local agents should be consulted for
updated reports relating to the situation on the ground
and Japanese government website consulted in respect
of radiation risks.
Deviation
Parties to the charter party should also consider
whether it contains any liberty to deviate to a different
port although, absent such an express provision, the
ship-owner (in the guise of the Master) has an implied
right to deviate in order to avoid danger to the vessel,
cargo or those on board. As to whether the risk of
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radiation will be deemed sufficient justification for a
deviation, this will depend on the relevant facts in the
particular circumstances.
It may be that the parties to a voyage charter party
wish to come to a new agreement and vary their
charterparty to allow discharge at a different port. Any
such variation should, among other things, also allocate
responsibility for any additional expenses arising out of
the deviation.
Where a decision is made to tranship cargo,
consideration must be given as to who bears the costs
of such transhipment.
Bills of lading
Where the cargo is going to be delivered at a substitute
port, then the bill of lading terms should be examined
to see whether the bill incorporates the terms of the
charterparty in question. Alternatively, the bill of lading
may contain its own liberty clause, which permits
deviation in these circumstances to another port. In the
absence of such a provision, it may be that discharge
at a port other than the one named in the bill amounts
to a breach of the owner’s / carrier’s obligations under
the bill of lading. Clearly also, the owner must make
sure that even where there is a liberty to deviate, any
delivery of the cargo at an alternative port is made only
to a party entitled to take such delivery.
Any additional expenses incurred by the owner as a
result of the deviation may be recoverable from cargo
interests but this will depend on the terms of the
relevant liberty clause in the contract of carriage.
Frustration / Force Majeure
The parties to the charterparty should check whether
their contract contains a provision that allocates risk
as between the parties in the case of supervening
events. If so, such a provision would specify where
responsibility lies in the case of such an event.
However, where there is such a provision, but it does
not expressly cover the earthquake / tsunami scenario,
then one or other of the parties might seek to rely on
frustration of the contract.
Under English law, it is rare for a party successfully to
demonstrate that its contract has been frustrated. This
will require the party alleging frustration to establish
that circumstances have changed to such a radical
extent since the contract was concluded that the
contractual obligation in question can no longer be
performed or, if performed, would be very different to
the obligation which was originally undertaken. Mere
inconvenience, hardship, additional expense or delay
will not generally amount to sufficiently frustrating
factors. However, where the vessel itself is damaged as
a result of the tsunami, there may be an argument for
frustration. Furthermore, in certain circumstances, a
delay may be such as to amount to frustration and this
will depend in part on the length of delay as against
the length of the charterparty, although this is not a
conclusive factor. By way of example, in The Sea Angel
[2007] EWCA Civ 547, the Court of Appeal held that a
delay of three or so months towards the end of a short
(20 day) time charter caused by the unlawful detention
of the vessel by the port authorities did not frustrate the
charter.
Whilst there is no general concept of force majeure
in English law, there may be a force majeure clause in
the charterparty and it is arguable that an exception
such as “Act of God” would cover the Japanese
disaster. Again, however, the relevant provision and the
prevailing circumstances would have to be considered
closely by the party seeking to rely on force majeure
before concluding whether or not there was a force
majeure event.
Delay
The congestion at Japanese ports (and possible
damage to equipment / facilities) that will have
resulted from the disaster will mean that any vessels
already at Japanese ports, or due to call there, are
likely to experience delays in loading or discharging
their cargoes. Time charterers might seek to argue
that the vessel is off-hire in such circumstances but,
generally speaking, hire will continue to run unless the
charterparty is frustrated or the vessel is ordered to an
alternative port pursuant to any relevant charterparty
provisions. However, the wording of the off-hire clause
in the charterparty will need to be reviewed carefully.
For example, the standard un-amended clause 15 of
the NYPE time charter lists specified off-hire events
and ends with the words “or by any other cause”.
The amended (and expanded) version adds the word
“whatsoever” to the end of that phrase. It is arguable
that, in the case of the former un-amended wording,
the off-hire clause will not cover a port closure,
whereas the latter amended wording might. On the
other hand, damage to the vessel resulting in a loss of
time might arguably be covered by the unamended
wording.
As regards a voyage charterparty, where notice of
readiness has been validly tendered and laytime has
already commenced, then the vessel is liable to be on
demurrage unless the voyage charterer can rely on any
exception or interruption to laytime.
Dangerous goods
The radiation from the damaged nuclear reactors has
been known to have affected food and water within the
surrounding area. There arises therefore the possibility
that certain cargoes on board vessels may have been
affected by the leaking nuclear radiation. This may give
rise to subsequent cargo claims. Alternatively, there
may be claims that affected cargoes are dangerous
cargoes entitling owners to refuse to load them. Again,
parties need to review their contractual provisions
carefully and assess the actual exposure to radiation
before deciding how to proceed.
International Trade
Japan is the world’s third largest oil importer and the
largest purchaser of thermal coal and LNG in the
world. Japan also has a large steel industry, ranking
second only to China in steel production. Japan
is furthermore a major importer of commodities,
including agricultural products. It was reported on
24 March that Japan has secured enough extra LNG
supplies to compensate in the short-term for reduced
power generation capacity as a result of a number
of coal-fire and nuclear power plants going offline.
Furthermore, as stated above, shipments of grain have
been rerouted to alternative Japanese ports in the
South. Nonetheless, there remain a number of legal
concerns for traders and others in the commodities
business.
Frustration / Force Majeure
As outlined above, frustration of contract is a difficult
argument to advance successfully under English law.
The fact that a sale contract may have become more
expensive or burdensome to perform, for example,
because of difficulties in production or transportation
issues, will not generally amount to frustration. By
way of example, in the case of The Mary Nour [2008]
EWCA Civ 856, the Court of Appeal held that the
seller of a cargo of cement was liable to the buyer for
failure to supply the cement as required under the
sale contract, notwithstanding that this was due to the
commercial pressure exerted by a third party, a state-
owned company that operated a cartel in the relevant
area. The fact that the original supplier chose not to
make the goods available did not amount to an event
frustrating the sale contract.
Traders who anticipate problems in fulfilling any
contractual obligations should check their sale
contracts for any force majeure provisions to establish
whether any such provisions cover the Japanese
disaster.
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Payment for goods Further information

To date, there have been no reports of major
disruption to the Japanese banking system.
Therefore, payment under sale contracts by letter
of credit should not have proved problematic.
Shipment of goods
Traders who are also charterers of the ship
nominated to transport the goods under a sale
contract may find themselves liable for demurrage.
The charterparty should be reviewed carefully to
check whether its provisions expressly provide
for the interruption of laytime or demurrage in
the case of a force majeure event. Alternatively,
traders may face cancellations where the laycan
period expires without loading having commenced.
Again, contractual provisions should be considered
carefully to assess the legal consequences.
This briefing is intended to provide no more than an
overview of the type of legal issues that may arise as
a result of the recent disaster in Japan. It is important
to note that the situation is constantly changing and
the legal position may change accordingly. Therefore,
where specific advice is needed on legal issues
resulting from the Japanese earthquake, please contact
Nick Burgess or your usual contact at Ince & Co.
Nick Burgess
Partner, London
nick.burgess@incelaw.com

Condition of goods

It should also be noted that some concerns have

arisen with regard to cargoes becoming affected
by radiation, so that they may no longer meet
their specifications under the sale contract. The
buyers may consequently refuse to pay for and /
or take delivery of the goods. The sellers may be
required to provide alternative goods from another
source, depending on the terms of the sale contract.
Alternatively, there may be countries which refuse
to allow the discharge of goods which may have
been affected by radiation even though the goods
might in fact be perfectly sound.

Insurance

Traders should check whether their cargo insurance

covers the type of risks being encountered in Japan,
including additional forwarding costs and the
potential damage or deterioration to any goods, for
example stored in warehouses.

Ince & Co is an international commercial law firm which practises in seven broad strands:
AVIATION | BUSINESS & FINANCE | COMMERCIAL DISPUTES | ENERGY & OFFSHORE | INSURANCE & REINSURANCE | INTERNATIONAL TRADE | SHIPPING

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nor for any consequences of reliance on them, is assumed by the firm. Readers are firmly advised to obtain specific legal advice about any matter affecting them and are
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