On the 14 of March 2020, the Spanish Council of Ministers agreed and issued Royal Decree 463/2020 by means of which the State of Alarm was put in place for the management of the health crisis caused by COVID-19.
Initially, the state of alarm was meant to last for a period of 15 days, but it was extended until 00:00 hours of 21 June, by virtue of the authorisation granted for this purpose by the Congress to the Government.
In these months, we have witnessed the publication of several provisions of law that seek to address the significant challenges posed by the (health, economic and social) crisis caused by the COVID-19. However, the impact of the COVID-19 in the Spanish shipping legal market has gone further these regulations.
Among others new situations, we have seen an unprecedent surge in the use of tankers as floating storage for oil and petroleum products. Spain, with near to 7,000Km of coastline and 46 ports of general interest, managed by 28 Port Authorities, has witnessed collapsing oil refineries and storage facilities’ capacity and consequently a high demanding for floating storage. It could be said that Spain was surrounded by “floating stores”.
The strategic geographic situation of Spain makes it an excellent platform to serve North Africa, from Far East, Middle East and the Americas increased the situation.
Although the practice of charterers using oil tankers for floating storage is nothing new, many legal issues may arise.
As starting point, it should be considered that neither BIMCO/international authorities nor major international oil companies have a specific “floating storage clause” in their charter parties and that the decision to employ the vessel as floating storage rests with charterers. However, the specific clauses of BPTIME 3 (which was jointly developed by BIMCO and BP) and the applicable clauses contained in SHELLVOY 6 and BPVOY 4 and BPVOY5 should be considered. If a time charter party contains a “floating storage clause” (as Clause 21 from BPTIME 3), there is a right to order the vessel for floating storage. However, if we were in presence of a voyage charter party, legal implications of stopping a vessel would be uncertain and the particular bill of lading should be considered.
As said, legal issues connected with the use of tankers as floating storage may arise and have arisen. First question to be considered would be where to wait. The location for the tank shall be agreed and must be a safe place (within the meaning of the charter party) for the vessel and for the crew. Second question to be considered would be the duration of storage and the impact that extended storage may have on the condition of the cargo and the vessel’s tanks, valves and pipework. Third question relates to potential oil spill: if an oil spill were to occur from a vessel engaged in oil-storage, oil traders (and/or their financiers as owning the oil) might not escape legal action. Pollutants from tankers used to store oil have potentially damaging effects on human health. Last but not least, Ship to Ship transfer operations and their risks should be also considered.
Proper insurance is an important aspect and both parties should check with their respective insurers (cargo, P&I, pollution, etc) if additional insurance premiums maybe required and which party should bear the cost. Owners are contractually obliged to care for the stored cargo, so it is important that the characteristics of the cargo are taken into account and the condition of the cargo closely monitored, bearing in mind that oil products may degrade over time. In addition, there may be an impact on tank coatings and cargo-related equipment due to prolonged idleness which normally fall under owners’ maintenance obligations.
The other side of the coin is the legal relationship between the owner of the stored oil products and the owners of the shore-based storage. Situations arising from the COVID-19 crisis have been also connected with the storage agreement between the owners of the tanks and its lessors as a part of the circle. Due to disruption caused COVID 19, storage companies in occasions were not able to provide storage capacity ashore and connected services in Spanish ports since they must adopt many measures and difficult decisions on a daily basis. For instance, they were forced to reduce personnel, they faced problems to execute preventive and corrective maintenance and even they found difficulties to obtain epidemic prevention materials. In the meantime, cargo owners could not discharge the products in the terminals/tanks but they were paying astronomical daily hire rates.
Could the effects of the Royal Decree 463/2020 declaring the State of Alarm be considered as Force Majeure excusing the storage company’s performance of the agreement? Were the parties to the contract entitled to rely on Force Majeure in these circumstances? Would be the charterer of the tanker used as floating storage entitled to invoke force majeure within the charter party frame because it was unable to discharge the vessel?. Much is uncertain because up to now the possible impact that the Sanitary Emergency Status and the measures approved by the government of Spain (by the several regulations enacted by the Spanish Government) are untested by Spanish Tribunals.
Spanish Civil Code establishes as a general principle that the contracting parties will not be liable in cases of Force Majeure. In particular, Article 1105 of the Spanish Civil Code provides that apart from the cases expressly mentioned in the law, and those cases in which the obligation is declared, no one shall be responsible for those events which could not have been foreseen, or which, if foreseen, were inevitable.
Force majeure situations could be described as an event that could not be foreseen in the ordinary and normal course of life, it is an unusual or extraordinary event and completely unpredictable and unavoidable, so its adverse effects cannot be avoided even if there is a prudent and diligent conduct by the parties, unavoidable event due to external factors and beyond the sphere of the parties (Judgment of the Spanish Supreme Court number 4688/1983 dated 30 September). In addition, the judgement of the Supreme Court number 1321/2006 dated 18 December 2006, establishes that “force majeure must be understood to be an event that takes place after the date of the agreement, which renders useless any diligent effort to achieve what has been agreed, (…); There must also be a total absence of fault, because fault is incompatible with force majeure and fortuitous event; and that “force majeure” must consist of a force beyond all control and foresight, and its occurrence must be weighed against the normal and reasonable foresight that the circumstances require to be adopted in each specific case, or inevitability in a practical possibility”. While the situation arising from COVID-19 could be considered as a case of force majeure, it should be analysed individually on a case-by-case basis as described herein
However, some judgements of the Spanish Courts have also considered in similar circumstances the “rebus sic stantibus” rule, which is intended to deal with problems arising from a sudden change in the situation or circumstances existing at the time of the signing of the contract, provided that the change is so relevant that it imposes an unreasonable burden or cost on one of the parties or frustrates the purpose of the contract (Judgement of the Supreme Court number 820/2013, dated 27 January 2013).
The rationale behind the principle “rebus sic stantibus” is that the clauses of a contract are agreed according to the concurrent circumstances at the time of its signature, so if the circumstances change substantially, the clauses should be modified accordingly.
We must emphasize that the application of the principle described above is based on a highly restrictive scope and with a strict and limited formulation of its application requirements by case law.