STEPS NECESSARY FOR RESTRAINT-OF-PRINCES EXCEPTION

The majority of vessel charter party contracts contain a general-exceptions clause. This clause provides either the shipowner or the charterer with protection from liability to the other whenever charter performance is prevented or delayed by any exception enumerated in the clause. These mutual exceptions will not excuse either party from liability associated with contributory negligence, however.

“Restraint of princes, rulers and people” is a standard exception found in nearly all charter party contracts’ general-exceptions clauses. This exception applies to forcible interference by a government that prevents performance of the charter. Examples of this exception are government orders prohibiting or restricting trade, embargoes, quarantine regulations, blockades, confiscation of contraband and seizures of ships for trading with the enemy.

It should be emphasized that this exception does not operate when the restraining order existed, or was known to the parties, when the charter was executed. Neither does the exception apply to ordinary admiralty vessel arrests for losses sustained in shipping ventures.

Most parties give little or no thought to the archaic restraint-of-princes clause when chartering vessels. However, this exception can be significant when an international crisis suddenly arises. The recent New York Nordic arbitration (S.N.A. no. 2972) emphasizes the importance of the restraint-of-princes exception in today’s shipping world.

On the morning of Aug. 2, 1990, Iraq invaded Kuwait. The United States responded immediately when President Bush issued an executive order, effective that same day, blocking the importation of Iraqi and Kuwaiti goods into the United States. This regulation was similar to past orders applicable to Libya, Iran and Cuba.

The invasion was unexpected. However, the government’s response and the impact of the order were swift. The ramifications immediately affected companies that were dealing with Iraq, especially those trading crude oils, and they affected the international trading community for some time thereafter.

Innocent buyers of embargoed crudes would suffer serious financial consequences if prohibited from discharging their oil in the United States. Therefore, on Aug. 3 the Treasury Department promulgated rules allowing importation if specific guidelines were met. These rules allowed for importation when crudes were loaded or bills of lading issued prior to Aug. 2. Outstanding payments for shipments also were required to be transferred into blocked accounts. If a cargo qualified under the rules, the embargo would be lifted.

The Nordic arbitration arose out of two lightering charter parties. The disputes related to discharge delays encountered in the U.S. Gulf Coast as a result of the executive order.

The vessel owner claimed the order did not prevent the charterer from discharging its Iraqi crudes from the lighters. The vessel owner argued that rules permitted discharge if security was posted for cargoes or if cargoes were discharged into sealed shore tanks.

The charterer maintained the order made performance temporarily illegal and, therefore, both parties were excused under the restraint-of-princes exception. Furthermore, it made every attempt to bring the vessels in promptly.

The arbitrators found no evidence to suggest sealed shore tanks were available. Nor would it make commercial sense for the charterer to pay twice for the same cargo by paying the purchase price into a blocked account.

The arbitrators found the charterer had immediate marathon negotiations with government officials to resolve specific problems and document requirements. The panel was satisfied that the charterer acted reasonably under difficult circumstances to clear the vessels for entry. The vessels owner’s claims for delay therefore were denied.

To be sure, international controversies will continue to hamper shipping in the future. The Nordic arbitration makes it clear that those engaged in chartering should act reasonably and promptly in order to benefit from the “restraint of princes” exception.


[Back]