Red Sea Crisis Takes a Toll on Egypt's Shaky Finances
The effects of the Red Sea crisis are weighing on the national economy of Egypt, which gets a good share of its dollar currency for foreign exchange from the operation of the Suez Canal. Traffic on this strategic - and lucrative - waterway has dropped by half since the beginning of hostilities in the Red Sea, according to the nation's top leader.
"The Suez Canal, which used to bring Egypt nearly $10 billion per year, [its revenues] have decreased by 40 to 50 percent. And Egypt must continue to pay companies and partners," Sisi said at an oil conference Tuesday, according to AFP.
Egypt faces a multitude of economic challenges. Deficit spending has driven its public debts up over the past 20 years, and external debt exceeded the $130 billion mark in 2020. It is import-dependent, especially for food, and a chronic current account deficit has dragged down the value of its currency. Inflation is running in the range of 30 percent, causing a crisis of purchasing power for the population at large.
The conflict in Gaza has handed Egypt two economic shocks: a drop in tourism revenue from security-conscious visitors, and a drop in Suez Canal traffic from Houthi attacks to the south. The designated terrorist group has targeted vessels with any links to Israel's allies, even tenuous links, and the risk has driven away most of the well-recognized names in shipping.
Egypt will likely get an economic aid package from the IMF shortly, and this will help plug the gap from the Suez Canal slowdown. The Egyptian government hasn't fully kept its past agreements with the IMF, but it will likely get more funding anyway - in part because it has such a key role in regional affairs, according to Ishac Diwan, an economist with the Paris School of Economics.
"It's a country that's very important geopolitically. The war in Gaza makes it, again, very important. The war has given new momentum in Western capitals to back the IMF and to vote for that loan at the IMF board. Egypt is just too big to fail right now," Diwan told NPR.
Red Sea Crisis: Understanding a Shipowner's Rights
With the Red Sea Crisis continuing to unfold, Rosie Goncare, partner in the marine, trade and energy team, at law firm Hill Dickinson, and Reema Shour, senior knowledge lawyer at Hill Dickinson, discuss the legal implications of the crisis. They highlight the rights of the shipowner/carrier, and what carriers should know in case they face the risk of being unable to fulfil their shipping contracts.
As the shortest sea route between Asia and Europe, the strait of Bab al-Mandab in the Red Sea is one of the world’s busiest shipping routes. Any vessel transiting through the Suez Canal or to or from the Indian Ocean must pass through this strait. Ongoing attacks by Houthi rebels in Yemen have resulted in great disruption, leading shipowners to avoid the area and divert their vessels via the longer Cape of Good Hope route. The diversion is estimated to add approximately 14-25 extra days to a voyage in comparison to the traditional Red Sea route.
The Red Sea attacks have serious political and commercial considerations, from disruption to global supply chains and the impact on consumers, to legal implications for the shipping industry. This article highlights some contractual issues that those in the shipping industry should be aware of in relation to this crisis.
Rights of the carrier: what do the contractual clauses say?
Deviation
Under the Hague/Hague Risby rules – international conventions governing the sea transportation of goods - a carrier is allowed to make a deviation from the agreed route to save life or property at sea. The charterparty may also incorporate an express liberty clause, which gives the carrier the right to deviate from the contractual voyage to another route, and to move containerized goods from one vessel to any other port.
The terms of the relevant charterparty should be checked to determine whether they permit deviation, and to what extent. In general terms, a deviation must be reasonable if the carrier is to avoid liability for any losses that result. In the context of the Red Sea attacks, the carrier will have to demonstrate that it was necessary for the safety of the vessel or cargo.
However, it is important to understand that just because a charterparty allows the ship to change its route, this does not automatically mean that the bills of lading – documents issued by the carrier to the shipper in respect of the goods being shipped - also permit these changes. Therefore, the documents should be checked carefully.
Force majeure / Frustration
Since the attacks began, a number of international carriers have invoked force majeure (FM) provisions due to the increased danger of the situation, making it unadvisable to take the Red Sea route. FM provisions arise when parties are relieved from performing their contractual obligations as a circumstance beyond their control has arisen. In this case, many voyages on the Suez Canal/Red Sea route are being terminated or rerouted via the Cape of Good Hope.
The closest English law equivalent to force majeure is frustration. This refers to where an unforeseen event occurs after the contracts have been agreed, affecting the ability to fulfil the contract. A party claiming frustration will have to prove that the Red Sea situation has made further performance impossible, illegal, or radically different from that which was originally contemplated.
The scope and effect of these clauses will depend on the law that governs the contract. For example, in English law, it is unlikely that the defence of frustration will be available as it is usually necessary to demonstrate performance of the contract has become impossible: not just more difficult or expensive. Due to the alternative Cape of Good Hope route, contracts can still be performed.
Safe port
The charterparty may incorporate a safe port warranty, which requires the charterer to only order the ship to a port with both physical and political stability. This warranty has a carve-out for ‘abnormal occurrence’. Insofar as the Red Sea attacks can be considered foreseeable, they may arguably not be considered an abnormal occurrence.
If a time charterer nominates a port that is deemed unsafe, the owner is entitled to reject this. If the port is safe when the charterer nominates it but becomes unsafe afterwards, the time charterer can nominate a new safe port.
By contrast, a voyage charterer may not be able to change the route without the owner’s consent. Instead, the charterparty will normally state that the vessel is to proceed to the nominated port, or as near to it as she ‘may safely get’.
With the Red Sea attacks, there is a safe route available and so the risk of an unsafe port can be avoided by taking the longer Cape of Good Hope route.
War risks
A charterparty will usually incorporate an express provision allowing for cancellation or termination in the event of an outbreak of war or war-like situation.
The Red Sea attacks may be covered by clauses addressing ‘hostilities’ and/or ‘warlike operations’. Generally speaking, if a vessel is being ordered to proceed to a war risk area, the war risks provision may provide that the owner has the right to refuse the order. It will be for the Master, in his reasonable judgment, to decide whether the vessel, cargo, and crew are likely to be exposed to war risks.
However, some charterparties may not allow the owner to refuse orders if war risk insurance is available. The war risk clauses can also affect whether the safe port provision applies and, unless the charter says otherwise, hire may continue to run during delays caused by war risks.
If the war risks clause is invoked and the cargo is discharged at a different port, the owner may be entitled to additional freight depending on the charter terms. Some war risks cover incorporates costs for detention or diversion.
If charterers send the ship through a high-risk war zone, standard insurance cover might not be enough, and additional insurance, with extra fees, might be needed. While owners usually pay the standard insurance fees, who covers the extra insurance costs depends on the charter agreement.
The Red Sea as a high-risk area
On 18 December 2023, the Joint War Committee (JWC) issued an amendment to its Listed Areas, widening the area in the Red Sea that it deems high risk. Vessels must notify their insurers when sailing through such areas and pay an additional premium. Depending on how the situation develops, there may be concerns as to whether ports in the Listed Areas remain safe, whether such ports fall within the trading limits in the charterparty and whether the owners are entitled to deviate to another port.
Where the parties to the charterparty agree that the cargo should be delivered at an alternative port, it is important to check whether the bill of lading names a specific discharge port. If the bill of lading does not allow for discharge at a port other than the one specified, delivery at an alternative port may constitute a breach of the bill of lading contract.
Looking ahead
It is clear that the Red Sea attacks have presented legal, commercial, and practical challenges for carriers, charterers, and cargo interests. Those potentially affected should keep a close eye on developments and should review their contracts closely to determine their rights and liabilities in this context.
Rosie Goncare is a partner in the marine, trade and energy team at Hill Dickinson.
Reema Shour is a senior knowledge lawyer at Hill Dickinson.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.
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