Comment and analysis by Reed Smith lawyers on the latest developments in the shipping industry
Introduction
Under English law, charterers’ obligation to pay hire as it falls due is absolute but the right to withdraw a vessel in case of default in charterers’ obligation to pay does not arise automatically. An express term will therefore be required.
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This blog post explores the different ways of drafting guarantees and how this interacts with the obligations of parties within the shipping industry.
What is a guarantee?
A contract of guarantee is an undertaking given by one party (the guarantor) to another party (the beneficiary) to pay the principal obligor’s debts or to perform their obligations set out in the underlying contract. A guarantor has a secondary obligation to the beneficiary and therefore the guarantor will typically only be obliged to act where there has been a breach of the underlying contract. Whilst the commercial reasons behind a guarantee are often straightforward, the use of the word “guarantee” including the fact that the term “guarantee” is also frequently used to refer to other arrangements, such as contracts of indemnity (the difference between these terms is explored further below), and the differing ways in which guarantees are drafted, often leaves scope for ambiguity. Such ambiguity can be problematic for a beneficiary trying to enforce the provisions of their agreement.
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Welcome back to our new series of ‘back to basics’ blog in which we will provide posts focused on common legal issues. This blog post looks at termination of contract, and the various ways in which contractual obligations could be brought to an end.
Why terminate a contract?
Parties enter into contracts in order to ensure mutually agreed obligations are enforceable by law. However, circumstances may change overtime: the contract may no longer be commercially beneficial, the other party may not be performing their obligations, or external circumstances – such as the COVID-19 pandemic – may render the contract unfeasible or detrimental to a contracting party. As a result, a party may wish to find means by which to bring the contract to end.
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Welcome back to our new series of ‘back to basics’ blogs in which we will provide blogs focused on common legal issues. This blog post looks at letters of indemnity, a sometimes unreliable but commonplace feature of the shipping industry.
When might an LOI be required:
Letters of indemnity act as an unofficial form of insurance in instances where a party is requested to step out of the bounds of its contracted obligations.
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Welcome to our new series of ‘back to basics’ blogs in which we will provide blogs focused on common legal issues. This blog post will address force majeure and frustration, two concepts which charterers have regularly relied on since the presence of COVID-19, often with varying degrees of success.
General Rule
English law generally holds parties who have contracted to do something accountable even where subsequent events make performance challenging or expensive. Nevertheless, two exceptions can often be invoked, frustration and force majeure. It is important to note that under English law force majeure only applies if there is a specific clause within a contract that provides for it, while frustration is a common law doctrine. There has been renewed interest on force majeure, in particular, because of the COVID-19 pandemic.
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