War and Emergency Surcharges: Who should bear the additional Cost?

1. The ongoing conflicts in the Middle East and Red Sea have resulted in emergency and war-related surcharges, often arising from changes in routing, destination or trading conditions. The obvious question is: who should bear these additional costs? Much will depend on the underlying contract, the applicable Incoterms® rule and, importantly, when the additional cost arose.
2. CIF contracts:
   1. We recently came across an article considering this issue in the context of a CIF sale contract incorporating Incoterms® 2020. The author argued that such additional charges should be borne by the seller rather than the consignee, relying on Tsakiroglou & Co Ltd v Noblee & Thorl GmbH¹ and Continental Ore Corp v United States².
   2. Both decisions, however, can be distinguished on their facts. In Tsakiroglou, the seller did not perform the shipment following the closure of the Suez Canal due to the need to use a substantially longer route. In Continental Ore, the contractual framework was different and, importantly, Incoterms® 2020 did not apply.
   3. Under Rule A4 of CIF Incoterms® 2020³, the seller must arrange or procure a contract of carriage from the agreed point of delivery to the named port of destination on usual terms. Accordingly, timing is important.
   4. If, at the time the contract of carriage is arranged and the goods are shipped, the emergency or war-related surcharge is already known or reasonably expected, that surcharge would ordinarily form part of the freight and transportation costs to be borne by the seller under a CIF contract.
   5. Conversely, where the surcharge arises only after shipment as a result of an unforeseen change in circumstances, there is a stronger argument that the seller has already performed its CIF carriage obligation and that the additional cost does not automatically fall upon the seller.
3. Position of the carrier
   1. The carrier’s position is different. The carrier may be entitled to recover additional charges if the contract expressly allows such charges⁴ to be imposed in circumstances such as war, sanctions, congestion, diversion or other emergencies.
   2. The critical question is therefore whether the bill of lading or other contractual terms provide a proper contractual basis for the charge. The carrier’s entitlement may also depend on whether the charge is recoverable from the original shipper, the consignee, or both⁵.
   3. In extreme circumstances, where the additional charges become wholly disproportionate to the value of the cargo, questions may arise as to whether the contract remains capable of performance or has been frustrated⁶. That issue will necessarily depend on the facts and the contractual framework.
4. Local law may affect recovery
   1. A further complication is that, in some jurisdictions, domestic law or regulation may restrict a carrier’s ability to collect particular charges from the consignee. In such circumstances, the carrier may have a contractual entitlement to the charge but nevertheless be prevented from recovering it from the consignee.
   2. The carrier may then need to consider recovery against the original shipper and, where legally and contractually permissible, the exercise of a lien over the cargo pending payment of the charges.
5. Conclusion
   1. There is no universal answer as to who must bear emergency or war-related surcharges.
   2. Two issues are particularly important:
      1. Under a CIF sale contract, responsibility will depend on the contractual terms and when the surcharge arose. If the surcharge was known or reasonably anticipated when shipment was arranged, it is more likely to form part of the seller’s freight obligation. If it arose only after shipment because of an unforeseen event, the position may be different.
      2. A carrier’s entitlement to recover additional charges will depend primarily on the wording of the contract of carriage, the circumstances giving rise to the charge, the applicable law and whether any local law restricts recovery from the consignee.
      3. As with most disputes concerning additional freight charges, the starting point remains the contract.

¹ Tsakiroglou & Co Ltd v Noblee & Thorl GmbH – House of Lords decision concerning the closure of the Suez Canal and whether performance by the longer route around the Cape of Good Hope frustrated the contract.

² Continental Ore Corporation v United States, 423 F.2d 1248 (Ct. Cl. 1970) – concerning war-risk surcharges imposed in relation to carriage to Vietnamese ports.

³ See Trade Finance Global commentary on CIF Incoterms® 2020.

⁴ For instance, see Clause 20 of the Maersk Bill of Lading Terms and Conditions.

⁵ Where English law governs the relevant contract of carriage, the Carriage of Goods by Sea Act 1992 is relevant, including section 3 in relation to liabilities attached to rights under bills of lading.

⁶ See MSC Mediterranean Shipping Company SA v Cottonex Anstalt in relation to continuing contractual obligations and the accrual of demurrage following repudiatory breach. See our earlier article, Validity of Detention & Demurrage Clauses, which touches on these issues.