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War Clauses in the Charter Party and Insurance of War Risks in Indonesia 2024
by Setyawati Fitrianggraeni, Reynalda Basya Ilyas , Melvin Julian and Cassey Jovenia[1]
On 26 January 2024, the Marshall Island-flagged Marlin Luanda was struck by a missile by Yemen’s Iranian-backed Houthi Group attacking ships crossing the Red Sea. Southern Red Sea together with the Indian Ocean, and the Gulf of Aden, has long been designated a listed area by the Joint War Committee of Lloyd’s and London companies market insurers, as lastly listed in JWC Listed Area for Hull War, Piracy, Terrorism, and Related Perils (JWLA-033 dated 18 December 2023).
By considering the current climate with respect to war, ship owners and charterers may regulate a war risk clause in the charter party.
Charter Party in Indonesia
Ship chartering is a reciprocal agreement between the owner and the charterer, with whom the owner binds himself to provide the ship complete with equipment and sailors for the benefit of the charterer, and the charterer binds himself to pay the charter money. This agreement is called a charter party, and in the Indonesian legal regime is regulated in Chapter V concerning “Ship Chartering” in the Second Book of the Indonesian Commercial Code, from Article 453 to Article 465.
The Indonesian Commercial Code does not provide definition of charter party. However, the Code does classify the types of ship chartering into two, (i) time and (ii) voyage charter. A time charter is an agreement in which one party (the ship-owner) binds himself to, for a certain time, provide a certain ship, to the other party (the charterer), with the intention of using the ship in sea voyages for the needs of the other party, by paying a price, which is calculated according to the length of time.[2] Meanwhile, a voyage charter is an agreement whereby one party (the ship-owner) binds himself to provide a certain ship, wholly or partly, to the other party (the charterer), with the intention of transporting people or goods by sea, in one trip or more, by payment of a fixed price for this transportation. Pursuant to Article 454 Indonesian Commercial Code, a charter party agreement may be made in the form of a deed. In general, there are several important substances included in the charter party, including (i) Name and address of the ship owner or ship charterer; (ii) Name of the ship and matters related to the ship; (iii) Place and time of loading or unloading of cargo; (iv) Use of the ship by the charterer for legitimate or legal purposes; (v) Type of cargo carried; (vi) Conditions of carriage and responsibilities of each party; (vii) Restrictions on traffic or ports that can be visited; (viii) Procedures regarding notification of ship readiness for use; (ix) Ship charter fees; and (x) Other terms agreed by both parties
War Clause in Charter Party in Indonesia
The losses from the risk of war in transporting cargo by sea can also occur on Indonesian ships including the cargo. Generally, a war risk clause is included in the charter party as a mechanism of settlement in times when losses occur due to war risk. The practice of including a war risk clause in the charter party is not common yet in Indonesia as there are no specific regulations or national references governing war clauses. Nevertheless, Article 1338 of the Indonesian Civil Code states that “All legally executed agreements shall bind the individuals who have concluded them by law. They cannot be revoked otherwise than by mutual agreement, or pursuant to reasons which are legally declared to be sufficient. They shall be executed in good faith.” Based on that regulation, the parties have the freedom to agree to have arrangements related to the war risk clause in relation to the potential risk of war in the process of transporting goods by ship domestically and internationally.
As an example and reference of a war risk clause, the Baltic and International Maritime Council (“BIMCO“) provides model clause for both time charter and voyage charter in War Risks Clause for Time Chartering 2013 (“CONWARTIME 2013”) and War Risks Clause for Voyage Chartering 2013 (“VOYWAR 2013”) respectively. In general, BIMCO defines war risks to include any actual, threatened or reported: war, act of war, civil war or hostilities; revolution; rebellion; civil commotion; warlike operations; laying of mines; acts of piracy and/or violent robbery and/or capture/seizure; acts of terrorists; acts of hostility or malicious damage; blockades (whether imposed against all vessels or imposed selectively against vessels of certain flags or ownership, or against certain cargoes or crews or otherwise howsoever), by any person, body, terrorist or political group, or the government of any state or territory whether recognized or not, which, in the reasonable judgment of the Master and/or the Owners, may be dangerous or may become dangerous to the Vessel, cargo, crew or other persons on board the Vessel.[3]
The clause in BIMCO CONWARTIME 2013 regulates that the chartered vessel shall not pass through areas where war risks may be exposed to them according to the reasonable judgment of the master and/or the owners. If the vessel has been in such area, the vessel shall be at liberty to leave it. However if the vessel insists on continuing its journey exposed to war risks, the charterers shall reimburse the owners any additional premiums required by the owner’s insurer and any reasonable related cost.[4]
Apart from BIMCO CONWARTIME 2013, the BIMCO VOYWAR 2013 provides that if under reasonable judgment by the master and/or the owners the performance of charter party may expose the vessel to war risk, the owners may give notice to the charterers canceling the contract or may refuse to perform their obligations under it as may expose the vessel, cargo, crew or other persons on board to war risks. The owners shall first require the charterers to nominate a different safe port within the range of the original instead of the port that may be exposed to war risk, to load or discharge goods.[5]
These examples of war risk clause concepts can be implemented in charter party agreements in Indonesia. Then again, apart from war risk clause itself, the Parties are also allowed to agree upon insurance on war risk in charter party agreements. Insurance can provide security to both the insured and insurer regarding damages suffered due to war risk. Insurance matters can be agreed on a war risk clause or an accompanying insurance policy to the agreement. This can provide an alternative convenience to the parties in a charter party.
Insurance Policy In Relation to War Clause in Indonesia
In principle, the war risk clause generally gives underwriters the option, but not the obligation to levy additional premiums over and above the basic annual rate for war risk cover. In practice, it is common for the charterers to be required to pay for the war risk additional premium (beyond the owners’ normal war risk insurance cover) imposed by underwriters as a result of the vessel navigating in the area of enhanced risk, which implies that owners have agreed not to claim against charterers for any damage or loss that is covered by the war risk insurance. For example, the Joint War Committee declared Tanjung Priok Port to be included in the Listed Area of war risk in 2016 which finally was lifted in 2018. During that period, charterers were required to pay for the war risk additional insurance premiums.[6] However, several previous court decisions notably the most recent UK Supreme Court Decision in Herculito Maritime Ltd and others v Gunvor International BV and others (The Polar) [2024] in the case of the seizure of a vessel by Somali pirates in 2010, determined that there is no principle exempting charterers from liability for their breaches of contract or in general average, simply because they have provided funds for the owners to insure themselves against the relevant loss or damage. This case has made it interesting for a further review of the general principles of insurance, and the necessity and interpretation of the provisions of war risk clauses under the charter parties which shall determine among others the rights of the owners, charterers, cargo interest, and insurer concerning recovery and right of subrogation.
Aside from war risk clause in charter party agreements, protection from war risk for the ship owner can be obtained through insurance. Fundamentally, provisions regarding insurance and ship insurance are regulated in the Indonesian Commercial Code. Article 592 until Article 685 of the Indonesian Commercial Code regulates insurance or coverage of dangers in the sea. Article 265 of the Indonesian Commercial Code states that when providing coverage for third parties, it must be clearly stated in the policy whether this occurs based on a mandate, or whether it is beyond the knowledge of those concerned. One of the fundamental principles of insurance is the subrogation principle which is may be exercised by the insurance company. This principle generally shifts liability and/or risk to the insurance company. Under Article 1400 of the Indonesian Civil Code, subrogation is a payment from a third party to a creditor, where as a result of this payment, the third party making the payment replaces the creditor’s position as the new creditor of the debtor. In a simple illustration, the subrogation principle shifts the burden to the insurance company to provide compensation for the loss that occurred rather than the third party. This can be advantageous as it may be difficult to pursue compensation from the said third party.
Insurance is a beneficial tool for ship-owners in receiving compensation for loss or damage that may be suffered by the ship. Under Indonesian Law Number 40 of 2014 concerning Insurance as amended by Law Number 4 of 2023 concerning the Development and Strengthening of the Financial Sector (“Insurance Law“), insurance is defined as an agreement between two parties, namely the insurance company and the policyholder, which is the basis for receipt of premiums by insurance companies in exchange for (a) providing compensation to the insured or policyholder due to loss, damage, costs incurred, lost profits, or legal liability to third parties that the insured or policyholder may suffer due to the occurrence of an event which is uncertain; or (b) provide payments based on the death of the insured or payments based on the life of the insured with benefits whose amount has been determined and/or based on the results of fund management.[7] This insurance will be stated by the insurance company and the policyholder in a document called the Insurance Policy which can is in essence an insurance agreement.[8] Through insurance, the ship-owner is able to receive compensation in case their ship suffers losses or damages due to the journey at risk of war by the charterer.
An insurance policy is thus an agreement based on the provisions contained in general civil law which regulates the interests agreed upon by the parties, one of which is regarding the inclusion, or exclusion, of the war risks. There are no specific rules governing coverage for war risks in Indonesia. However, in Indonesia, there are insurance companies that cover war risks in insurance policies that provide compensation to the insured for losses arising from the physical impact of ships affected by war. One clear case in point is Tugu Insurance.[9] This insurance covers loss or damage caused by war, civil war, revolution, guerrilla war, rebellion, civil unrest arising therefrom, or any act of hostility by or against a warring country. The procurement of war risk insurance in Indonesian practice is also fairly difficult as there are few insurers who are prepared to assume this risk.
Conclusion
A war risk clause in a charter party agreement is important, bearing in mind the threat of smaller armed conflicts in the region and the ever threat of terrorism. A vessel’s voyage may be exposed to war risks. While no Indonesian law directly regulates war risks to ships, parties are able to insert war risk clauses in their charter party agreement. In regards to the wording of the war risk clause, parties are free to use BIMCO CONWARTIME 2013 and BIMCO VOYWAR 2013 which provide model clauses. In addition to a war risk clause, specific war risk insurance can also help to alleviate the financial risk and loss due to war and armed conflict.
References :
[1] Setyawati Fitrianggraeni is the Managing Partner at Anggraeni and Partners, Indonesia. She is also an Assistant Professor at the University of Indonesia’s Faculty of Law and is pursuing her PhD at the World Maritime University in Malmo, Sweden. Reynalda Basya Ilyas holds the position of Senior Associate, while Melvin Julian serves as a Middle Associate at Anggraeni and Partners. Cassey Jovenia is engaged as an Intern Associate with the firm. The authors wish to extend their heartfelt thanks to Dr. Hary Elias for his invaluable feedback on their article.
[2] Article 453 Indonesian Commercial Code
[3] Letter a number (ii) BIMCO War Risks Clause for Time Chartering 2013 (CONWARTIME 2013).
[4] Letter d BIMCO War Risks Clause for Time Chartering 2013 (CONWARTIME 2013).
[5] Letter b BIMCO War Risks Clause for Voyage Chartering 2013 (VOYWAR 2013).
[6] “INSA Jaya Sambut Baik Penghapusan Priok dari War Risk” (26 June 2018) accessed 3 April 2024, https://insa.or.id/insa-jaya-sambut-baik-penghapusan-priok-dari-war-risk/
[7] Article 1 number 1 Insurance Law.
[8] Article 1 number 6 Financial Services Authority Regulation No. 23/POJK.05/2015 of 2015 concerning Insurance Product and the Marketing Insurance Product.
[9] “Asuransi Kapal- Asuransi Marine War Risk” (2020) accessed 3 April 2024, https://tugu.com/produk/korporasi/kelautan
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Anggraeni and Partners, an Indonesian law practice with a worldwide vision, provides comprehensive legal solutions using forward-thinking strategies. We help clients manage legal risk and resolve disputes on admiralty and maritime law, complicated energy and commercial issues, arbitration and litigation, tortious claims handling, and cyber tech law.
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Reynalda Basya Ilyas
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