Shipping groups are increasingly seeking break clauses in contracts with Chinese firms that would make it easier for them to walk away from the deals if Western governments impose sanctions on Beijing.
Senior lawyers from four maritime law firms, who declined to be named, told the Financial Times that shipowners were regularly asking for tailored clauses offering clearer protection against the impact of Western sanctions when negotiating deals with Chinese counterparts. such as shipbuilders, lenders and merchants cargo rental services.
The impact of Russia’s full-scale invasion of Ukraine has shaken shipowners and it has left groups far more exposed to sanctions, with the war putting pressure on them to keep track of their vessels amid increased scrutiny from regulators, banks and insurers.
“People had not foreseen the eventual scale of the sanctions against Russia. And how quickly we finally got there,” said Patrick Murphy, shipping attorney at Clyde & Co.
The situation has prompted companies to consider the likelihood of even more disruptive restrictions being imposed Chinaamid fears of US-China tensions and Beijing’s military assertiveness towards Taiwan.
“China is vastly more systemically important to the trading system [than Russia] – it would be very difficult if the same sanctions were applied,” added Murphy. “But you can’t take anything for granted. We have to be prepared.”
The shipping industry would be severely exposed to a breakdown in diplomatic ties with Beijing: Billions of dollars worth of goods are transported between China and the rest of the world every day, while China builds more ships each year than any other country.
In the past, industry agreements generally included a provision that allowed shipowners to abandon an agreement if compliance with it would lead them to violate the law. However, such clauses do not always cover penalties, which are usually limited in time, meaning that shipowners may find it difficult to terminate agreements permanently.
Lawyers said a desire for greater protection was driving demand for tailor-made clauses, such as allowing shipowners to tear up deals when penalties created a risk that continued trade would become illegal.
“Sanctions tend to be introduced suddenly. This leaves business parties forced to choose: comply with the law and breach the contract, or perform the contract and break the law,” said Daniel Martin, shipping and sanctions specialist at law firm HFW.
“Sanction clauses make it easier for commercial parties to manage these competing pressures. If they invoke the clause, they may be able to comply with the law without breaking the contract.
Two lawyers said conversations about the possibility of sanctions affecting trade with China had become more frequent even before the invasion of Ukraine, as the United States has imposed restrictions on Chinese technology groups and Beijing has stepped up military exercises around in Taiwan.
An attorney said two clients had inquired about the matter in just the past month. “Shipbuilding in China has been linked to state rallies,” the lawyer said, noting that government-owned entities were often at the “top of the list” when sanctions were enforced.
China Shipbuilding Industry Corporation and China State Shipbuilding Corporation, two of the world’s largest shipping conglomerates, are both state-owned.
While some deals were reached, the lawyers said the deals were difficult to achieve in China.
“It’s very, very difficult to get these clauses in,” said a London-based penalties lawyer. The shipbuilders were “often quasi-state and the [Chinese] the government won’t like it.”
Another lawyer said the shipping groups were particularly concerned about being locked into long-term contracts with Chinese shipbuilders. Payments are typically made in stages as a vessel is built over several years, creating the risk that penalties will be imposed during a vessel’s construction and payments have yet to be made.
Lawyers said some shipowners have made compromises to reach settlements, such as agreeing to pay more upfront or providing compensation if a contract is torn up due to penalties.
But one said that “a clause allowing [a shipowner] leaving will not be easily accepted.” Chinese shipbuilders were building ever more specialized vessels, making it difficult to transfer a vessel to another owner if the original purchaser canceled the deal, the lawyer added.
“Sea shipping is a good example of how China and the rest of the world are united economically. Self [diplomatic relations] deteriorate, you can see how painful that could be for everyone involved.”
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