Shipping groups press Chinese counterparts for sanctions-proof contracts

Shipping groups are increasingly seeking break clauses in contracts with Chinese businesses that would make it easier for them to walk away from deals if western governments impose sanctions on Beijing.

Senior lawyers at four maritime law firms, who declined to be named, told the Financial Times that vessel owners were regularly asking for bespoke clauses that would offer clearer protection against the impact of western sanctions when negotiating deals with Chinese counterparts such as shipbuilders, lenders and traders chartering freight services.

The impact of Russia’s full-scale invasion of Ukraine has shaken shipowners and left groups far more exposed to sanctions, with the war putting pressure on them to keep track of their vessels amid greater scrutiny from regulators, banks and insurers.

“People didn’t anticipate the eventual scale of the sanctions against Russia. And how quickly we ultimately got there,” said Patrick Murphy, a shipping lawyer at Clyde & Co.

The situation has prompted companies to consider the likelihood of even more disruptive restrictions being imposed on China, amid fears over US-China tensions and Beijing’s military assertiveness around Taiwan.

“China is hugely more systemically important to the trading system [than Russia] — it would be very difficult were the same sanctions to come in,” Murphy added. “But you can’t assume anything. We have to be prepared.”

The shipping industry would be acutely exposed to a collapse in diplomatic relations with Beijing: billions of dollars’ worth of goods are carried between China and the rest of the world very day, while China builds more ships annually than any other country.

In the past, industry contracts have generally included a provision allowing shipowners to walk away from a deal if fulfilling it would cause them to break the law. However, such clauses do not always cover sanctions, which are generally time-limited, meaning shipowners could struggle to renege on agreements permanently.

Lawyers said a desire for greater protection was driving demand for bespoke clauses, such as permitting shipowners to tear up deals when sanctions created the risk of continued trade becoming illegal.

“Sanctions tend to be introduced suddenly. That leaves commercial parties forced to choose — comply with the law and breach the contract, or perform the contract and break the law,” said Daniel Martin, a shipping and sanctions specialist at law firm HFW.

“Sanctions clauses allow commercial parties to more easily manage these competing pressures. It they invoke the clause, they may be able to comply with the law without breaching 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 US placed restrictions on Chinese tech groups and Beijing ratcheted up military drills around Taiwan.

One lawyer said two clients had asked about the topic over the past month alone. “Shipbuilding in China has been linked to manifestations of the state,” 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.

Despite some deals being struck, lawyers said agreements had been tricky to reach in China.

“It is very, very difficult to get these clauses,” said one London-based sanctions lawyer. Shipbuilders were “often quasi-state-owned and the [Chinese] government won’t like it”.

Another lawyer said shipping groups were particularly concerned about being locked into long-term contracts with Chinese shipbuilders. Payments are generally made in stages while a vessel is built over several years, creating the risk of sanctions being imposed while a ship was being built and payments still having to be made.

Lawyers said some shipowners had made compromises to reach agreements, such as agreeing to pay more up front or to provide compensation if a contract was torn up because of sanctions.

But one said that “a clause that allows [a shipowner] to walk away is not going to be readily accepted”. Chinese shipbuilders were constructing increasingly specialised ships, creating difficulties in transferring a vessel to another owner if the original buyer called off the deal, the lawyer added.

“Shipping is a good example of how China and the rest of the world are joined at the hip economically. If [diplomatic relations] deteriorate, you can see how painful it could be for everyone involved.”