The Panama Canal, a crucial waterway connecting the Atlantic and Pacific Oceans, is facing unprecedented challenges as the region grapples with its most severe drought in over seven decades. Normally facilitating the transit of 13,000 to 14,000 vessels annually, the Panama Canal Authority has been forced to take unprecedented measures in response to the water shortage. Delays in the crossing the waterway are set to impact shipping contracts according to Hill Dickinson Partners in Shipping and Legal Experts.
For the first time in its history, the Panama Canal Authority has implemented limitations on the number of vessels allowed to cross the canal. Typically accommodating an average of 36 vessels per day, this figure was reduced to approximately 32 in June 2023, further declining to 25 vessels as of November 2023. Projections suggest a further reduction to 18 vessels per day starting February 2024.
Additionally, the draft limit, representing the maximum depth a ship can have while traversing the canal, has been reduced from 50ft to 44ft. This reduction not only affects the size of vessels able to navigate the canal but also impacts the volume of cargo that can be transported through this vital trade route.
The repercussions of these limitations extend beyond the immediate region, causing delays in the global supply chain and resulting in increased costs. Vessels now experience extended waiting periods, prompting some shipping companies to seek alternative routes such as the Cape of Good Hope, Cape Horn, or the Suez Canal. Others opt to distribute cargo across multiple vessels to comply with the reduced draft limits.
The delays have led to an uptick in shipping rates in other regions, and some vessels without pre-booked slots are being turned away. Notably, expedited transit slots are reportedly being auctioned at record prices, with one slot for an LPG carrier fetching a reported US$3.95 million.
Legal experts caution that these delays may impact charterparties and contracts of affreightment. Parties engaged in existing or future agreements are advised to carefully assess the contractual implications of canal delays, examining clauses related to delay, detention, demurrage, force majeure, and stoppage of canals and waterways.
Sales contracts are also affected, prompting the need to identify responsibility for additional carriage costs and potential adjustments to contractual chains. Legal professionals emphasize the importance of understanding the rights and responsibilities under existing contracts and seeking legal advice to navigate the evolving landscape of climate-related threats to trade routes and businesses.
As the climate crisis persists, adaptation and preparation are crucial to mitigating the impact of ongoing threats on global trade. Beth Bradley, a partner at Hill Dickinson specializing in shipping dispute resolution, underscores the importance of legal preparedness for businesses facing the evolving challenges posed by climate change.
Contributors: Beth Bradley, Colin Lavelle, Reema Shour – Hill Dickinson Partners in Shipping and Legal Experts
Source: The Maritime Executive