Excuse in the time of Coronavirus: A Review of Recent Case Law on Force Majeure

  1. With the outbreak of the Covid 19 pandemic, advice will increasingly be sought as to whether reliance may be placed upon a force majeure clause in order to excuse performance[1].
  2. The answer to that question will necessarily turn upon a construction of the terms of the clause in question.
  3. Some force majeure clauses refer in terms to “pandemic”[2] as a force majeure event. Other clauses may not, but contain wording that is sufficiently wide at least arguably to extend to the consequences of Covid 19, for example clauses that define force majeure events so as to include “governmental or other regulatory action” which may well extend to measures taken under the Coronavirus Act 2020 or secondary legislation addressing the pandemic.
  4. In this paper I shall focus upon issues that often arise by reference to some recent cases in which the Courts have been required to address the construction of such clauses – notwithstanding the recent warning from the Court of Appeal that[3], “the citation of cases dealing with very differently worded clauses is …of limited if any assistance.

The Requirement of Causation

  1. Must the party seeking to rely upon a force majeure clause prove that but for the event it would have performed?
  2. That issue arose in Classic Maritime Inc v Limbungan Makmur SDN BHD[4], where the force majeure clause was contained in a contract of affreightment. The charterer failed to provide cargoes for seven shipments of iron ore pellets. Five of those failures occurred after the Fundao dam had burst, which shut down the relevant mine’s production.
  3. The charterer’s obligation was absolute subject only to a force majeure provision. It stipulated, under the hearing “Exceptions”, that the charterer was not responsible for any loss or damage to, or failure to supply or deliver the cargo resulting from numerous matters beyond the parties’ control, including “accidents at the mine”, provided the event directly affected the performance of either party under the contract.
  4. At first instance, the judge found that even if the dam had not burst it was more likely than not that the charterer would not have been able or willing to perform. Therefore, even if the dam had not burst the charterer would not have performed.
  5. The Court of Appeal held that on a true construction of the force majeure clause, the party seeking to rely upon it had to show that but for the event it would have performed. Males LJ regarded the following features (amongst others) as being of importance:
    • First, the heading, “Exceptions”: that was indicative of the fact that the clause was mutually applicable, operating to excuse the party relying upon such clause from performance or exempting it from responsibility for a breach of an obligation. It was not, therefore, appropriate to approach the task of construction on the basis that the clause was a force majeure as distinct from an exceptions clause.
    • Second, the words “failure to deliver” had to refer to a particular cargo, which but for the event in question, would have been delivered.
    • Third, the clause referred to numerous events in respect of some of which, sense could only be made if they referred to a particular consignment which but for the event would have been delivered.
    • Fourth, the words “resulting from” and the proviso that the event had “directly (to) affect the performance of either party” imparted a causation requirement.
  6. A different issue arose in Seadrill Ghana Operations Ltd v Tullow Ghana Ltd[5]: namely, whether a party is entitled to rely on a force majeure clause where the inability to preform arose by reason of two external causes, only one of which was a force majeure event.
  7. In that case, the relevant clause provided that neither party would be responsible for any failure to fulfil any term or condition of the contract if and to the extent that fulfilment had been delayed or temporarily prevented by one of a series of force majeure events, which was beyond the control and without the fault or negligence of the party affected and which by the exercise of reasonable diligence that party was unable to prevent or provide against.  One of those events was a drilling moratorium imposed by the government.
  8. Under the contract, one party, T, was obliged to issue drilling instructions to the other party. Its intention was to do so in relation to two fields, A and B. T defaulted and sought to rely upon the force majeure clause. 
  9. It was held that there was a drilling moratorium and that that was an effective cause of T’s failure to issue drilling instructions in relation to A. However, there was another effective cause, which did not constitute a force majeure event, that prevented T issuing drilling instructions in relation to B. 
  10. It was held in those circumstances that T could not rely on the force majeure clause. That was said to be consistent with the approach of the Court of Appeal in Intertradex v Lesieur[6], in which it was held that where two force majeure events operated to prevent a seller from shipping goods, a force majeure notice had to be given in relation to each event, so that where a notice had only been given in respect of one such event, the party seeking to be excused could not rely upon the clause. 

Events within the Control of One Party

  1. Generally, force majeure clauses apply in respect of events which are beyond the control of both parties[7] – although that will not always be so.
  2. In Jiangsu Guoxin Corporation Ltd (formerly known as Sainty Marine Corporation Ltd) v Precious Shipping Public Co. Ltd it was held that a clause that applied to “other causes beyond the control of the seller or its subcontractors”, in addition to “by force majeure of any description, whether of the nature indicated by the forgoing or not” embraced matters other than what might be described as “conventional” force-majeure events, which are beyond the control of either party, and in particular might extend to matters, which were within the control of the Buyer but not the Seller[8].

Force Majeure and Repayment of Advance Payments

  1. On occasion, a pre-payment may be made under a contract that is subsequently affected by a force majeure event. Can the payer recover that pre-payment?  The answer will turn on the wording of the advance payment/repayment and force majeure provisions and their interrelationship. 
  2. In Totsa Total Oil Trading SA v New Stream Trading AG[9] the repayment term provided that, subject to the force majeure provision, if “for any reason whatsoever” the product were not delivered, the seller would, within five working days of the buyer’s written demand, reimburse their advance payment together with accrued interest on the outstanding advance amount.
  3. The force majeure clause provided that delivery would be extended during a period where a force majeure event had occurred but that if delivery were delayed for more than 30 days, either party might terminate the contract.
  4. In April 2019 the seller provided notice of an alleged force majeure event. No delivery was made.  In May 2019 the buyer served a written demand on the seller requiring repayment of its advance payment together with interest.  The seller asserted that the reimbursement clause did not apply as a force majeure event had occurred that prevented delivery of the cargo so that it was not liable to repay the advance payment.  The buyer terminated the contract in October 2019 and re-issued its demand for repayment.
  5. On an application for summary judgment, Andrew Baker J held that the reimbursement clause was the agreed provision between the parties for the repayment of the advance sum in circumstances of non-delivery. The reference in that clause to the force majeure clause was to indicate that if a force majeure event arose, it was open to the parties to agree a different arrangement from the default position under the reimbursement clause.

The Requirement of Reasonable Endeavours

  1. Often a clause will require the taking of reasonable endeavours by one or both parties to mitigate the effects of the force majeure event. The burden of proof in such cases, is upon the party seeking to rely upon the clause.
  2. Such clauses enable account to be taken of all matters that bear upon the question whether it is reasonable to expect a party to take certain steps to avoid or circumvent a force majeure.
  3. However, context is of the utmost importance.  Generally, it will not be sufficient for the party, who is seeking to rely upon a force majeure clause, to say that it could not mitigate the effects of the force majeure event because it would not be in its commercial interests or unprofitable to do so. However, the party will not be required to act in a manner that would be commercially wholly futile such that performance would be outside of the parties’ contemplation. 
  4. Overall, a party required to mitigate the effects of a force majeure event is entitled to have regard to its own commercial interests. It is also obliged to have regard to the commercial interests of the other party[10].

The Requirement to Provide Notice

  1. Often force majeure clauses will contain provisions requiring the provision of notice of the event and sometimes detailed information concerning the same.
  2. An issue will often arise as to whether compliance is a condition precedent to reliance upon the force majeure provision.
  3. Whether such a notice provisions are a condition precedent will depend upon three matters[11]:
    • The form of the clause itself;
    • The relation of the clause to the contract as a whole; and
    • General considerations of law.
  4. As with the majority of issues concerning such clauses, the issue is one of construction so that focus must be on the specific wording used[12].
  5. In Scottish Power UK Plc v BP Exploration Operating Company Limited[13] Leggatt J relied upon the following matters in determining that the clause in that case did not make the provision of a detailed report, by way of amplification of the initial report required, a condition precedent:
    • First, the contract did not expressly provide that compliance was a condition precedent. This factor was of particular importance given the detailed provisions as to notice and information contained within the clause[14]. The use of the imperative “shall” was merely intended to denote that compliance was a contractual obligation and not to provide for the consequences of non-compliance. 
    • Second, the obligation to provide the further, detailed report, only arose after the other party had already been notified of a force majeure event (and provided with an interim report) and then only if such a report was requested. In the absence of express words, it could not be said that a reasonable person in the position of the parties would have thought it appropriate to make compliance a condition of the right to claim relief.
    • Third, there was no express time limit by which a request for the detailed report was to be made. However, there was an express time limit for provision of the further detailed report (calculated by reference to the original notification). The effect of that was that the time for provision of the detailed report might be very short. Further, the clause stipulated that the detailed report should contain “such further explanation and information relevant to the event causing the failure as may be reasonable [sic] required”. That introduced an element of uncertainty[15].
    • Fourth, other provisions within the force majeure clause were inherently uncertain (e.g. the obligation to “take as soon as reasonably practicable all reasonable steps to rectify the cause of the failure”) and there was no basis within the clause for distinguishing between the various individual obligations.
    • Fifth, it could not be said that the damages would provide no worthwhile protection since there were situations of breach of the obligation to provide the detailed report where substantial damages would be awarded.
    • Overall, parties deciding whether to make compliance a condition precedent would see merits and drawbacks in either choice and accordingly it could not be said that making compliance a condition precedent was inherently more sensible or commercially reasonable than not so doing.

Reasonable Control

  1. Many force majeure clauses expressly provide that the event in question must be beyond the reasonable control of the parties. In analysing whether that is the case the Court must not focus on the particular servant or agent dealing with the issue on the ground but rather the party as a whole. 
  2. Moreover, it should be noted that the requirement “sets a comparatively high hurdle since corporations usually do have a significant measure of control over their own business”[16].

Conclusion

  1. Force majeure clauses are effectively a species of exemption clause. Their application will always turn upon the construction of the particular clause.
  2. While, the Courts will be astute not to permit reliance upon such clauses save in truly meritorious cases, there may well be scope for such reliance by reason of the present pandemic.
  3. Certainly, subject to the wording of the clause in question, there may well be scope for argument.

 

[1] A force majeure clause is one in which the parties are excused performance by 1 of a number of ‘supervening events which arise without the fault of either party and for which neither of them has undertaken responsibility’: see The Kriti Rex [1996] 2 Ll Rep 171, 196

[2] As was the case in Entertain Video Limited, BBC Studios Distribution Limited (formerly known as BBC Worldwide Limited), Demon Music Group Limited v Sony DADC Europe Limited [2020] EWHC 972 (TCC)

[3] In Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102, [2019] 4 All E.R. 1145, [2019] 2 All E.R. (Comm) 592, [2019] Bus. L.R. 2854 [37]

[4] Supra

[5] [2018] EWHC 1640 (Comm), [2019] 1 All E.R. (Comm) 34, [2018] 2 Lloyd's Rep. 628, [2018] 2 C.L.C. 191

[6] [1978] Lloyd’s LR 509: the case has been regarded as authority for the proposition that a force majeure event must generally be the sole cause of the inability to perform, subject to the express wording of the clause

[7] In order to rely upon a force majeure clause, a party must show that the situation and consequences are beyond his reasonable control – B & S Contracts v VG Publications [1984] ICR 419

[8] [2020] EWHC 1030 (Comm) although see Zhoushan Jinhaiwan Shipyard Co Ltd v Golden Exquisite Inc & Ors [2014] EWHC 4050 (Comm), [2014] 2 C.L.C. 922 where Legatt J relied on the principle of ejusdem generis to restrict the apparently unlimited application of general words at the end of the clause to force majeure events where the events were beyond the control of both parties

[9] [2020] 3 WLUK 387

[10] Seadrill Ghana Operations Ltd v Tullow Ghana Ltd (surpa)

[11] Per Lord Wilberforce in Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd's Rep 109, 113

[12] For different conclusions on different wording see the obiter observations of Aikens J in Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD [2002] EWHC 2210 (Comm) [2003] 1 Lloyd's Rep 1, Christopher Clarke J in SHV Gas Supply & Trading SAS v Naftomar Shipping & Trading Co Ltd Inc (the “Azur Gaz”) [2005] EWHC 2528 (Comm); [2006] 1 Lloyd's Rep 163 and of Teare J in Great Elephant Corporation v Trafigura Beheer BV [2012] EWHC 1745 (Comm); [2012] 2 Lloyd's Rep 503

[13] [2015] EWHC 2658 (Comm), [2016] 1 All E.R. (Comm) 536 |

[14] For a case in which the consequences were set out see Zhoushan Jinhaiwan Shipyard Co Ltd v Golden Exquisite Inc & Ors [2014] EWHC 4050 (Comm), [2014] 2 C.L.C. 922

[15] Uncertainty as to information required and the time by which notice/information was to be provided has been held on numerous occasions to be a factor against construing notice requirements as conditions precedent – see, for example, Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd's Rep 109, 113 & 128 and Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD (No.3) [2003] EWCA Civ 1031, [2003] 2 All E.R. (Comm) 640, [2003] 2 Lloyd's Rep. 635

[16] Great Elephant Corp v Trafigura Beheer BV & Ors. [2013] EWCA Civ 905, [2013] 2 C.L.C. 185

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