Terminating contracts for events outside of your reasonable control
Often contracts contain provisions that allow a party to terminate the relationship, due to an event of force majeure (otherwise known as events outside of ‘your reasonable control’).
During the Covid-19 pandemic, some of our clients tried to invoke this provision to terminate their supply contracts, as the various lockdowns across the world affected their ability to conduct business in accordance with the agreement terms. Others, got in touch with us to tighten the wording of their force majeure clauses, to ensure it covered all possible eventualities.
We are now seeing a flux of clients wanting to review force majeure provisions in their contracts and understand what rights they have if their business is affected due to the ongoing situation in Ukraine. One thing is for sure, whether it’s Covid or conflict-related, a good (and properly drafted) force majeure clause may enable parties to minimise or avoid contractual liability.
NKD Maritime v Bart Maritime
In the recent case of NKD Maritime v Bart Maritime, the courts’ clarified their approach to the construction and operation of force majeure provisions.
The contract relates to the sale and purchase of a ship. Delivery of the ship was meant to be made to a location in India and, if the delivery location was inaccessible, the contract stipulated that delivery could be made at a nominated alternative accessible location or at a location at which it was customary for vessels to wait.
The ship was due to arrive at the delivery location just as Covid restrictions were being introduced. Lockdown measures meant that the ship couldn’t be anchored at the preferred delivery location and so, the vessel anchored at another safe destination. At that time, it was expected that Covid restrictions would delay matters for a matter of weeks (rather than months).
The buyer sought to terminate the contract, relying on the following force majeure clause:
“Should the Seller be unable to transfer title of the Vessel or should the Buyer be unable to accept transfer of the Vessel…due to…restraint of governments… then either the Buyer or the Seller may terminate…“.
In addition, the buyer claimed a refund of the deposit it had paid for the ship. This was approximately $4 million.
The seller argued that there was no force majeure and the termination in fact, was a repudiatory breach. On this basis, the seller was of the view, that it was entitled to retain the deposit.
The High Court agreed with the seller. It decided that an inability to deliver the ship was not the same as an inability to transfer title to the ship (which was required by the force majeure clause).
The ship was delivered to a place at which it was customary for vessels to wait and that constituted performance of the seller’s obligations.
When it comes to considering force majeure, inability to perform an obligation should not be judged solely in relation to performance by a deadline. As if that were the case, minor, short delays could trigger termination.
Instead, when looking at force majeure, you should assess the inability to perform by reference to whether the likely duration of the force majeure event would materially undermine the commercial venture overall.
Applying those principles to the facts, the court noted that the buyer intended to demolish and recycle the ship. That process in itself would be lengthy, regardless of Covid delays. Accordingly, a delay of approximately 2 – 3 weeks would not undermine the whole commercial venture, and so the ‘inability test’ was not met.
What can we do?
If you are concerned about the effects of Covid or the war in Ukraine on your business activities, you should undertake a full review of your contracts and check the adequacy of the force majeure provisions contained within them. If the contracts don’t include any force majeure provisions or, the existing provisions are inadequate, you should look to have the contracts revised and updated.
As well as checking the force majeure provisions, you should also consider other contractual provisions, such as break clauses, price adjustment clauses, variation clauses and dispute processes. It may be the case that these too need updating to include additional trigger events for when they can be invoked and, relied on.
Should you require any assistance in invoking a force majeure clause or, would like to update your existing contracts, please get in touch with the Commercial Team who would be happy to assist.