Mishcon de Reya page structure
Site header
Main content section

An inability to perform? Termination of contracts by force majeure in the context of COVID-19

Posted on 11 July 2022

Contract Signing

The outbreak of the COVID-19 pandemic and resulting government restrictions caused many contracting parties to consider the possibility of termination on the basis of force majeure. However, as the recent judgment of Butcher J in NKD Maritime Limited V Bart Maritime (No. 2) Inc indicates, successfully demonstrating that a force majeure event has occurred will always require careful consideration of the relevant clause in the context of the factual matrix.

In this article, we consider the decision, which arose in the context of a ship sale. We also examine the dangers of wrongful termination and implications on best practice for drafting force majeure provisions going forward.

The Facts  

In March 2020, Bart Maritime and NKD entered into a Memorandum of Agreement (the "MOA") pursuant to which NKD agreed to purchase from Bart Maritime a converted Very Large Ore Carrier, the "Shagang Giant", for scrapping and/or recycling. The MOA provided for the vessel to be delivered at outer anchorage Alang, in Gujarat state, India. If on arrival the delivery location was inaccessible for any reason, the buyer could nominate an alternative safe and accessible berth or anchorage that was as near as possible to the delivery location. If the buyer failed to nominate such a place, the delivery location would be the place at which it was customary for vessels to wait. The purchase price was US$14.2 million, and an initial payment of US$4.2 million was made two days after the MOA was signed.

The vessel was due to arrive on around 21 March 2020, at a time when COVID-19 restrictions were being introduced across the world. However, although Port Health Organisation clearance had been obtained, on arrival the vessel was not permitted to enter the anchorage at Alang and was instead forced to anchor further afield. On 24 March 2020, the Indian Government issued a lockdown order providing for offices of central and local government to be closed, and while the vessel was able to obtain immigration clearance, the necessary shipbreaking clearances could not be obtained from the Gujarat Pollution Control Board (GPCB).

The Indian lockdown measures were extended on 14 April 2020 and the next day NKD purported to terminate the MOA, relying on the force majeure provisions of clause 10, which provided that:  

"Should the Seller be unable to transfer title of the Vessel or should the Buyer be unable to accept transfer of the Vessel both in accordance with this contract due to … restraint of governments, princes, rulers or people of any nation or the United Nations, act of God, then either the Buyer or the Seller may terminate this Agreement upon written or telegraphic notice from one party to the other without any liability upon either party and the Initial Payment … shall be released to the Buyer.

The suspension or termination of the activities of the Ship Recycling Facility shall not constitute a force majeure event under this Agreement and the Buyer agrees to pay for and take delivery of the Vessel in accordance with the terms and conditions of this Agreement and after delivery, the Buyer shall be at liberty to ballast the Vessel to another Ship Recycling Facility … for Recycling."

Bart denied there had been a force majeure event and alleged that NKD's purported termination was itself a repudiation which Bart accepted. Less than a month later it sold the vessel to another party.  In due course NKD brought proceedings before the English court to recover its initial payment of US$4.2 million. However, Bart contended that under the terms of the MOA it was entitled to keep the initial payment and was also entitled to loss and expenses occasioned by NKD's default which, together with interest, exceeded the initial payment.

The Commercial Court Decision

There were three key issues before the Court:

Was 'delivery' of the Vessel a requirement to give effect to the transfer of title?

Butcher J considered that it was clear that delivery and transfer of title were to be treated separately under the force majeure clause. The terms delivery and transfer were both used in the MOA, but were not interchangeable or synonymous, and it was entirely unsurprising that the parties had agreed that only inability to perform certain key obligations under the contract would lead to termination. Accordingly clause 10 could not be invoked by showing an inability to deliver the vessel in accordance with the delivery provisions of the MOA if there was no relevant inability to transfer title.

If so, did 'delivery' within the meaning of the MoA necessitate the delivery at a particular pre-agreed location?

In any event, Butcher J went on to conclude that while the area where the vessel actually anchored was not the "outer anchorage Alang" and thus was not the agreed delivery location, it was a place "at which it was customary for vessels to wait" and could therefore constitute a substituted delivery location. The vessel's arrival at that point therefore constituted full performance of Bart's obligations in terms of delivery of the vessel. 

Did government restraints result in Bart's 'inability' to perform its contractual obligations, constituting a force majeure event?

It was therefore not strictly necessary for the judge to consider whether there had been a force majeure event pursuant to clause 10. He nevertheless considered the implications of the Indian lockdown measures, noting that the reason why the vessel had not obtained clearance to proceed to the outer Alang anchorage by 14 April 2020 was due to directions given to GPCB officials to work full time on the collection and disposal of biomedical waste, rather than on shipbreaking. As of 14 April 2020, it was not clear how long that would be the position, although in fact shipbreaking activities resumed shortly thereafter and it was likely that the vessel would have been permitted to proceed to Alang outer anchorage and been inspected by the GPCB in early May 2020. 

Butcher J noted that an "inability" to perform contractual obligations was significantly different from a provision referring to hindrance or delay. In his view, "inability" is not to be judged simply by reference to whether there was an inability to perform by the contractual cancellation date (which could mean potentially very transient hindrances to performance might trigger the operation of the clause), but it depends on whether the probable period of any temporary restraint of governments is such that it would materially to undermine the commercial adventure.  In this case, the contract was aimed at demolition of the Vessel (which would inevitably be a lengthy process), delays to commencement of the recycling were to be anticipated, and it would not have been seen as probable as at 14 April 2020 that the lockdown measures would be extended beyond the start of May 2020. On that basis Butcher J concluded that the delay that there had been at 14 April 2020, together with that which could reasonably be anticipated, did not constitute an "inability" on the part of Bart to perform the MOA.

He therefore held that NKD had not been entitled to terminate, and had therefore repudiated the contract.  Pursuant to the terms of the MOA, Bart was entitled to retain NKD's initial payment, although Butcher J held that its claimable loss did not exceed that amount.


Comment

Notwithstanding the significant challenges faced by many businesses during and following the COVID-19 pandemic, the approach of the Commercial Court in NKD Maritime, which follows similar decisions in sectors as diverse as the real estate market and the aviation industry, indicates that successfully terminating a contract on the basis of force majeure provisions is far from straightforward.  In particular, the Court's comment that an "inability" to perform must be considered in the context of the relevant commercial adventure is a valuable reminder that identifying when a force majeure clause can be triggered will depend on all the surrounding circumstances.

Where a party does seek to terminate on the basis of a force majeure clause, it is vital to ensure that careful thought is given to the precise requirements of the contract, and that evidence supporting the alleged force majeure event and its impact, is gathered and carefully considered.  Parties should also be aware of the risk that a wrongful termination under a force majeure clause will expose the party giving notice to the risk that a wrongful notice of termination will itself amount to a repudiation of the contract s.

When drafting force majeure clauses, it is important to consider whether it is appropriate to include provisions that:

  • force majeure events are defined to include pandemics and epidemics, as well as any resulting government restrictions;
  • the provision can be triggered by delay or hindrance (if such subsists for a set period) as opposed to complete prevention of performance of the contract; and
  • the length of the period of delay which would constitute "force majeure" is sufficient to recognise the occurrence and impact of such an event.
How can we help you?
Help

How can we help you?

Subscribe: I'd like to keep in touch

If your enquiry is urgent please call +44 20 3321 7000

I'm a client

I'm looking for advice

Something else