Terminating contracts by force majeure: High Court clarifies correct approach

In our earlier article, we set out detailed legal and practical advice in relation to the termination of commercial contracts by frustration, and pursuant to force majeure provisions or material adverse change clauses.

In this article, we highlight a recent case which has clarified the courts’ approach to the construction and operation of force majeure provisions.

Why is NKD Maritime v Bart Maritime of interest?

This case [1] is of interest because, as so often happens, the particular contractual provisions did not unequivocally cater for the exact circumstances which actually arose on the ground (or, as this was a shipping case, on the sea!).  The court therefore had to interpret the force majeure clause, and determine its applicability to the facts.  The court’s approach should be instructive for both contract drafters and for businesses contemplating termination of contractual arrangements for force majeure.

The case is also a cautionary tale.  Incorrectly purporting to terminate for force majeure cost that party over $4 million.

What practical advice arises?

Full legal and practical advice in relation to force majeure and frustration is set out in our earlier article.  In terms of practical advice arising specifically from this case:

• Businesses concerned about the effects of Covid or the war in Ukraine should undertake a full contract review. As well as checking for the existence and terms of any force majeure provisions, other contractual provisions may be relevant, such as break clauses, price adjustment clauses, variation/no-oral modification clauses, limitations/exclusions of liability, dispute resolution mechanisms, and material adverse change clauses.
• Any business wishing to invoke force majeure (or to ascertain the validity of any force majeure claim made against it) should take specialist legal advice. NKD Maritime demonstrates just how costly a force majeure mistake can be.
• The courts will not lightly reach a finding of force majeure. If a contract does not cater exactly for the factual circumstances, the courts will construe the clause, taking into account whether the alleged force majeure event ‘materially’ undermines the commercial venture.  That is a high bar and will not easily be met.  In particular, minor performance infractions, such as short delays, will not suffice to invoke force majeure.
• The NKD Maritime case highlights just how important it is to get the force majeure provisions in your commercial contract right from the start. Precisely defining the events which trigger termination by force majeure can remove the uncertainty and litigation risk which accompany any contractual construction exercise.

What happened in the case?

The parties had contracted for the sale of a ship.  The contract specified a delivery location in India.  It also provided that if the delivery location was inaccessible, delivery could occur 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 necessary clearances could not be obtained.  The vessel therefore anchored where it safely could.  At that time, it was reasonably probable that Covid restrictions would delay matters for some 2 – 3 weeks.

The buyer purported to terminate the contract in reliance on the force majeure clause.  The clause read:

“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…“.

The buyer also claimed return of the approx. $4 million deposit it had paid for the ship.

The seller argued that there was no force majeure, that the termination was a repudiatory breach, and that it was therefore 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, as was required by the force majeure clause.  In any event, 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.  As such, strictly speaking, it was not necessary for the court to consider the meaning and operation of the force majeure clause.  The court did so, however, in case its initial conclusions were wrong.  The court held:

• Inability to perform a contractual obligation is a much higher bar than performing on time/without delay.
• When it comes to considering force majeure, inability to perform an obligation should not be judged solely in relation to performance by a deadline. If that were the case, even very minor or short delays could trigger termination.
• Instead, for force majeure purposes, inability to perform should be assessed 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 was likely to entail a lengthy process, regardless of Covid delays.  Delays of around 2 – 3 weeks would not undermine the whole commercial venture, and so the ‘inability test’ was not met.  There was, therefore, no force majeure.

How we can help

Relying on force majeure is not an easy, nor by any means a guaranteed, ‘get out’ for contracting parties.  A better option is to cater, at the point of drafting, for the specific circumstances in which the parties may wish to renegotiate key terms, to extricate themselves entirely via an express termination provision or due to defined force majeure events, and/or to avoid or limit liability for any particular breach or non-performance.

Walker Morris’ Commercial Dispute Resolution experts work seamlessly with our specialist transactional Commercial Group to make sure that clients’ contracts contain the most appropriate and effective provisions to govern their commercial ventures from the outset.  Our Commercial Dispute Resolution team also has a wealth of experience advising clients on complex issues of contractual interpretation, including on the operation of force majeure and other provisions.  The team is therefore able to support businesses with negotiations for new commercial/supply chain arrangements, and to provide strategic risk management and/or dispute resolution advice if and when any party is seeking to minimise or avoid contractual liabilities.

For further information or advice, please contact Gwendoline, Nick or Nick.

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[1] [2022] EWHC 1615 (Comm)