Can you take advantage of the force majeure clause in your contract?
The coronavirus pandemic and the war in Ukraine are events that could fall within the scope of a Force Majeure (FM) clause in a commercial contract. However, as a recent case shows, FM clauses can be difficult to rely on in practice. This is because often the breach of a contractual obligation is actually due to a business decision rather than events beyond the control of the party (as generally required by FM clauses).
In NKD Maritime Ltd v Bart Maritime (#2), plaintiff buyer sought to invoke an FM clause in its contract with defendant seller to terminate the contract. The defendant denied that the clause applied.
The clause in question provided that if the seller was “unable” to transfer the title (where the buyer was “unable“to accept the transfer of the vessel)”due to…governments restriction…then either buyer or seller may terminate this agreement…without any liability to either party“.
Butcher J found that a lockdown imposed by the Indian authorities (which lasted three weeks from March 25, 2020) due to Covid-19 did not (in fact) result in an inability to perform the parties’ obligations .
If he had been wrong on this point, however, he admitted that the effect of the foreclosure would have been to prevent the transfer of ownership on the date on which either party had the opportunity to cancel the contract (April 14, 2020). However, the judge considered that the transfer could have taken place a few weeks later.
The judge accepted that an FM clause referring to “inability” is significantly different from one that only refers to an obstacle: “I also agree that inability shall not be judged simply on whether or not an inability to perform exists on the contractual termination date.“, otherwise very short-term and transitory impediments to performance could satisfy the clause.
Instead, the test was “if the probable duration of this restriction is likely to materially compromise the commercial adventure“.
Here it was clear to the parties that there could be delays in the performance of the contract and it was also clear that the lockdown measures would be relaxed fairly quickly. Therefore, there had been no “incapacity” within the meaning of the clause.