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Trading and force majeure in a time of COVID-19

Posted on: 12 May 2020

Whilst the coronavirus pandemic has ravaged normal life and left large sections of the world’s population cowering in lockdown, international trade has continued, albeit under difficult circumstances, says Chirag Karia QC of Quadrant Chambers in a recently pubished article discussing force majeure clauses. Countries have adopted various precautions to protect their populations, including port workers, while still allowing vital commodities to be imported and exported. For example, South Africa imposed a partial lockdown of its ports as part of its national lockdown in late March 2020, and certain Bangladeshi ports imposed a 16-day quarantine on vessels arriving from China.

It is primarily such governmental actions – rather than the COVID-19 disease itself – that have severely disrupted the performance of commodity trading contracts, leading to large potential losses. The question is – as it always is when contracts don’t go to plan – which of the parties bears the loss?

Force Majeure Clauses Generally
This is where force majeure clauses come into play. Though such clauses are ubiquitous in trading contracts, their terms vary greatly. Being products of the parties’ agreement – and not imposed on the parties by rules of law, like the common law doctrine of frustration – their effect is governed by the words actually chosen by the parties. The exercise in all cases is to determine the proper construction of the force majeure clause in question and then apply it to the facts of the case (Tennants (Lancashire) Ltd v CS Wilson & Co Ltd [1917] A.C. 495 (HL); Tandrin Aviation Holdings Ltd v Aero Toy Store [2010] 2 Lloyd’s Rep. 668 (Hamblen J)).

However, the courts have developed the following general principles of construction applicable to all force majeure clauses absent contrary wording (The Crudesky [2014] 1 Lloyd’s Rep. 1 (CA); Channel Island Ferries Ltd. v. Sealink UK Ltd [1988] 1 Lloyd’s Rep. 323 (CA)):

  • The burden is on the party relying on the force majeure clause to bring itself squarely within terms of that clause, with any ambiguity being resolved against that party;
  • That party must show that the force majeure event was beyond its reasonable control; and
  • It must show that it took all reasonable steps to avoid the force majeure event and mitigate its effects.

Consequently, in every case, the following questions must be answered to determine whether a party has a force majeure defence or not:

  • Has there been a force majeure event?
  • Has that event interfered with performance in the required way?
  • Was the event beyond the party’s reasonable control?
  • Did that party take all reasonable steps to avoid the event and mitigate its effects?

Has there been a force majeure event?
As explained above, whether a particular occurrence amounts to a force majeure event depends on the proper construction of the words of the applicable clause. Such clauses vary greatly as to their structure, formulation and breadth.

Some of the broadest clauses are to be found in standard terms for the sale of oil and oil products. For example, the force majeure clauses in the BP 2015 Terms and the Shell 2010 Terms, which are substantially identical, lay down a broad overarching test requiring the party’s failure to perform to be due to “an impediment beyond its control”. They then set out a non-exhaustive list of events likely to fall within that definition (e.g. war, natural disasters, fire, strikes, etc.). Although disease, epidemics and pandemics are not listed, they would clearly amount to impediments beyond the parties’ control satisfying the overarching test.

The ICC Force Majeure Clause 2003 adopts the same “impediment beyond its control” test and then lists events which are rebuttably presumed to satisfy that requirement, including war, terrorism, act of God, plague and epidemic.

Governmental actions such as lockdowns and discharge port quarantines based on a vessel’s recent ports of call will generally satisfy the “impediment beyond its control” test. But that might not always be the case. Consider, for example, a CIF seller who appropriates to its sale contract a cargo shipped from a country that is already listed in the quarantine operated at the discharge port. Would that seller be able rely on this provision if cargoes shipped from non-quarantined countries were available to be appropriated to the contract at the time?

The force majeure clause in the Repsol 2017 Terms is slightly narrower in scope, applying to failures by a party to perform arising out of “any occurrence or circumstance reasonably beyond the control of that Party which could not be foreseen the moment of the contract formation.”  As can be seen, this clause requires the party claiming force majeure to establish the additional requirement that the alleged force majeure event was unforeseeable. Whilst that may be easily established in relation to contracts concluded before coronavirus-related governmental actions started to be taken in March 2020, it must be questionable whether it can be said that such actions “could not be foreseen” from late March onwards. That means that parties seeking to rely on this clause in contracts concluded after late March may experience difficulty.

Follow this link to read the article in full.

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