No quick way out: High Court rules against force majeure justification to terminate commercial contract
The Covid pandemic and its associated government restrictions have widely been described as unprecedented, and many businesses will have considered the mechanisms available to them to address the strain that the resultant uncertainty placed on their commercial relationships. In this latest case, KD Maritime Limited v Bart Maritime (No. 2) Inc, the English High Court held that the force majeure clause was not triggered when the arrival of a vessel was delayed by government restrictions in India.
The case confirms that the courts will generally be reluctant to find that a contract can be terminated on force majeure grounds, even in the exceptional circumstances existing at the early stages of the Covid pandemic.
The defendant company (the Seller) owned a vessel that it wanted to scrap, so it entered into a sale contract with the claimant company (the Buyer), a company which specialized in acquiring ships for scrapping and recycling. The contract required the vessel to be delivered at Alang, on the West Coast of India, with delivery expected between 1 March and 15 April 2020. The Buyer had the option to cancel the contract up to 15 April 2020.
Regulations in India required that certain notices and documentation be provided and processed prior to arrival. The vessel then needed to receive immigration clearance and be boarded by local authorities, following which anchorage instructions would be issued by the State Maritime Board or Port Authority. On 16 March 2020, the Seller gave notice of its intention to anchor on or about 21 March 2020. However, on 21 March, the vessel was told not to enter the vessel traffic service area. No reason for this was given. The vessel was instead anchored outside the vehicle traffic service limits, and the Buyer was informed that the vessel had arrived at Alang. The Buyer disputed that this was effective delivery under the contract.
On 25 March 2020, the government of India issued a lockdown order in response to Covid, effective for three weeks. Ship recycling activities were suspended. Local port authority employees were unable to board the vessel because they had been directed to assist with medical waste management and supervision. The Seller asked the Buyer to nominate an alternative delivery location, but the Buyer did not do so.
On 14 April 2020, the Prime Minister of India announced that the lockdown was being extended to 3 May 2020. The Buyer wrote to the Seller later the same day asserting that, due to the Covid restrictions, delivery of the vessel was not possible, an event of force majeure had occurred, and the contract was accordingly terminated. The Seller argued that such an event had not occurred, and that the Buyer had wrongfully repudiated the contract.
One of the key issues for the Court to decide was whether the force majeure clause applied. The clause 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 … then either the Buyer or the Seller may terminate this Agreement upon written or telegraphic notice from one party to the other …”.
The parties submitted expert evidence about the meaning and effect of the relevant lockdown orders, but the Court found that this added little to the terms of the orders. The Court was satisfied that the lockdown did not prevent the Seller’s paperwork from being processed and permissions granted, as government officials were able to work from home, and this process was in fact completed by the end of March 2020. However, the unavailability of officials who would normally board the vessel meant that a ‘restraint of government’ had prevented the vessel from arriving at outer Alang anchorage by 14 April 2020.
The Court also considered evidence which demonstrated that, when lockdown restrictions were extended, they were also somewhat eased. From that date, other vessels were being allowed to proceed to Alang outer anchorage and be boarded with the knowledge of the authorities. There was also evidence that shipbreaking had resumed. The Court considered it was likely that the vessel would have been boarded in the first few days of May (had the contract not been terminated).
The Court held that whether there was an ‘inability’ to perform the contract was significantly different from a hindrance or delay. Additionally, the Buyer’s option to cancel the contract by 15 April 2020 did not mean that any delay beyond that date triggered the force majeure clause. The question was whether the delay was such as to “materially to undermine the commercial adventure”.
In this case, the contract was for demolition of the vessel, not trading, and recycling could take around a year, with the exact period of time fluctuating. Given the size of the vessel, beaching it could also be delayed, as this could only be done for larger vessels with the right tide. The evidence also showed that there was pressure on the government to ease the lockdown, such that it was not probable that the lockdown would be extended further. Further, from mid-April, other vessels had been processed by the local authorities. In such circumstances, the force majeure clause could not apply.
The Court ultimately determined that delivery of the vessel was not required in order to transfer title to the vessel. In any event, where the vessel had been anchored could in fact be deemed the contractual delivery location. Therefore, the Seller had not been “unable to transfer title” to the vessel and there could be no argument that the Seller had failed to cooperate with the Buyer. The Buyer had therefore wrongfully terminated the sale contract.
Whether parties will be able to rely on force majeure clauses will depend entirely on the wording of the relevant clause and the factual matrix in question. The English courts take a strict approach to interpretation of similar clauses, as the courts are generally reluctant to bring contracts to an end on force majeure grounds. In this case temporary obstacles to performance were not found to amount to an inability to perform under the clause and did not provide an excuse for the Buyer to exit the deal.
The case also shows that, where Covid restrictions have caused delay and this is said to amount to a force majeure event, the courts will carefully scrutinise both the importance of timing in the contract and the impact that the restrictions had on comparable businesses and activities.