Force majeure and Covid-19: High Court decision turns on specific wording of FM clause

The High Court has held that a notice of termination served in April 2020, following the outset of the Covid-19 pandemic, under a force majeure ("FM") clause in a contract for sale of a vessel was not valid: NKD Maritime Ltd v Bart Maritime (No. 2) Inc [2022] EWHC 1615 (Comm).

This decision turned on the specific construction of the FM clause, which applied if the seller was unable to "transfer title" in the vessel due to (among other things) "restraint of governments". The court held that the clause could not be relied on as delivery of the vessel was not a condition precedent to transfer of title and, in any case, the vessel had been properly delivered in accordance with the contract.

Even if that was wrong, the Covid-19 restrictions imposed by the Indian government did not render the relevant party "unable" to transfer title in the vessel. The criterion was not hindrance or delay. While "inability" could have a temporal element, it was not enough that a party was unable to perform by the contractual deadline. It would require that the actual and anticipated delays were such as to materially undermine the commercial adventure (which would depend on similar considerations to those relevant in assessing frustration).

This decision illustrates that the ability of a party to rely on a FM clause boils down to the specific wording of the clause. Construction of the FM clause should therefore be carefully considered by a party before it is invoked as a basis for terminating a contract. Here, by wrongly relying on the FM clause, the buyer was found to have repudiated the contract and the seller was entitled to retain a substantial initial payment. The decision also highlights that the impact of Covid-19 restrictions on a commercial arrangement will not necessarily be found to prevent performance of relevant obligations, particularly where the Covid-19 induced delay is only temporary.

Background

In early March 2020 the owners of a large commercial ship built in 1993 (the "Seller") entered into a contract to sell the vessel to a company specialised in acquiring ships for scrapping/recycling (the "Buyer"). The Buyer would then sell directly to a recycling yard in Alang, India. In accordance with the contract, the Buyer provided an initial payment of $4,264,723.13 prior to delivery of the vessel. The contract contained a FM clause that provided:

"Should the Seller be unable to transfer title of the Vessel… in accordance with this contract… due to… restraint of governments… then either the Buyer or the Seller may terminate this Agreement…."

Covid-19 restrictions prevented the vessel from reaching the delivery location stipulated in the contract.  The Seller asked the Buyer to nominate an alternate location for delivery, and said that if it failed to do so within 24 hours the Seller would be deemed to have performed its obligations, having delivered the vessel to "the place at which it is customary for vessels to wait".

The Buyer declined to nominate an alternative location and contended that delivery had not taken place in accordance with the provisions of the contract. It sent a notice of termination pursuant to the FM clause, claiming that Covid-19 restrictions constituted "restraint of government" which had precluded the Seller from transferring title.

At trial, the Buyer submitted that, for the purposes of the FM clause, a transfer of title required delivery, which included the vessel reaching the stipulated contractual delivery location (or agreed substitute). The Seller contended that "transfer of title" did not require "delivery" and, in any event, it had not been unable to deliver the vessel by reason of the FM event relied upon by the Buyer, namely "restraint of governments". The Seller argued that the Buyer's notice of termination was a repudiation of the contract which the Seller had accepted and it was therefore entitled to retain the initial payment and recover damages.

Decision

The High Court (Butcher J) found that the Buyer had not been entitled to terminate and that the notice of termination under the FM clause constituted a repudiation of the contract. The Seller was entitled to retain the initial payment (pursuant to the terms of the contract) but was not entitled to further damages as the losses suffered were more than covered by the initial payment.

Construction of the FM clause

Butcher J found that, on the wording of the contract, a FM event had to prevent performance of the obligation to transfer title to the vessel, and that delivery was not a condition precedent to transfer of title (which only required payment of price, delivery of the Bill of Sale and deletion from the relevant ships' register). In particular, Butcher J considered the fact that the terms "transfer of title" and "delivery" were both used in the contract but were not used interchangeably or synonymously meant that the use of the term "transfer of title" and not "delivery" in the FM clause must be regarded as deliberate. Butcher J therefore held that the FM clause could not be invoked by showing an inability to deliver the vessel if there was no relevant inability to transfer title (which he found there was not).

Butcher J held that, even if he was wrong on the construction of the FM clause, the Seller had in any event fulfilled its obligations to deliver the vessel in accordance with the contract. The Buyer therefore still would not have been entitled to rely on the FM clause.

FM event due to restraint of government

Butcher J went on to consider whether, if he was also wrong on the question of delivery, there was an "inability" to perform by reason of "restraint of governments". Butcher J accepted that the relevant Covid-19 restrictions imposed by the Indian government could be described as "restraint of governments". However, the key question was whether those restraints rendered the Seller "unable" to transfer title.

Butcher J accepted that the requirement in the FM clause of an "inability" to transfer title was significantly different from a provision that refers to hindrance or delay. He also accepted that "inability" should not be judged by reference to whether a party could perform its obligations by the contract's delivery deadline, as this would mean that even short-lived delays could trigger the FM clause.

Butcher J considered that an "inability" to perform for the purposes of the FM clause depended on whether the probable period of restraint materially undermined the commercial adventure, and this required similar considerations as to the question of whether a contract is frustrated (as discussed in Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage and Towage) Ltd (The Sea Angel) [2007] EWCA Civ 547.

On the facts of this case, Butcher J concluded that the probable period of restraint that could be anticipated as a result of the Covid-19 restrictions did not materially undermine the commercial adventure, taking into account that: (i) the contract was aimed at scrapping rather than trading the vessel; (ii) the recycling process would take around a year; (iii) delays were anticipated as the vessel's size meant it could only be beached on tides occurring twice a month; and (iv) it was not reasonably probable at the time that Covid-19 restrictions would extend by more than three weeks.