Force Majeure - far from plain sailing
Issue 8 of the Energy and Natural Resources Case Law Update
In NKD Maritime Limited v Bart Maritime (No 2) In1 the terminating party was found to have been wrong to terminate under the force majeure clause of the contract for sale of a vessel despite the impact of COVID-19 restrictions in India on delivery.
Key takeaways
This judgment confirms the difficulty in seeking to rely on a force majeure clause. Contracting parties must carefully consider the precise terms of their agreement, the practical implications on performance and whether force majeure, as contractually agreed, can be validly invoked in a given circumstance. It is therefore a reminder to parties to carefully consider:
- the particular terms of any force majeure clause in their contract;
- the practical obligations of their contract and how they are to be discharged; and
- whether government restrictions (such as those imposed in relation to the COVID-19 pandemic) do indeed create the requisite impossibility or inability to act sufficient to satisfy any force majeure provisions.
Facts
Bart Maritime (No 2) inc (Bart) was the owner of the vessel Shagang Giant (the Vessel), which it intended to scrap. On 5 March 2020, Bart entered into a memorandum of agreement (MOA) to sell the Vessel to NKD Maritime Limited (NKD), a company specialising in acquiring ships for scrapping and/or recycling. The intention was that the Vessel would be scrapped at the recycling yards at Alang, India. Pursuant to the MOA, NKD made an initial payment of USD4,264,723.13 to Bart before the Vessel was delivered. Delivery of the Vessel was required at a specific location (Alang) but should that location be inaccessible, the MOA permitted NKD to designate another berth or anchorage.
The Vessel was unable to arrive at Alang due to COVID-19 restrictions imposed by the Indian government which required vessels to wait outside the anchorage area. NKD argued that because the Vessel could not and did not arrive at the designated delivery location, neither Bart’s obligation to transfer title nor NKD’s obligation to make payment of the further consideration could be triggered.
On 14 April 2020, NKD issued a notice of termination to Bart stipulating that the government restrictions constituted a force majeure event which prevented and continued to prevent Bart from transferring title of the Vessel to NKD in accordance with the contract, and NKD sought to terminate the contract as a result.
Both NKD and Bart initiated proceedings against the other party. NKD sought the return of a deposit paid and the initial payment following its notice of termination. Bart made a claim against NKD for repudiatory breach by way of wrongful termination.
The relevant part of the force majeure clause in the MOA provided that “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 […]”
The court’s decision
The court considered the force majeure clause and, in particular:
- the proper construction of the phrase “transfer of title […] in accordance with this contract” and whether force majeure was properly invoked;
- whether there was a requirement that delivery should be at a particular place, and if so, whether Bart was unable to effect such delivery;
- whether Bart was unable to transfer title due to government restrictions; and
- whether Bart was unable to act due to lack of cooperation from NKD.
The judge found as follows:
- the obligation to transfer title was not synonymous with delivery, as defined in the MOA. On that basis, force majeure could not be invoked where transfer of title was possible;
- the Vessel “had got as close to Alang outer anchorage as she could,” despite the actual delivery location being inaccessible, and as such the delivery obligations as set out in the MOA were satisfied;
- the government restrictions caused a delay in delivery to the delivery location, but as the force majeure clause could only be invoked in relation to an “inability” to transfer title, which was not dependent upon delivery, the government restrictions did not render Bart unable to transfer title as required for the operation of the force majeure clause; and
- although he did not need to consider arguments regarding lack of cooperation by NKD, he did not consider this to be made out in any event.
NKD’s notice of termination was therefore invalid and it had accordingly repudiated the MOA. Bart was entitled to keep the USD4.2 million payment received, although it did not recover the further losses claimed.
Comment
This decision is significant in the wider context of force majeure cases and the impact of COVID-19 restrictions. It demonstrates the difficulties facing parties seeking to argue that COVID-19 restrictions constituted a force majeure event rendering them unable to perform their mutual obligations.
Central to the court’s reasoning in this and other recent cases on force majeure is whether the relevant restrictions could be said to constitute an “inability” or an impossibility to perform, as is usually required by the wording of force majeure clauses. In this case this “inability” depended on whether the probable period of restraint materially undermined the commercial adventure, which required an analysis similar to that for the question of whether a contract can be said to be frustrated.
Particularly relevant to the facts of this case was that (a) the Vessel “had got as close to Alang outer anchorage as she could” at the relevant time, and (b) the delay in reaching the actual delivery location would be remedied once local restrictions were lifted (which was known to be scheduled for a few weeks’ time after the Vessel’s arrival at Alang’s outer anchorage). Accordingly, parties should carefully consider the practical nature of their contractual obligations and whether substantial performance of an obligation, for example where there will only be a temporary delay in performance, can thereby excuse a party from performance generally.
