Party entitled to rely on force majeure clause where counterparty’s parent company became subject to US sanctions

The Commercial Court has held that a shipowner was entitled to rely on a force majeure clause in a shipping contract where its charterer’s parent company became subject to US sanctions: MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm).

Although set in a non-financial context, the decision is of particular interest as the court allowed reliance on force majeure despite the fact that the sanctions did not directly bite on the shipowners, but rather would be likely to delay US dollar payments which in turn meant that shipowners were not prepared to go ahead with performance of the contract. The two key points arising from the court’s decision are as follows:

  1. In exercising reasonable endeavours to overcome the impact of a force majeure event, a party is not obliged to accept anything other than contractual performance. In this case, for example, the shipowners were not required to accept payment in Euros rather than the contractual currency of US dollars.
  2. There is no requirement that a force majeure event directly prevents or delays performance, without any intervening decision-making process on the part of the party relying on the clause. A party’s decision, taken in reaction to a force majeure event, will not necessarily break the chain of causation between the force majeure event and the non-performance, at least where the decision is reasonable.

For a more detailed discussion of the decision, please see our litigation blog post.

Court of Appeal confirms buyer entitled to repayment of advance where seller failed to deliver due to force majeure

The Court of Appeal has dismissed an appeal against a Commercial Court decision that a buyer was entitled to the repayment of an advance where there had been non-delivery for force majeure reasons. In doing so, the court found that, as a matter of construction, the contract between the parties obliged the seller to make repayment in the circumstances, both because that was the natural meaning of the language and because a different construction would offend business common sense: Nord Naphtha Limited v New Stream Trading AG [2021] EWCA Civ 1829.

Whilst the force majeure event in this case was unrelated to COVID-19, the decision will be of interest to financial institutions considering the ongoing impact of the pandemic. Of note is the Court of Appeal’s comment that it would be “surprising” if a contract for the sale of goods did not include a provision requiring the return of an advance payment in the event of non-delivery. The court considered this to be a reasonable starting point for the construction of such a clause. Nonetheless, the court’s criticism of the contract’s “clumsy drafting” serves as a reminder that the terms of a repayment obligation – or indeed any contractual provision – should be clearly expressed to avoid the sort of dispute that arose in this case.

The decision is also a reminder that, as stated in the leading Supreme Court decision Wood v Capita [2017] UKSC 24 (considered here), construction is a “unitary exercise”, in which it does not matter whether the analysis starts with the contractual language or the relevant context so long as the court balances the indications given by each. The present case demonstrates the importance of considering the commercial consequences of differing contractual constructions as part of this unitary exercise.

For a more detailed discussion of the decision, please see our litigation blog post.

High Court considers implied terms and “failure of basis” in context of COVID-19 pandemic

There have been only a limited number of commercial cases arising solely as a result of the COVID-19 pandemic and so judicial guidance on the legal principles applicable to the disruption of commercial contracts in this specific context is sparse.

However, in a recent decision, the High Court has granted summary judgment to the landlord of commercial premises in a claim for arrears of rent and service charges due since the outbreak of the pandemic: London Trocadero (2015) LP v Picturehouse Cinemas Ltd [2021] EWHC 2591 (Ch).

Although set in a non-financial context, the decision will be of interest to financial institutions as an example of the court’s approach to applying the relevant legal principles in the context of COVID-19. In contrast to previous cases where claims to be excused from contractual performance have been based primarily on force majeure or frustration (see for example herehere and here), the tenant’s arguments were based on alleged implied terms and a total failure of consideration (or “failure of basis” as it is now called).

In the present case, the court found that there was no real prospect of the tenants establishing that terms should be implied to the effect that the payment obligations under the leases were suspended during the periods that it was unlawful to operate the premises due to COVID-19 restrictions. Nor was there any real prospect of establishing that there had, in the circumstances, been a failure of basis. As such, the tenants could not avoid paying rent for the affected period.

For a more detailed discussion of the decision, please see our litigation blog post.

High Court considers operation of force majeure clause in context of COVID-19 pandemic

The High Court has found that, when exercising its discretion as to whether to designate a force majeure event under a franchise agreement due to the COVID-19 pandemic, the franchisor was in breach of duty in failing to consider the franchisee’s need to self-isolate: Dwyer (UK) Franchising Ltd v Fredbar Ltd & Bartlett [2021] EWHC 1218 (Ch).

Although set in a non-financial context, the decision will be of interest to financial institutions as one of the very few cases to date which has considered the operation of a force majeure clause in the context of the COVID-19 pandemic.

The relevant clause in this case was somewhat unusual in providing that the agreement would be suspended during any period that either of the parties was prevented or hindered from complying with their obligations “by any cause which the Franchisor designates as force majeure”. The question for the court was whether the franchisor was in breach of the so-called Braganza duty, derived from the Supreme Court’s decision in Braganza v BP Shipping Ltd [2015] UKSC 17, which meant that this unilateral power to call a force majeure event had to be exercised honestly, in good faith and genuinely.

While it is highly fact-specific and involved consideration of an atypical force majeure clause, this case nevertheless demonstrates that English courts are willing in principle to recognise that the COVID-19 pandemic, or related factors, could amount to a force majeure event. As ever with force majeure, however, each case will depend on, and require close examination of, the specific circumstances and the precise wording of the force majeure clause in question.

For a more detailed discussion of the decision, please see our litigation blog post.

For further legal analysis and insights in relation to COVID-19, and how we expect the crisis to operate as a catalyst for change, please visit our Catalyst Hub.

Commercial Court considers impact of force majeure clause on repayment obligation in sale of goods contract

In a decision earlier this year, the Commercial Court considered the impact of a force majeure clause on a repayment obligation in a contract for the sale of goods: Totsa Total Oil Trading SA v New Stream Trading AG [2020] EWHC 855 (Comm). (The judgment was given in March 2020 but the transcript has only recently become available.)

While the force majeure event in this case was unrelated to COVID-19, the decision will be of interest to financial institutions considering the ongoing impact of the pandemic. Although, under English law, force majeure is entirely a creature of contract, it is helpful to see further examples of the court’s interpretation of such clauses. Whether force majeure can be relied on, and the effect of such reliance, will depend on the proper construction of the contract and the particular circumstances of the case.

In this case, the court granted summary judgment on a buyer’s claim for repayment of an advance payment, in circumstances where (on facts assumed for the purposes of the summary judgment application) the seller had been prevented from delivering product due to a force majeure event, and the buyer had given notice terminating the contract. The court found that, on the proper construction of the contract, the repayment obligation kicked in if product was not delivered in accordance with the contract (and any agreed extension) for any reason whatsoever, including force majeure. However, where the failure to deliver was due to force majeure and that triggered an extension to the delivery timeframe, it could not be said that product had not been delivered “in accordance with the contract and any agreed extension” until the contract was actually terminated in accordance with its terms.

This decision illustrates that a valid claim to force majeure will not necessarily relieve a party of all of its obligations under the contract, such as obligations to repay advance payments for deliveries that are prevented due to force majeure. Parties negotiating force majeure provisions will wish to consider the extent to which any relevant obligations are to be affected by force majeure, and ensure the drafting is clear.

For a more detailed discussion of the decision, please see our litigation blog post.

For further legal analysis and insights in relation to COVID-19, and how we expect the crisis to operate as a catalyst for change, please visit our Catalyst Hub.

Our new publication: COVID-19 Contract Disputes Guide

The economic disruption caused by the COVID-19 pandemic inevitably exposes businesses to heightened legal risk. In particular, counterparties may seek to delay, avoid performance and/or terminate agreements. This may be either because COVID-19 has legitimately prevented them from performing their contractual obligations, or because they are seeking to use the pandemic as an excuse to extricate themselves from a bad deal.

We have published a guide which provides a general overview of the common bases for avoiding contractual obligations in commercial contracts, including a comparison of the key rights and remedies. Click here to access the guide.

The banking litigation team has also prepared a more detailed COVID-19 disputes “handbook” for in house legal teams at banks, specifically considering the key clauses engaged in standard financial market documentation and sharing our market insight as to the types of litigation risks our clients are already seeing in each asset class. If you would like to receive a copy of the handbook, please get in touch with your usual HSF contact.