In a decision earlier this year, the Commercial 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: 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.)

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.

Under English law, force majeure is entirely a creature of contract. Accordingly, 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. 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 more information on force majeure, see our recently published guide When events intervene: Force majeure, frustration and material adverse change (issue 7 of our series of contract disputes practical guides).

Background

The dispute concerned a contract for the sale by the defendant seller of a cargo of naptha to the claimant buyer. The contract provided, at clause 10.1, for an advance payment of 90% of the provisional value of the product against presentation of certain documents. Clause 10.18 stated:

“Save for clause 16.6 of the Contract…, if for any reason whatsoever, the agreed contractual Quantity of the Product has not been delivered to Buyer in accordance with this Contract and any agreed extension, the Seller shall… reimburse to the Buyer… the outstanding amount of the advance payment…”.

Clause 16 was a force majeure clause, which provided that neither party would be in breach of contract as a result of any failure or delay in performance resulting from an event reasonably beyond its control. It provided, at clause 16.3, that if any delivery was delayed or prevented by force majeure for more than 30 days, either party could terminate the contract with respect to such delivery by giving written notice. Clause 16.6 stated:

“Subject to any agreement between the parties in relation to deliveries after termination of Force Majeure Event or any variation of the Contract with regard to the delivery affected by Force Majeure Event, in case of termination of the Contract, nothing herein shall impair the obligations by the Seller to repay to the Buyer the amount of the advance payment… in the event that the delivery of the Product is not made… due to Force Majeure Event”.

The buyer made the advance payment (nearly US$14 million) on or about 15 March 2019. On 22 April 2019, the seller gave notice of a force majeure event under clause 16, and no delivery under the contract was ever made. The buyer argued that the existence of any force majeure event (which it disputed in any event) did not affect the seller’s obligation to repay the advance payment.

The buyer brought proceedings and the seller argued (among other things) that where the time for delivery was extended due to force majeure, there could be no obligation to repay the advance payment without a termination of the contract. The buyer therefore sent a notice terminating the contract for alleged repudiatory breaches by the seller – or in the alternative, if (contrary to the buyer’s position) the seller was entitled to rely on force majeure, terminating the contract under clause 16.3.

The buyer sought summary judgment in respect of the claim for repayment.

Decision

The High Court (Andrew Baker J) granted summary judgment, finding that the buyer was plainly correct that clause 10.18, properly construed, required repayment in circumstances where there had been no delivery by reason of force majeure, just as it required repayment if there had been no delivery for any other reason.

The court rejected the seller’s argument that the opening reference in clause 10.18 to clause 16.6 of the contract, read together with clause 16.6, amounted to an agreement that clause 10.18 did not apply where force majeure arose pursuant to clause 16. In the court’s judgment, that cross-reference neither said nor implied any such thing. To the contrary, it said explicitly that nothing in clause 16.6 was to impair the seller’s obligations to repay the advance payment in the event that delivery had not taken place as a result of a force majeure event.

The cross-reference to clause 16.6 at the start of clause 10.18 was “if not completely surplusage, no more than a helpful cross-reference by way of belt and braces to record that in clause 16.6 the parties have adverted to the possibility that if force majeure arises, it will of course be open to them to agree a different arrangement from that which would otherwise apply under clause 10.18”. That was understandable in light of the use of such a stark and wide-ranging phrase as “if for any reason whatsoever… the product has not been delivered…”.

The overall effect of clause 10.18, read with the force majeure regime, was to trigger the repayment obligation if product was not delivered in accordance with the contract and any agreed extension. Where force majeure had arisen and been properly notified, it could not be said that product was not delivered in accordance with the contract and any agreed extension until the contract had been terminated pursuant to clause 16.3. At that point, the advance payment became repayable on demand. The fact that the failure to deliver was due to force majeure did not provide any defence to the obligation to repay because of the “for any reason whatsoever” language in clause 10.18, and because clause 16 made clear that it did not excuse or discharge the obligation to repay.

Anna Pertoldi

Anna Pertoldi
Partner
+44 20 7466 2399

Maura McIntosh

Maura McIntosh
Professional support consultant
+44 20 7466 2608