Force Majeure And Covid-19: High Court Decision Turns On Specific Wording Of FM Clause

• Published date: 26 July 2022
• Subject Matter: Government, Public Sector, Coronavirus (COVID-19), Government Contracts, Procurement & PPP, Government Measures, Litigation, Contracts and Force Majeure
• Law Firm: Herbert Smith Freehills
• Author: Ms Tamsin Baird and Tamsin Rankine-Fourdraine

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...