A Warning on Force Majeure Clauses, Covid-19, and ‘Price Majeure’

As a result of the current Covid-19 pandemic, much has been written about force majeure clauses in contracts; in particular, whether they can be used to escape contractual obligations.

Under English law the message is clear: the validity of a force majeure claim is governed strictly and exclusively by the specific wording of the contract.

This article provides guidance on force majeure clauses in contracts governed by English law and offers parties three warnings on the usage of force majeure during the Covid-19 pandemic.

The meaning of ‘force majeure’:

Whilst not defined by English law, ‘force majeure’ is generally understood to mean an unforeseeable event, over which the parties have no control, that prevents, hinders, or delays the performance of a contract.

The contract defines the meaning, circumstances, procedure, and effect of force majeure within the context of that specific agreement. There is no separate concept of force majeure in English law aside from this; consequently, without a force majeure clause, neither party will be able to claim its protection.

This means that a party cannot claim force majeure to avoid their obligations during Covid-19, simply because they have become more difficult or expensive to perform. For Covid-19 to constitute force majeure, the contract must prescribe for this to be the case.

Force majeure claims can therefore be complex: parties should think twice before submitting or accepting one.

Warning 1: force majeure clauses are often complex

Parties declaring force majeure due to Covid-19 must do so strictly in accordance with the wording of their contract. If this is not the case, then the claim is likely to be invalid.

Requirements for a valid force majeure claim:

(1) There must be a force majeure clause in the contract.

(2) The force majeure event relied upon must fall within the specific events as set out in the clause and the party claiming force majeure must prove that the clause covers the event relied upon.

A contract’s force majeure clause will state how, to what events, and in which circumstances force majeure will apply. Pursuantly, for Covid-19 to constitute force majeure, there must be clear wording in the contract to this effect.

Typically, force majeure clauses refer to an ‘Act of God’, but there has been little guidance on whether Covid-19 amounts to this. Reference to more specific events in the clause, such as ‘epidemics’, plagues’ or ‘pandemics, are more likely to encompass Covid-19 situations, as are ‘quarantine’, ‘embargo’, and ‘government action’, which may include trade restrictions or vessel quarantines, that prevent or hinder performance.

Quite often a general catch all provision is included at the end of the list of events defined as force majeure in the contract. These apparently wide-ranging provisions should be treated with caution since, depending on the precise words used, an English court may limit the apparent generality to events similar in kind to those specifically listed earlier in the clause.

For a valid force majeure claim, the claiming party must prove that the facts fit the exact wording of an event in the clause. Failing this, there will be no force majeure and the parties’ contractual obligations will continue.

(3) The party seeking to rely on the clause must comply with the procedural requirements prescribed by the clause.

The mere occurrence of a force majeure event will not necessarily mean that a party is entitled to walk away from or suspend the performance of a contract. Often force majeure clauses prescribe notice requirements and limitation periods as well. These must be complied with strictly, or the right to invoke the force majeure clause may be lost for that claim.

(4) The event must be beyond the party’s control and the party must have taken steps to mitigate the event’s effect on the contract.

The party relying on the clause must demonstrate that their inability to perform was neither their own, nor their agent’s fault. Accordingly, if their unreasonable act or omission contributed to the occurrence of the event, or if they could have mitigated the effect of the event by taking reasonable steps, then it is unlikely that they will be able to successfully claim force majeure.

This is primarily a question of fact. For example, in contracts concluded after the initial outbreak in Wuhan, an issue may be whether the effect of Covid-19 on the contract was reasonably foreseeable, and/or open to mitigation. Indeed, if the parties were aware of Covid-19 at the time of contracting, then it may be arguable that ‘quarantine’ or ‘government action’ was foreseeable in certain locations.

If that were the case, the party’s claim to force majeure may be invalid. Their counterparty may point out, that both parties agreed to the contract with their eyes open, when Covid-19 was a known risk. Furthermore, they may maintain that the virus’ impact on performance could have been mitigated by, perhaps, the party considering whether to perform at an alternative, unaffected and contractually permitted location. Fundamentally, if the party may have foreseen, or exercised, a degree of control over the occurrence or impact of the event, then their claim is likely to fail.

Note: There may also be other clauses in the contract which need to be considered in such circumstances (such as one of the BIMCO Infectious or Contagious Diseases Clauses, or the safe port clause).

(5) The consequences of the force majeure event must have caused the contractually agreed effect on performance (usually either impossibility, hindrance or delay).

It is very important to note that, absent specific wording in the relevant clause, economic hardship does not qualify as force majeure under English law (i.e. insufficient cashflow or a market downturn as a result of Covid-19). Equally, it is not a force majeure, where prior to the occurrence of an otherwise valid force majeure event, the claiming party was already unable or not intending to fulfil performance for financial reasons.

(6) Any additional requirements of the clause must also be complied with.

The effect of a force majeure claim:

If all the conditions are met, then the clause will set out if a party’s contractual obligations are suspended or terminated. It should also be noted that if every aspect of the clause is not complied with entirely, then the party claiming force majeure could be liable in damages for the wrongful repudiation of the contract.

If there is no express provision allowing for termination, then the only way for the contract to be validly ended, absent agreement, is by placing reliance on the doctrine of frustration; yet this is notoriously difficult to substantiate under English law. A negotiated extension, suspension or alteration of obligations may therefore offer parties a superior and more commercial route.

Warning 2: Force majeure is not a way to escape an unfavourable contract

The economic fallout following Covid-19 has presented businesses with significant challenges. Performing previously negotiated contracts may be difficult, undesirable or impossible as a result of the pandemic. Force majeure clauses, however, are not to be regarded as general purpose escape clauses and may not be applied solely for economic reasons.

A good example of this has been the increase in force majeure claims in long-term commodity supply contracts. Although some of these claims will be valid, others may simply be responses to market volatility. In trading circles these have been coined as ‘price majeure’ claims, meaning a claim of force majeure borne out of a price drop, as opposed to contractually defined circumstances arising.

A party should consider whether there is a genuine force majeure event under the contract, or whether the purported reliance on the clause is a disguised attempt to escape from the contract due to economic hardship.

This is clearly fertile ground for disputes. For example, in February 2020, it was reported that Shell and Total rejected the force majeure notices served by CNOOC, China’s largest importer of LNG, on the ground that, despite a record crash in LNG prices, the event was not covered by the contract.

Similarly, facing the biggest slowdown in Indian economic growth in the 21st century, it was reported that Oil India Limited, Adani Ports and The Uttar Pradesh Power Corporation Limited respectively declared force majeure in their supply contracts.

Under English law, claims of force majeure are unlikely be valid if their basis is solely economic in nature, but, of course, each case will depend on its individual facts and the contractual terms agreed. Parties should therefore always look carefully at the specific wording of the contract, whilst being on guard against price majeure tendencies in the market.

Warning 3: State intervention on force majeure claims may not be binding

During the current epidemic, China has endorsed its companies’ use of force majeure clauses in unfavourable international supply contracts. In similar circumstances, India has condemned force majeure claims in order to protect the cashflow of essential domestic companies.

It is reported that in February 2020, the China Council for the Promotion of International Trade (CCPIT) began issuing ‘force majeure certificates’ to companies whose contracts had been affected by the impact of Covid-19. As of 25 March, it was estimated that the authority had issued 6,454 certificates, covering a total contract value of circa $89.42 billion.

So, what is the effect of such certificates?

Under English law, force majeure is governed by the contract alone: the policy of a government will only be determinative where the contract provides for this to be the case.

Unless the contract provides otherwise, a state-endorsed force majeure certificate, issued on the basis of local law’s definition of force majeure, will not necessarily amount to conclusive evidence of the validity of a claim to force majeure under English law.

Accordingly, before accepting at face value such a notice from any government body or authority, it is recommended that a party consider the terms of the contract very carefully.

Conclusion

Force majeure claims are usually far more complex than they first appear. They frequently involve complicated questions of law and fact which can have significant commercial consequences. A party who accepts an invalid claim may lose the benefit of their contract; a party who submits an invalid claim may be liable in damages for a repudiatory breach of contract. Under English law the message is clear: the validity of a force majeure claim is governed strictly and exclusively by the specific wording of the contract.

Economic hardship caused by a global pandemic or state-backed certificates will not change this. If someone seeks to rely on force majeure to avoid their contractual obligations, we suggest the first step is to obtain proper legal advice.

Article Authors: Jonathan Clyne, Partner, and Monty Birley, Trainee Solicitor.

Another success for Jackson Parton: Simetra Global Assets v IKON Finance [2019] EWCA Civ 1413

Jonathan Clyne of Jackson Parton successfully acted for the Appellants/Claimants, Simetra Global Assets Ltd and Richcroft Investments Ltd, in an appeal against the judgment of Mr. Justice Robin Knowles CBE given in October 2018.

The Claimants alleged they were victims of a Ponzi scheme operated by a Mr George Daskaleas and companies controlled by him, with the assistance of a number of companies and individuals in the Ikon Group of companies.  The Claimants’ claims against the Ikon Group of companies and individuals for dishonest assistance in the fraudulent Ponzi scheme and for deceit were dismissed by Mr Justice Robin Knowles CBE in a surprisingly brief 13 page judgment following a 3 week trial in the Commercial Court.  The Claimants appealed, at which stage Jackson Parton were instructed.

Only the Ikon Group companies and individuals took part in the appeal.  Lord Justice Males, with whom Lord Justice McCombe and Lord Justice Peter Jackson agreed, found in favour of the Appellants, that the Appellants’ submissions were well founded and that, however unpalatable the prospect, a retrial was the only just course. 

In the appeal the Appellants contended that the judgment at first instance failed to address many of the issues which arose at trial, the conclusions of the judge were cursory and his reasoning was limited, he failed properly to analyse the witness and documentary evidence on a number of critical issues and as a result many of his findings were unexplained and unjust.  The Appellants therefore argued justice required a retrial before a different judge.

For the Court of Appeal to order a retrial before a different Commercial Court judge is an extremely rare occurrence.  The court held “that there was a plainly arguable case of dishonesty on the part of Ikon which needed to be addressed and with which the judge did not engage, and that the judge’s findings on the absence of reliance are inadequately reasoned”  They also held that “this judgment plainly does not take into account the evidence which needed to be taken into account”.

The Court of Appeal judgment briefly summarises the law on dishonest assistance in breach of a fiduciary duty, deceit and conspiracy, the approach of an appellate court to the judge’s findings of fact and contains important guidance on the requirements for a properly reasoned judgment.  After citing the relevant authorities, drawing especially from Flannery v Halifax Estate Agencies Ltdand English v Emery Reimbold & Strick Ltd, Males LJ summarised, without attempting to be comprehensive or prescriptive, what is required in a judgment:

“First, succinctness is as desirable in a judgment as it is in counsel’s submissions, but short judgments must be careful judgments. Second, it is not necessary to deal expressly with every point, but a judge must say enough to show that care has been taken and that the evidence as a whole has been properly considered. Which points need to be dealt with and which can be omitted itself requires an exercise of judgment. Third, the best way to demonstrate the exercise of the necessary care is to make use of “the building blocks of the reasoned judicial process” by identifying the issues which need to be decided, marshalling (however briefly and without needing to recite every point) the evidence which bears on those issues, and giving reasons why the principally relevant evidence is either accepted or rejected as unreliable. Fourth, and in particular, fairness requires that a judge should deal with apparently compelling evidence, where it exists, which is contrary to the conclusion which he proposes to reach and explain why he does not accept it.”

He also made clear that, if these requirements were not followed, the reasoning of the judgment would need to be particularly cogent if it was to satisfy the demands of justice.

In the judgment, Males LJ also emphasised the importance of contemporary documents and especially instantaneous messages, which nowadays, in his view, are “where true thoughts are plain to see”. When considering documents that appeared on their face to provide cogent evidence contrary to the judge’s conclusion, the judge ought to have considered the oral evidence in the light of the telling contemporaneous documentation.

This judgment is a great result for our clients and goes to show what can be achieved by our small, but very effective, team, working closely with counsel.  One lesson learned, which is of particular importance to our more usual shipping and international trade clients, is that the courts will place considerable reliance on the contemporaneous documentary evidence, which these days will include instantaneous communications such as WhatsApp, Viber and other similar instantaneous messages.  When these are available they can be extremely revealing of what is really going on in the minds of the parties involved in a dispute.  Whilst disclosure is often a hotly contested part of the litigation process, obtaining copies of this type of unofficial correspondence, required to be disclosed under the Civil Procedure Rules, can be vital to a successful, and just, outcome. 

View full judgement of Simetra Global Assets Limited v IKON Finance Limited.