Force Majeure and Frustration in Commercial Contracts 9781526517111, 9781526517142, 9781526517135

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Force Majeure and Frustration in Commercial Contracts

Force Majeure and Frustration in Commercial Contracts Ben Symons

Barrister, The 36 Group Contributor

Joseph Dalby SC The 36 Group

BLOOMSBURY PROFESSIONAL Bloomsbury Publishing Plc 50 Bedford Square, London, WC1B 3DP, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc © Bloomsbury Professional Ltd 2022 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/opengovernment-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998-2022. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN:

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Preface Force majeure clauses have routinely appeared in commercial contracts since the early 1900s. They were introduced into contracts to ameliorate the rigidity of the doctrine of frustration. The doctrine of frustration could rarely be invoked by a party who had been impeded in their contractual performance by an unforeseen event and wanted to be excused from contractual performance. Force majeure clauses provided parties with a tool that allowed them to allocate the risk in relation to the non-performance of a contract where a major unforeseen event occurred. Force majeure clauses are more common in industries that have some experience of large, unexpected catastrophic events like the oil and gas industry, the nuclear power industry and shipping. Case law in relation to force majeure is sparse. Most of the case law that does exist has been litigated in the courts of England and Wales. There is a simple reason for this. Many commercial contracts, and particularly those relating to shipping and trading in soft commodities, specify that they are subject to the laws of England and Wales. This is so even though the parties to the contract may have little connection to the jurisdiction of England and Wales. For instance, the greatest body of jurisprudence in relation to force majeure clauses concerns the disputes that arose out of the flooding of the Mississippi Delta in the United States in May 1973. The parties to those disputes were soya bean traders litigating the force majeure provisions in the Grain and Feed Trade Association 100 Form. The actual force majeure event had no connection with England or Wales, and many of the parties to those disputes had no connection to England or Wales either. However, the GAFTA 100 Form, like many shipping and international mercantile contracts, was specified to be subject to the laws of England and Wales. Consequently, disputes in relation to force majeure clauses are more likely to arise in the jurisdiction of England and Wales. Despite force majeure clauses being commonplace in commercial contracts over a long period of time, case law in relation to force majeure clauses is relatively sparse. Recently, there has been relatively little written about force majeure and frustration. However, the recent Covid-19 pandemic triggered the issuance of a multitude of force majeure notices and initiated a great deal of interest in force majeure clauses. This book is directed toward commercial practitioners seeking a greater understanding of the legal issues that arise in relation to force majeure and frustration disputes. It is authoritatively researched and seeks to offer a comprehensive, original review of all the legal issues that a practitioner dealing with a force majeure matter could expect to encounter. In particular, it considers:

v

Preface •

What amounts to a force majeure event;

•

What amounts to ‘prevention’, a ‘hindrance’, or ‘delay’ in relation to a force majeure clause;

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When an event can be considered to be ‘beyond the reasonable control’ of a party;

•

Causation – when can a force majeure event be considered to have caused a party’s failure to perform its obligations;

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Notice – how to determine whether a force majeure notice is valid or invalid;

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Mitigation – what are the reasonable steps a party needs to take to avoid a force majeure event;

•

International jurisprudence from Australia, Canada, Singapore and Hong Kong in relation to force majeure.

•

The doctrine of frustration in a modern context.

It is a fantastic resource for any practitioner who encounters a force majeure dispute or wants to better develop their understanding of this area of law. The law is up to date to December 2021. Ben Symons April 2022

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Contents

Prefacev Table of cases xi Table of statutes xix Chapter 1  Introduction to Force Majeure

1

Chapter 2  General Principles of Contractual Interpretation 4 Introduction4 General principles of contractual interpretation in English law 4 What is meant by ‘business common sense’? 6 The court can use its power of ‘interpretation’ to correct a mistake in the contract 7 General approach to the construction of a force majeure clause 8 The difficulties of interpreting a force majeure clause 8 Are force majeure clauses exception or exclusion clauses? 11 What is the consequence if a force majeure clause is an exceptions clause? 14 The modern approach to the construction of an exclusion clause 16 The more valuable the right a party is giving up, the clearer an exclusion clause needs to be 17 Conclusion18 Application of the contra proferentem rule to a force majeure clause 19 If the party claiming the benefit of an exclusion clause is negligent, what impact does this have on their ability to rely on the clause? 20 Do the Canada Steamship guidelines apply to a force majeure clause? 27 Unfair Contract Terms Act 1977 31 Chapter 3  What Constitutes a ‘Force Majeure’ Event? 34 Introduction34 ICC 2020 long-form force majeure clause 34 There must be a force majeure ‘event’ 37 What is meant by ‘war’? 37 What is meant by ‘extensive military mobilisation’? 38 What amounts to a ‘riot’? 40 What constitutes ‘piracy’? 41 What is the meaning of an ‘embargo’? 43 What is the meaning of an ‘act of authority’? 43 What is the meaning of ‘plague, disease outbreak, epidemic or pandemic’?45 vii

Contents What is the meaning of an ‘act of god’? What events does a ‘sweeper’ clause catch’? A force majeure clause that requires one party to form an opinion on whether a force majeure event has occurred

47 50 53

Chapter 4  Prevent, Hinder and/or Delay 56 Introduction56 ‘Prevention’/‘prohibition’ as compared with ‘hindering’ when performing a contractual obligation 57 Prohibition/prevention – Grain and Food Trade Association 100 form 60 Background to the 1973 Mississippi flood cases 60 Burden of proof 62 Proof of ‘prevention’ in relation to clause 21 or clause 22 of the GAFTA 100 form 62 Mitigation63 Alternative sources of supply/performance 65 Cattle Food Trade Association (Inc) contracts 65 Grain and Feed Trade Association (‘GAFTA’) 100 form 66 Can a dramatic increase in price amount to ‘prevention’ or ‘hindrance’ in relation to a force majeure clause? 68 Can a dramatic increase in price amount to frustration? 69 Chapter 5  Beyond Reasonable Control 71 Introduction71 Events beyond the reasonable control of a party 72 Performance is dependent on a third party – is this a matter ‘beyond the control’ of a party? 72 Cases illustrating where a party has assumed this risk of performing an obligation 72 Can a party rely on a force majeure clause where they are negligent? 77 Prevention principle and negligence 79 Case law on the prevention principle 79 Foreseeability81 Is there a general rule that the force majeure event must not be foreseeable?81 Chapter 6 Causation 85 Introduction85 In relation to clauses in a commercial contract 85 The ‘common sense’ approach 86 In relation to a force majeure event 88 In relation to an exclusion clause using force majeure type language in a commercial contract 91 Burden of proof 95 In relation to an exclusion clause – did the charterer bear the onus of proving that they were ready to perform? 95 viii

Contents In relation to force majeure clauses Observations in Classic Maritime Inc on causation and force majeure clauses Causation where there are two causes of equal efficiency Applicability of principles relating to exclusion clauses

96 98 98 99

Chapter 7 Notice 102 Introduction102 Is a notice provision a condition precedent or an intermediate term? 102 Some common law background on conditions and intermediate terms103 General principles in relation to notice provisions in force majeure clauses 105 Other cases considering the late service of a force majeure notice 113 Force majeure notice clause as a condition precedent 117 Clauses that are expressly made to be a condition precedent 118 Clauses where the notice provision is a condition precedent by necessary implication from the process of contractual interpretation118 Who can impugn an invalid notice? 121 Waiver121 General background to waiver and force majeure 121 General principles of unilateral waiver/abandonment of a right 125 It must generally be shown that the party making the representation had knowledge of their rights 126 Latent defect in the notice 127 The representation must be clear, unambiguous and unequivocal 128 Insisting on one’s strict legal rights 129 Accepting part performance up to the maximum amount permitted under the licensing system 130 Continuing to negotiate to try and reach a settlement does not amount to a waiver 131 The other party must rely on that representation such that it is inequitable for the party making the representation/giving notice to insist on its strict legal rights 131 Chapter 8  Material Adverse Change (‘MAC’) Clauses 133 Introduction133 Interpretation of a MAC in a loan agreement 133 The leading UK authority on MAC clauses 133 Is there a ‘material adverse change’? 135 In the ‘financial condition’ of a party? 136 The length of the change in ‘financial condition’ of a company or group137 Pre-existing circumstances/foreseeable events at the date of signing 139

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Contents MAC clauses where the lender forms an opinion as to whether there is a ‘material adverse change’ in the financial condition of the borrower Material adverse effect (‘MAE’) clauses in acquisition agreements The leading UK authority on MAE clauses

140 142 142

Chapter 9  Force Majeure in International Case Law 152 Introduction152 Canada153 Atlantic Paper v St Anne Pulp153 Atcor Ltd v Continental Energy Marketing Ltd154 Domtar Inc v Univar Canada Ltd156 Singapore157 Holchim (Singapore) Pte Ltd v Precise Development Pte Ltd157 RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd161 China Resources (S) Pte Ltd v Magenta Resources (S) Pte Ltd162 Australia166 Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd166 South32 Aluminium (RAA) Pty Ltd v Alinta Sales Pty Ltd168 Yara Nipro Pty Ltd v Interfert Australia Pty Ltd169 Hong Kong 170 Regent National Enterprises Ltd v Goldlion Properties Ltd (Raiffeisen Zentralbank Osterreich AG intervening)170 Chapter 10 Frustration 174 Joseph Dalby SC 174 Introduction174 Origins174 Development175 The modern doctrine 176 Performance of contracts 178 Supervening events 180 Frustration of purpose 182 Illegality183 Impossibility185 Specific contracts 186 ‘In-person’ contracts or obligations 186 Building and construction 187 Consequences of frustration 190 Index193

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Table of Cases 2 Entertain Video Ltd v Sony DADC Europe Ltd [2020] EWHC 972 (TCC), [2021] 1 All ER 527, [2021] 1 All ER (Comm) 936...................2.12; 3.6; 5.7, 5.10 A Akorn Inc v Fresenius Kahi AG No 2018-0300-JTL (unreported, 2018) WL 4719347...................................................................................... 8.5, 8.6, 8.10, 8.14 Alderslade v Hendon Laundry Ltd [1945] KB 189, [1945] 1 All ER 244, [1945] 1 WLUK 45..................................................................................................2.13 Alfred C Toepfer v Peter Cremer GmbH & Co [1975] 2 Lloyd’s Rep 118, [1975] 3 WLUK 59, (1975) 119 SJ 506...................................................... 7.6, 7.12 Alghussein Establishment v Eton College [1988] 1 WLR 587, [1991] 1 All ER 267, [1988] 5 WLUK 64..............................................................................5.9 Anderson v Anderson [1895] 1 QB 749, [1895] 2 WLUK 84.............................3.16 Andre & Cie SA v Etablissements Michel Blanc et Fils [1977] 2 Lloyd’s Rep 166, [1977] 2 WLUK 148............................................................................7.6 Ann Strathatos, The; see Royal Greek Government v Minister of Transport (The Ann Strathatos) Ark Shipping Co LLC v Silverburn Shipping (IoM) Ltd [2019] EWCA Civ 1161, [2019] 2 Lloyd’s Rep 603, [2019] 7 WLUK 122.............................. 7.5, 7.11 Association of British Travel Agents Ltd v British Airways plc [2000] 2 All ER (Comm) 204, [2000] 2 Lloyd’s Rep 209, [2000] 5 WLUK 425..................2.9 Atcor Ltd v Continental Energy Marketing Ltd (1996) 178 AR 372...................9.3 Athens Maritime Enterprises Corp v The Hellenic Mutual War Risks Association [1983] QB 647, [1983] 2 WLR 425, [1983] 1 All ER 590......3.6, 3.7 Atlantic Paper v St Anne Pulp 56 DLR (3d) 409.................................................9.2, 9.4 Atlasnavios-Navegação LDA (formerly Bnavios-Navgeação LDA) v Navigators Insurance Co Ltd [2018] UKSC 26, [2019] AC 136, [2018] 2 WLR 1671....................................................................................................6.1, 6.9 Avimex SA v Dewulf & Cie [1979] 2 Lloyd’s Rep 57, [1978] 11 WLUK 211........ 7.16, 7.17 Azur Haz, The; see SHV Gas Supply & Trading SAS v Naftomar Shipping & Trading Co Ltd Inc (The Azur Haz) B B & S Contracts & Design Ltd v Victor Green Publications Ltd [1984] 1 WLUK 1197, [1984] ICR 419, (1984) 81 LSG 893....................................4.6 Bahamas Oil Refining Co International Ltd v Owners of the Cape Bari Tankschiffahrts GmbH & Co KG [2016] UKPC 20, [2017] 1 All ER (Comm) 189, [2016] 2 Lloyd’s Rep 469......................................................2.11 Bank Line Ltd v Arthur Capel & Co [1919] AC 435, [1918] 12 WLUK 28.......4.12 Banning v Wright [1972] 1 WLR 972, [1972] 2 All ER 987, [1972] 6 WLUK 42.................................................................................................................7.14 Barclays Bank plc v HHY Luxembourg SARL [2010] EWC Civ 1248, [2010] 10 WLUK 543, [2011] 1 BCLC 336............................................................2.3

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Table of Cases Braganza v BP Shipping Ltd [2015] UKSC 17, [2015] 1 WLR 1661, [2015] 4 All ER 639...................................................................................................3.17 Brauer & Co (Great Britsain) Ltd v James Clark (Brush Materials) Ltd [1952] 2 All ER 497, [1952] 2 Lloyd’s Rep 147, [1952] 2 TLR 349......................4.12 Bremer Handels GmbH v Bunge Corpn [1983] 1 Lloyd’s Rep 476, [1983] 3 WLUK 33, [1983] Com LR 103........................................................4.5; 7.20, 7.22 Bremer Handels GmbH v C Mackprang Jr [1979] 1 Lloyd’s Rep 221, [1978] 11 WLUK 98....................................................................................................3.8; 7.14 Bremer Handels GmbH v Continental Grain Corp [1983] 1 Lloyd’s Rep 269, [1982] 10 WLUK 128............................................................................ 4.4, 4.5, 4.9 Bremer Handels GmbH v Raiffesen Hauptgenossenschaft eG (No 1) [1982] 1 Lloyd’s Rep 599, [1982] 3 WLUK 203.......................................................4.4 Bremer Handels GmbH v Vanden Avenne-Izegem PVBA [1977] 2 Lloyd’s Rep 329, [1977] 6 WLUK 78; revs’d [1978] 2 Lloyd’s Rep 109, [1978] 3 WLUK 49 ..................................................................................4.4, 4.10, 4.11; 6.4, 6.6, 6.7; 7.4, 7.5, 7.6, 7.8, 7.11, 7.12, 7.14, 7.15, 7.18, 7.22 Bremer Handels GmbH v Westzucker GmbH (No 2) [1981] 2 Lloyd’s Rep 130, [1981] 4 WLUK 200, [1981] Com LR 179.................................................6.6 Britain Steamship Co Ltd v King, The [1921] 1 AC 99, (1920) 4 Ll L Rep 245.3.5 British Movietonews Ltd v London & District Cinemas [1952] AC 166, [1951] 2 All ER 617, [1951] 2 TLR 571.................................................................4.12 Bulk Transport Group Shipping Co Ltd v Seacrystal Shipping Ltd (The Kyzikos) [1989] AC 1264, [1988] 3 WLR 858, [1988] 3 All ER 745.........7.16 Bunge Corp v Tradax Export SA [1981] 1 WLR 711, [1981] 2 All ER 540, [1981] 2 Lloyd’s Rep 1........................................................................ 7.3, 7.5, 7.11 Bunge SA v Deutsche Conti-Handels GmbH (No 1) [1979] 2 Lloyd’s Rep 435, [1979] 1 WLUK 672....................................................................................3.8 Bunge SA v Fuga AG [1980] 2 Lloyd’s Rep 513, [1980] 1 WLUK 517.............4.5 Bunge SA v Kruse (No 2) [1979] 1 Lloyd’s Rep 279, [1978] 6 WLUK 33........7.5 C Canada Steamship Lines Ltd v King, The [1952] AC 192, [1952] 1 All ER 305, [1952] 1 Lloyd’s Rep 1......................................................................2.13, 2.14; 5.7 Cehave NV v Bremer Handels GmbH (The Hansa Nord) [1976] QB 44, [1975] 3 WLR 447, [1975] 3 All ER 739................................................................7.5 Chandris v Isbrandtsen-Moller Co Inc [1951] 1 KB 240, [1950] 2 All ER 618, (1950) 84 Ll L Rep 347...............................................................................3.16 Channel Island Ferries Ltd v Sealink UK Ltd [1988] 1 Lloyd’s Rep 323, [1987] 12 WLUK 109 .......................................................................4.2, 4.6; 5.1, 5.10; 6.6 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, [2009] 3 WLR 267.......................................................................................2.4 Cheall v Association of Professional, Executive, Clerical & Computer Staff (APEX) [1983] 2 AC 180, [1983] 2 WLR 679, [1983] 1 All ER 1130.......5.9 China Resources (S) Pte Ltd v Magenta Resources (S) Pte Ltd [1997] SGCA 2...................................................................................................................9.9 Cie Commerciale Sucres et Denrees v C Czarnikow Ltd (The Naxos) [1990] 1 WLR 1337, [1990] 3 All ER 641, [1991] 1 Lloyd’s Rep 29........................7.5, 7.8

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Table of Cases Clan Line Steamers Ltd v Liverpool & London War Risks Insurance Association Ltd [1943] KB 209, [1942] 2 All ER 367....................................................3.5 Classic Maritime Inc v Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102, [2019] 4 All ER 1145, [2019] 2 All ER (Comm) 592.............2.5, 2.7; 6.4, 6.5, 6.6, 6.7 Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (The Marine Star) [1993] 1 Lloyd’s Rep 629, [1994] 6 WLUK 290, [1994] CLC 1019.2.6 Constantines (Joseph) Steamship Line Ltd v Imperial Smelting Corp Ltd (The Kingswood) [1942] AC 154, [1941] 2 All ER 165, (1941) 70 Ll L Rep 1.......4.12; 10.3 Continental Grain Export Corp v STM Grain Ltd (Charles E Ford Ltd) [1979] 2 Lloyd’s Rep 460, [1978] 10 WLUK 49....................................................4.10 Cook Industries Inc v Meunerie Liegeois SA [1981] 1 Lloyd’s Rep 359, [1980] 4 WLUK 208................................................................................................4.5 Cook Industries v Tradax Export SA [1985] 2 Lloyd’s Rep 454, [1984] 10 WLUK 218...................................................................................................7.17 Coxwold, The; see Yorkshire Dale Steamship Co Ltd v Minister of War Transport (The Coxwold) Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305................7.14 Crudesky, The; see Great Elephant Corp v Trafigura Beheer BV (The Crudesky) Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd (Nos 3 to 5) [2013] UKPC 2, [2016] AC 923, [2015] 2 WLR 875..................................8.7 D Davis Contractors Ltd v Fareham Urban DC [1956] AC 696, [1956] 3 WLR 37, [1956] 2 All ER 145.....................................................................................10.4 Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265, [1944] 1 All ER 678, 1944 SC (HL) 35...................................................................4.12 Domtar Inc v Univar Canada Ltd [2011] BCTC Uned 1776...............................9.4 Dunavant Enterprises Inc v Olympia Spinning & Weaving Mills Ltd [2011] EWHC 2028 (Comm), [2011] 2 Lloyd’s Rep 619, [2011] 7 WLUK 940...4.2 Dwyer (UK Franchising) Ltd v Fredbar Ltd [2021] EWHC 1218 (Ch), [2021] 5 WLUK 82..................................................................................................3.17 E ENE Kos 1 Ltd v Petroleo Brasileiro SA (The Kos) [2012] UKSC 17, [2012] 2 AC 164, [2012] 2 WLR 976.........................................................................6.1, 6.3 European Grain & Shipping v JH Rayner & Co [1970] 2 Lloyd’s Rep 239, [1970] 7 WLUK 9........................................................................................4.7 Eurus, The; see Total Transport Corp v Arcadia Petroleum Ltd (The Eurus) F FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Ltd [1916] 2 AC 397, [1916] 7 WLUK 66.........................................................4.12 Faidi v Elliot Corp [2012] EWCA Civ 287, [2012] 3 WLUK 539, [2012] HLR 27.............................................................................................................. 7.18, 7.22 Fairclough, Dodd & Jones v Vantol (JH) [1957] 1 WLR 136, [1956] 3 All ER 921, [1956] 2 Lloyd’s Rep 437....................................................................2.7; 4.2 Federal Comr of Taxation v Silverton Tramway Co Ltd [1953] HCA 79, [1953] 88 CLR 559..................................................................................................3.9

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Table of Cases Field v Metropolitan Police Receiver [1907] 2 KB 853, [1907] 7 WLUK 106...3.6 Flacker Shipping Ltd v Glencore Grain Ltd (The Happy Day) [2002] EWCA Civ 1068, [2002] 2 All ER (Comm) 896, [2002] 2 Lloyd’s Rep 487...... 7.14, 7.15, 7.16, 7.18, 7.22 Fullers Theatres & Vaudevile Co v Rofe [1923] AC 435, [1923] 2 WLUK 70...7.16 Fyffes Group Ltd & Caribbean Gold Ltd v Reefer Express Lines Pty Ltd & Reefkrit Shipping Inc (The Kriti Rex) [1996] 2 Lloyd’s Rep 171, [1996] 5 WLUK 97.....................................................................................................2.5; 5.6 G Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689, [1973] 3 WLR 421, [1973] 3 All ER 195............................................2.10 Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS [2016] EWCA Civ 982, [2017] 4 All ER 124, [2017] 2 All ER (Comm) 701........ 7.3, 7.5, 7.11 Great Elephant Corp v Trafigura Beheer BV (The Crudesky) [2013] EWCA Civ 905, [2014] 2 All ER (Comm) 992, [2014] 1 Lloyd’s Rep 1.......5.1, 5.5, 5.10; 7.8 Great Western Rly Co v Owners of the SS Mostyn [1928] AC 57, (1927-28) 29 Ll L Rep 293, [1927] 12 WLUK 67.............................................................3.14 Grupo Hotelero Urvasco SA v Carey Value Added SL (formerly Losan Hotels World Valye Added I SL) [2013] EWHC 1039 (Comm), [2013] 4 WLUK 655, [2013] Bus LR D45 ..................................................................... 8.2, 8.4, 8.14 H HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, [2003] 1 All ER (Comm) 349, [2003] 2 Lloyd’s Rep 61.......... 2.13, 2.14 Hansa Nord, The; see Cehave NV v Bremer Handels GmbH (The Hansa Nord) Happy Day, The; see Flacker Shipping Ltd v Glencore Grain Ltd (The Happy Day) Heskell v Continental Express Ltd [1950] 1 All ER 1033, (1949-50) 83 Ll L Rep 438, [1950] 4 WLUK 2.........................................................................6.8 Hirjl Mulji v Cheong Yue Steamship Co Ltd [1926] AC 497, [1926] 2 WLUK 72, [1926] 1 WWR 917................................................................................4.12 Hoecheong Products Co Ltd v Cargill Hong Kong Ltd [1995] 1 WLR 404, [1995] 1 Lloyd’s Rep 584, [1995] 2 WLUK 24........................................5.10; 9.12 Hoe International Ltd v Andersen [2017] CSIH 9, 2017 SC 313, [2017] 2 WLUK 115................................................................................................7.5 Holchim (Singapore) Pte Ltd v Precise Development Pte Ltd [2011] SGCA 1..1.1; 9.5, 9.6 Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (The Hongkong Fir) [1962] 2 QB 26, [1962] 2 WLR 474, [1962] 1 All ER 474..................7.3 Hong Kong Fir, The; see Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (The Hongkong Fir) I IBP v Tyson Foods Inc 789 A2d 14 (Del Ch 2001).............................................8.5, 8.6 Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) [1998] 1 WLR 896, [1998] 1 All ER 98, [1997] 6 WLUK 340...............2.2, 2.4 Interactive E-Solutions JLT v O3B Africa Ltd [2018] EWCA Civ 62, [2018] 1 WLUK 476, [2018] BLR 167......................................................................2.8, 2.9

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Table of Cases J J Lauritzen AS v Wilsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep 1, [1989] 10 WLUK 146.......................................................................2.14 Johnson v Agnew [1980] AC 367, [1979] 2 WLR 487, [1979] 1 All ER 883.....7.14 K K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904, [2012] Ch 497, [2012] 2 WLR 470...............................................2.12 Kammins Ballroom Co Ltd v Zenith Investments (Torquay) Ltd [1971] AC 850, [1970] 3 WLR 287, [1970] 2 All ER 871............................................7.14 Kanchenjunga, The; see Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) .......................................................... 7.14, 7.16 Kawasaki Kisen Kabushiki Kaisha of Kobe v Bantham Steamship Co Ltd (No 2) [1939] 2 KB 544, [1939] 1 All ER 819, (1939) 63 Ll L Rep 155...........3.4 Kingswood, The; see Constantines (Joseph) Steamship Line Ltd v Imperial Smelting Corp Ltd (The Kingswood) Krell v Henry [1903] 2 KB 740, [1903] 8 WLUK 20..........................................10.3 Kriti Rex, The; see Fyffes Group Ltd & Caribbean Gold Ltd v Reefer Express Lines Pty Ltd & Reefkrit Shipping Inc (The Kriti Rex) Kyzikos, The; see Bulk Transport Group Shipping Co Ltd v Seacrystal Shipping Ltd (The Kyzikos) L Lancashire Insurance Co Ltd v MS Frontier Reinsurance Ltd [2012] UKPC 42, [2012] 12 WLUK 681............................................................................... 7.14, 7.15 Levison v Farin [1978] 2 All ER 1149, [1977] 11 WLUK 26.............................8.3 M Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD (No 3) [2002] EWHC 2210 (Comm), [2003] 1 Lloyd’s Rep 1, [2002] 11 WLUK 37, [2003] 2 Lloyd’s Rep 635; aff’d [2003] EWVA Civ 1031, [2003] 2 All ER (Comm) 640, [2003] 2 Lloyd’s Rep 635 ................................6.6; 7.7, 7.8, 7.11 Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, [1997] 2 WLR 945, [1997] 3 All ER 352....................................................2.3; 7.5 Marine Star, The; see Coastal (Bermuda) Petroleum Ltd v Vtt Vulcan Petroleum SA (The Marine Star) Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd [2020] NSWCA 234............9.10 Mitsui Sumitomo Insurance Co (Europe) Ltd v Mayor’s Office for Policing & Crime [2014] EWCA Civ 682, [2015] QB 180, [2014] 3 WLR 576...........3.6 Mostyn, The; see Great Western Rly Co v Owners of the SS Mostyn Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) [1990] 1 Lloyd’s Rep 391, [1990] 2 WLUK 229............ 7.16, 7.22 N Navrom v Callitsis Ship Management SA (The Radauti) [1987] 2 Lloyd’s Rep 276, [1987] 2 WLUK 103............................................................................5.10 Naxos, The; see Cie Commerciale Sucres et Denrees v C Czarnikow Ltd (The Naxos) New Zealand Shipping Co Ltd v Société des Ateliers et Chantiers de France [1919] AC 1, [1918-19] All ER Rep 552, [1918] 4 WLUK 31....................5.9

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Table of Cases Nitro-Phosphate & Odam’s Chemical Manure Co v London & St Katherine Docks Co (1878) 9 Ch D 503, [1878] 7 WLUK 86 Nobahar-Cookson v Hut Group Ltd [2016] EWCA Civ 128, [2016] 3 WLUK 592, [2016] 1 CLC 573........................................................................ 2.8, 2.9, 2.10 Nugent v Smith (1876) 1 CPD 423, [1876] 5 WLUK 128..................................3.14 O Obrascon Huarte Lain SA v Her Majesty’s A-G for Gibraltar [2014] EWHC 1028 (TCC), [2014] 4 WLUK 656, [2014] BLR 484..................................7.10 Okta Crude Oil Refinery AD v Mamidoil-Jetoil Greek Petroleum Co SA, MoilCoal Trading Co Ltd see Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD (No 3) Oliver Ashworth (Holdings) Ltd v Ballard (Kent) Ltd [2000] Ch 12, [1999] 3 WLR 57, [1999] 2 All ER 791.....................................................................7.14 P PJ van der Zijden Wildhandel NV v Tucker & Cross Ltd (No 1) [1975] 2 Lloyd’s Rep 240, [1975] 2 WLUK 128.......................................................9.12 Pandorf & Co v Hamilton Fraser & Co (1886) 17 QBD 670, [1886] 8 WLUK 15.................................................................................................................3.14 Paradine v Jane (1647) Sty 47, 82 ER 519, [1646] 1 WLUK 1...........................10.2 Persimmon Homes Ltd v Ove Arup & Partners Ltd [2017] EWCA Civ 373, [2017] 5 WLUK 580, [2017] PNLR 29...................................................... 2.8, 2.12 Personal Touch Financial Services Ltd v SimplySure Ltd [2016] EWCA Civ 461, [2016] Bus LR 1049, [2016] 5 WLUK 360.........................................7.3 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, [1980] 2 WLR 283, [1980] 1 All ER 556.............................................................................2.8 Piracy Jure Gentium, Re [1934] AC 586, (1934) 49 Ll L Rep 411, [1934] 7 WLUK 46.....................................................................................................3.7 R R v Disciplinary Committee of the Jockey Club, ex p Aga Khan [1993] 1 WLR 909, [1993] 2 All ER 853, [1992] 12 WLUK 92.........................................3.9 R v Panel on Takeovers & Mergers, ex p Datafin plc [1987] QB 815, [1987] 2 WLR 699, [1987] 1 All ER 564...................................................................3.9 RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd [2007] SGCA 39...................9.8 R (on the application of Holmcroft Properties Ltd) v KPMG LLP [2018] EWCA Civ 2093, [2020] Bus LR 203, [2018] 9 WLUK 358......................3.9 R (on the application of Liberal Democrats) v ITV Broadcasting Ltd [2019] EWHC 3282 (Admin), [2020] 4 WLR 4, [2019] 11 WLUK 544................3.9 Radautil, The; see Navrom v Callitsis Ship Management SA (The Radautil) Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900, [2012] 1 All ER 1137 ......................................................................................2.2, 2.3; 3.14 Regent National Enterprises Ltd v Goldlion Preoprties Ltd [2009] 5 HKC 67.. 4.6; 9.13 Republic of Bolivia v Indemnity Mutual Marine Insurance Co Ltd [1909] 1 KB 785, [1909] 1 WLUK 112............................................................................3.7 River Wear Comrs v Adamson (1877) 2 App Cas 743, [1877] 7 WLUK 93.......3.14 Ross T Smyth & Co (Liverpool) Ltd v WN Lindsay (Leith) Ltd [1953] 1 WLR 1280, [1953] 2 All ER 1064, [1953] 2 Lloyd’s Rep 378..............................6.6

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Table of Cases Royal Greek Government v Minister of Transport (The Ann Strathatos) (194950) 83 Ll L Rep 228, (1949) 66 TLR (Pt 1) 504, [1949] 12 WLUK 44......6.9 S SHV Gas Supply & Trading SAS v Naftomar Shipping & Trading Co Ltd Inc (The Azur Haz) [2005] EWHC 2528 (Comm), [2006] 2 All ER (Comm) 515, [2006] 1 Lloyd’s Rep 163....................................................................7.8 Scarf v Jardine (1882) 7 App Cas 345, [1882] All ER Rep 651, [1882] 6 WLUK 45.................................................................................................................7.14 Scottish Power UK plc v BP Exploration Operating Co Ltd [2016] EWCA Civ 1043, [2016] 11 WLUK 27..........................................................................2.8 Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm), [2019] 1 All ER (Comm) 34, [2018] 2 Lloyd’s Rep 628.............6.3 Seadrill Management Services Ltd v OAO Gazprom [2010] EWCA Civ 691, [2011] 1 All ER (Comm) 1077, [2010] 1 CLC 934.....................................2.10 Seechurn v ACE Insurance SA NV [2002] EWCA Civ 67, [2002] 2 Lloyd’s Rep 390, [2002] 2 WLUK 144.....................................................................7.21 Shell International Petroleum Co Ltd v Gibbs [1982] QB 946, [1982] 2 WLR 745, [1982] 1 All ER 1057...........................................................................3.7 Sigma Finance Corp (in administration), Re [2009] UKSC 2, [2010] 1 All ER 571, [2009] 10 WLUK 757..........................................................................2.2 Smith v South Wales Switchgear Co Ltd; Smith v UMB Chrysler (Scotland) Ltd [1978] 1 WLR 165, [1978] 1 All ER 18, 1978 SC (HL 1.....................2.13 Sonat Offshore SA v Amerada Hess Development Ltd & Texaco (Britain) Ltd [1988] 1 Lloyd’s Rep 145, [1987] 5 WLUK 126, 39 BLR 1......................3.16; 5.7 South32 Aluminium (RAA) Pty Ltd v Alinta Sales Pty Ltd [2015] WASC 450.9.11 Stobart Group Ltd, Stobart Rail Ltd (formerly WA Developments Ltd) v William Stobart, William Andrew Tinkler [2019] EWCA Civ 1376, [2019] 7 WLUK 520................................................................................................7.5 Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75, [2010] QB 27, [2009] 3 WLR 677...........................................................................2.10 Super Servant Two, The; see J Lauritzen AS v Wilsmuller BV (The Super Servant Two) T Taberna Europe CDO II plc v Selskabet af 1 September 2008 A/S (formerly Roskilde Bank A/S) (in bankruptcy) [2016] EWCA Civ 1262, [2017] QB 633, [2017] 2 WLR 803............................................................................ 2.13, 2.14 Tandrin Aviation Holdings Ltd v Aero Toy Store LLC [2010] EWHC 40 (Comm), [2010] 2 Lloyd’s Rep 668, [2010] 1 WLUK 289.................3.1, 3.16; 9.4 Tang Man Sit (dec’sd) v Capacious Investments Ltd [1996] AC 514, [1996] 2 WLR 192, [1996] 1 All ER 193...................................................................7.14 Target Rich International Ltd v Forex Capital Markets Ltd [2020] EWHC 1544 (Comm), [2020] 6 WLUK 282....................................................................2.15 Taylor v Caldwell [1863] EWHC QB J1.............................................................10.2 Tennants (Lancashire) Ltd v CS Wilson & Co Ltd [1917] AC 495, [1917] 6 WLUK 42 ..........................................................................................3.16; 4.2, 4.11 Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573, [1994] 7 WLUK 198...............................................................................................................8.3

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Table of Cases Thornborow v Whitacre (1706) 2 Ld Raym 1164, 92 ER 270, [1705] 1 WLUK 58.............................................................................................................. 10.2, 10.3 Total Transport Corp v Arcadia Petroleum Ltd (The Eurus) [1998] 1 Lloyd’s Rep 351, [1997] 11 WLUK 313, [1998] CLC 90........................................6.3 Tradax Export SA v Andre & Cie SA [1975] 2 Lloyd’s Rep 516, [1975] 6 WLUK 84; revs’d [1976] 1 Lloyd’s Rep 416, [1975] 11 WLUK 97.......4.10, 4.11; 6.6; 7.5, 7.6 Tradax Export SA v Cook Industries Inc [1982] 1 Lloyd’s Rep 385, [1981] 10 WLUK 69.....................................................................................................6.6 Transco plc v Stockport Metropolitan Borough Council [2003] UKHL 61, [2004] 2 AC 1, [2003] 3 WLR 1467............................................................3.14 Transocean Drilling UK Ltd v Providence Resources Ltd [2016] EWCA Civ 2611, [2016] 10 WLUK 460, 169 Con LR 84................................... 2.9, 2.11, 2.12 Travelport Ltd v Wex Inc [2020] EWHC 2670 (Comm), [2020] 10 WLUK 93 ........ 8.9, 8.10, 8.13, 8.14, 8.15 Tsakiroglou & Co Ltd v Noblee Thori GmbH [1962] AC 93, [1961] 2 WLR 633, [1961] 2 All ER 179.............................................................................4.2 U United Australia Ltd v Barclays Bank Ltd [1941] AC 1, [1940] 4 All ER 20, [1940] 8 WLUK 19......................................................................................7.14 V V Berg & Son Ltd v Vanden Avenne-Izegem PVBA [1977] 1 Lloyd’s Rep 499, [1976] 11 WLUK 84................................................................................... 7.6, 7.19 W WJ Alan & Co v El Nasr Export & Import Co [1972] 2 QB 189, [1972] 2 WLR 800, [1972] 1 Lloyd’s Rep 313....................................................................7.22 Westfailische Central-Genossenschaft v GmbH Seabright Chemicals Ltd (unreported, 1979, HC)................................................................................4.9 Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173, [2017] 2 WLR 1095.....................................................................2.2, 2.5; 3.14; 4.2; 5.1; 6.1, 6.4, 6.5, 6.7; 7.3, 7.5, 7.9; 8.13 Y YL v Birmingham City Council (Secretary of State for Constitutional Affairs intervening) [2007] UKHL 27, [2008] 1 AC 95, [2007] 3 WLR 112..........3.9 Yara Nipro Pty Ltd v Interfert Australia Pty Ltd [2010] QCA 128.....................9.12 Yorkshire Dale Steamship Co Ltd v Minister of War Transport (The Coxwold) [1942] AC 691, [1942] 2 All ER 6, (1942) 73 Ll L Rep 1...........................6.2, 6.8

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Table of Statutes Law Reform (Frustrated Contracts) Act 1943............1.1; 10.3 Sale of Goods Act 1979 s 7.............................................10.3 Unfair Contract Terms Act 1977..................................... 2.8, 2.9, 2.15

Unfair Contract Terms Act 1977 – contd s 2.............................................2.13 3.............................................2.15 FRANCE Civil Code s 1218.......................................1.1

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Chapter 1

Introduction to Force Majeure

1.1 A  ‘force majeure’ clause is a common clause in many commercial contracts by which one party may be excused from performing their obligations or allowed to perform their obligations in a different way, where a ‘force majeure event’ occurs. A  ‘force majeure event’ is generally defined to be a large, unforeseeable, often catastrophic event beyond the control of the parties. The term force majeure was originally derived from French civil law. ‘Force majeure’ in French literally means ‘superior force’. The French courts have long recognised this concept as referring to an event beyond the control of the parties – an ‘Act of God’, resulting in one party being prevented from performing its obligations.1 In France, and many other civil law jurisdictions, the courts have great flexibility to tailor a wide range of remedies to enable the parties to overcome the force majeure situation. Force majeure clauses have been incorporated in contracts governed by English law to overcome the difficulties posed by the English common law doctrine of frustration. When an unexpected situation interfered with the performance by one party of their obligation under a contract, the English common law doctrine of frustration was generally an impossibly high bar for a party to satisfy. When a party did satisfy this doctrine, it simply resulted in the parties being discharged from their contractual obligations. Such a consequence was often undesirable from a commercial point of view. It was also inelegant from the theoretical point of view of English contract law. One of the main functions of English contract law is freedom and sanctimony of contract. That is, where a party fails to perform obligations that they have contracted to perform, the courts should enforce the performance of obligations or otherwise provide damages as a remedy. The statutory remedies in the Law Reform (Frustrated Contracts) Act 1943 are not always sufficient to overcome these problems. In fact, in recent times, these problems have received little attention in English common law jurisdictions. It has long been accepted that parties should allocate the risks of unexpected events that prevent or hinder performance and craft remedies in relation to these events through a force majeure clause in their contracts.

1 The term was only codified in French civil law in 2016, however, and is now defined in section 1218 of the French Civil Code. A recent article, ‘Force Majeure and its Effects’ (2017) 6 IBLJ, 603–617 by Louis Thibierge discussed the history of force majeure in French civil law.

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1.1  Introduction to Force Majeure Across the chapters that follow, this book seeks to comprehensively examine the issues that arise in relation to the interpretation of force majeure clauses, including: (1) the general principles in relation to the interpretation of a force majeure clause; (2) what amounts to a ‘force majeure event’; (3)

what constitutes ‘prevention’, ‘hindrance’ or ‘delay’ in relation to a force majeure clause;

(4) when an event is considered to be ‘beyond the control’ of a party’; (5) the relevance of ‘foreseeability’ to the event; (6) whether the force majeure event ‘caused’ a party’s failure to perform; and (7) what obligation a party has to ‘take reasonable steps’ to avoid a force majeure event or limit its impact. In addition, a chapter is included that comprehensively examines the interpretation of ‘material adverse change’ clauses in English law, including an analysis of all pertinent US case law on this issue. The force majeure section of this book concludes with a comprehensive analysis of case law concerning the interpretation of force majeure clauses in the international jurisdictions of Canada, Singapore, Australia and Hong Kong, whose legal systems are derived from the English common law system. Three points will become apparent: (1) looking back over the last 100 years or so, case law in relation to force majeure clauses is relatively sparse. The case law that does exist relates chiefly to the interpretation of these clauses under English law. This should be no surprise, as many international commercial contracts are made subject to the laws of England, and this would seem to explain this eventuality; (2) both anecdotally and through an analysis of case law, a significant problem in relation to the interpretation of force majeure clauses arises when they are ‘boilerplate’ clauses that are full of ambiguities and provide for insufficient remedies where a force majeure event occurs.2 This is a serious issue that parties need to grapple with if they are to provide clients with comprehensive, tailored solutions when an unexpected event interferes with one party’s performance of their obligation;

2 At least the first of these problems was explicitly acknowledged in Holchim (Singapore) Pte Ltd v Precise Development Pte Ltd [2011]  SGCA  1, per Andrew Phang Boon Leong JA at [101] giving judgment for the Singaporean Court of Appeal.

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Introduction to Force Majeure 1.1 (3) the interpretation of a force majeure clause is a mixed question of fact and law. Each case turns on both the particular wording of the clause and the factual circumstances of the case. It is difficult to lay down general principles in relation to the interpretation of a force majeure clause; however, as above, this book seeks to distil the relevant legal issues that arise when a party seeks to rely on a force majeure clause. This book concludes with a chapter pithily sumarising the current state of the law in relation to frustration. In sum, this book seeks to provide a comprehensive overview of the principles relating to force majeure and material adverse change clauses, and to make a significant contribution to the understanding of an area of the law which has received little attention in both English law and international common law jurisdictions.

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Chapter 2

General Principles of Contractual Interpretation

INTRODUCTION 2.1 It is helpful to start with a general overview of the principles of contractual interpretation relating to English law because much of the jurisprudence in relation to force majeure relates to contracts governed by English law. However, these principles bear many similarities to the principles of contractual interpretation across other common law jurisdictions that derive from the English common law.

GENERAL PRINCIPLES OF CONTRACTUAL INTERPRETATION IN ENGLISH LAW 2.2 Lord Hodge in the recent Supreme Court case of Wood v Capita Insurance Services Ltd,1 summed up a court’s task in interpreting a contract: ‘The court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of the drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning.’2 The general approach to the construction of a contract was elegantly summarised by Lord Clarke in Rainy Sky SA v Kookmin Bank:3 ‘The language used by the parties will often have more than one potential meaning. I  would accept the submission made on behalf 1 [2017] UKSC 24. 2 [2017] UKSC 24 at [10] with all other judges of the court concurring with his judgment. 3 [2011] UKSC 50.

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General principles of contractual interpretation in English law 2.2 of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.’4 Lord Hodge in Wood v Capita further elaborated on the process of interpreting a contractual clause: ‘12. This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated: Arnold para 77 citing In re Sigma Finance Corp [2010] 1 All ER 571, para 10 per Lord Mance. To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each. 13. Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn 4 [2011] UKSC 50, per Lord Clarke (with all other judges concurring) at [21]; this approach was endorsed by Lord Hodge in Wood v Capita Insurance Services Ltd [2017] UKSC 24 at [11].

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2.2  General Principles of Contractual Interpretation contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type. The iterative process, of which Lord Mance spoke in Sigma Finance Corpn (above), assists the lawyer or judge to ascertain the objective meaning of disputed provisions.’5 Both of the above judgments endorsed the principles originally summarised by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society6 in interpreting a contract. Essentially, the entire factual background that was available to the parties at or before the date of the signing of the contract can be taken into account in interpreting an agreement, excluding pre-contractual negotiations and subjective statements of intent by either party.7

What is meant by ‘business common sense’? 2.3 The words in a contract should be interpreted to conform with a ‘business common sense’ meaning. What is meant by a ‘business common sense’ meaning? This was nicely summarised by Lord Steyn in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd: ‘Words are therefore interpreted in the way in which a reasonable commercial person would construe them, and the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language.’8 As above, there may be two possible interpretations of a clause where both rival constructions produce a sensible meaning. In these cases, the more commercial construction should be adopted. This approach was endorsed by Lord Clarke (with all other members of the Supreme Court concurring) in Rainy Sky SA v Kookamin Bank: ‘If a clause is capable of two meanings, as on any view this clause is, it is quite possible that neither meaning will flout common sense. In such circumstances, it is much more appropriate to adopt the more, rather than the less, commercial construction.’9 5 Wood v Capita Insurance Services Ltd [2017] UKSC 24 Lord Hodge at [12] and [13]. 6 [1998] 1 WLR 896 at 912–913. 7 Wood v Capita Insurance Services Ltd [2017] UKSC 24 at [10]; Rainy Sky SA v Kookmin Bank [2011] UKSC 50 at [14]; and Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912–913. 8 [1997] AC 749 at 771. 9 Lord Clarke in Rainy Sky SA v Kookamin Bank [2011] UKSC 50 at [29] endorsing the approach of Longmore LJ in Barclays Bank plc v HHY Luxembourg SARL [2011] 1 BCLC 336.

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General principles of contractual interpretation in English law 2.4

The court can use its power of ‘interpretation’ to correct a mistake in the contract 2.4 The court also has the power generally to read a contract in a way that gives the documents a sensible meaning and which gives effect to the commercial purpose of the clause. This was originally stated as the fifth principle of those summarised by Lord Hoffmann in his seminal judgment in Investors Compensation Scheme Ltd v West Bromwich Building Society: ‘the “rule” that words should be given their “natural and ordinary meaning” reflects the common-sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had …’10 Effectively, the court has the power to correct mistakes in a contract. There is arguably no limit to the amount of rearrangement of language that a court can undertake to overcome a mistake. In Chartbrook Ltd v Persimmon Homes Ltd Lord Hoffmann said: ‘there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which a court is allowed. All that is required is that it should be clear that something has gone wrong with the language and it should be what a reasonable person would have understood the parties to have meant.’11 A  court will always take into account the background ‘factual matrix’ and context in which the contract was executed, excluding pre-contractual negotiations and subjective statements of intent, in deciding how to interpret the contract to account for a mistake in the document.12

10 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, per Lord Hoffmann at 912–913. 11 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, per Lord Hoffmann at [25], with Lord Hope of Craigend at [1], Lord Rodger of Earlsferry at [68], Lord Walker of Gestinghope at [96], and Baroness Hale of Richmond at [100] and [101] concurring. 12 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, per Lord Hoffmann at [24], with Lord Hope of Craigend at [1], Lord Rodger of Earlsferry at [68], Lord Walker of Gestinghope at [96] and Baroness Hale of Richmond at [100] and [101] concurring; and Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, per Lord Hoffmann at 912–913.

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2.5  General Principles of Contractual Interpretation

General approach to the construction of a force majeure clause 2.5 In the case of The Kriti Rex13 Moore-Bick J  made the following observations about the interpretation of a force majeure clause: ‘In general I  think it fair to approach such clauses with the presumption that the expression force majeure is likely to be restricted to supervening events which arise without the fault of either party and for which neither of them has undertaken responsibility. However, as Mr Justice McCardie pointed out, the question is one of construction and in each case close attention should be given to the language of the clause itself whilst paying due regard to the nature and terms of the contract as a whole.’14 To similar effect, Males LJ (with whom Rose LJ and Haddon-Cave LJ agreed) in the Court of Appeal in the recent case of Classic Maritime Inc v Limbungan Makmur SDN BHD15 stated the following in relation to the construction of force majeure clauses: ‘As already indicated, any clause must be construed as a whole. … questions of construction encouraged by cases such as Wood v Capita Insurance Services Ltd [2017] AC 1173, which requires the court to check its provisional conclusions against the terms of the contract as a whole and the commercial consequences of the proposed construction.’16 Essentially, recent authorities that have considered force majeure clauses affirm that the construction of a force majeure clause is one to be undertaken according to the general principles of contractual construction outlined above.

The difficulties of interpreting a force majeure clause 2.6 The decision of Mance J, later Lord Mance, in Coastal (Bermuda) Petroleum Ltd v Vtt Vulcan Petroleum SA (‘The Marine Star’)17 provides an interesting example of how difficult it can be to interpret a force majeure clause. The Court of Appeal later overturned this decision on appeal.

13 Fyffes Group Ltd and Caribbean Gold Ltd v Reefer Express Lines Pty Ltd and Reefkrit Shipping Inc (‘The Kriti Rex’) [1996] 2 Lloyd’s Rep 171. 14 Ibid, per Moore-Bick J at 196. 15 [2019] EWCA Civ 1102. 16 Ibid, per Males LJ at [56]. 17 [1994] CLC 1019.

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General principles of contractual interpretation in English law 2.6 The plaintiff in The Marine Star was a member of an oil refining and trading group. The purpose of its trading operation was to ‘cut out the middleman’ and make a trading profit, where possible by purchasing and selling various types of oil. In relation to this case, around 10 July 1991, the plaintiff agreed to purchase approximately 56 metric tons of Russian E-4 fuel oil from the defendant. The defendant was required to deliver this fuel oil between 4 and 10 August 1991 to the plaintiff in Aruba, part of the Netherlands Antilles. The contract required the defendant to nominate a vessel by 31 July 1991 on which the fuel oil would be delivered. The defendant nominated the ‘Marine Star’ around 10 July 1991. The plaintiff accepted this nomination. However, later on 23 July 1991, the defendant withdrew this nomination with a view to making a substitution. The defendant did not make a future substitution, nor was it ever agreed with the plaintiff that a substitution would be made. On 2 August 1991, the plaintiff sued the defendant for repudiating the contract. The plaintiff purchased a cargo of M-100 oil from Vitol SA, another oil trader, and delivered this to Coastal Aruba in substitution for the Russian E-4 fuel oil that they had originally contracted to deliver. The plaintiff had entered into a back-to-back contract with Coastal Aruba and the defendants for the sale of the fuel oil that was identical in terms. Essentially, this was because the plaintiff was acting as the ‘middleman’, so to speak, and seeking to make a quick trading profit. The plaintiff expected to make a trading profit of around $95,000 on the onsale of the fuel oil to Coastal Aruba. Consequently, the plaintiffs also sought to recover damages because the plaintiff had suffered a ‘loss of yield’, or a lost opportunity to make a trading profit, on the Russian E-4 fuel oil that they were to deliver to Coastal Aruba. Both back-to-back contracts contained a force majeure clause that can be abbreviated in the following terms: ‘Neither party shall be liable for any breach, delay or non-performance hereunder which directly or indirectly results from or is caused, in whole or in part, by … impairment or interference with sellers’ means of supply … or which directly or indirectly results from any cause beyond sellers or buyers control, whether such other causes be of the classes herein specifically provided or not.’ The trial between liability and damages had been split. The defendant had lost in relation to liability in an earlier case.18 The Court of Appeal ultimately considered that the defendant could not invoke the clause because their failure to perform the contract was essentially a result of their own voluntary decision not to perform the contract. They failed to perform for their own commercial reasons.19 18 Coastal (Bermuda) Petroleum Ltd v Vtt Vulcan Petroleum SA [1993] 1 Lloyd’s Rep 629. 19 Ibid, per Hirst JA at 332.

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2.6  General Principles of Contractual Interpretation At the trial in relation to damages before Mance J, the defendant sought to argue that they should not have to pay damages to the plaintiff for any liability that they had toward Coastal Aruba for ‘loss of yield’ that Coastal Aruba suffered, as the plaintiff could have mitigated their losses towards Coastal Aruba by declaring a force majeure event. At first blush, this argument appears attractive. The force majeure clause is very widely drafted. It covered ‘non-performance … which results from any event beyond the buyer’s control’. The defendant sought to argue that their commercial decision not to make delivery to the plaintiff amounted to an event beyond the plaintiff’s control in fulfilling its obligation to make a quick onward supply of the Russian E-4 fuel oil to Coastal Aruba. Reading the clause in context, Mance J, as he then was, rejected this argument. He considered that it had been included in both the contract between the plaintiff and the defendant and between the plaintiff and Coastal Aruba at the defendant’s request. The defendant wanted the force majeure clause in both contracts for their own commercial purposes. At least, in this case, Mance J  considered that the force majeure clause was present in the contract between the plaintiff and Coastal Aruba in the instance that the defendant decided to exercise the force majeure provision in their contract with the plaintiff. In this situation, he considered that the defendant could not use the force majeure clauses in the contract between the plaintiff and Coastal Aruba to set up a defence. He stated: ‘This second point is reinforced in the present case by the consideration that the inclusion and wording of the force majeure clause were both suggested by the defendants for their own purposes, and were simply picked up and accepted both by the plaintiffs and by Coastal Aruba. In my judgment the plaintiffs would not have been and are not entitled to rely on the force majeure clause in the circumstances of this case to negative any liability on their part towards Coastal Aruba. The main reason for this conclusion lies in the essentially back-to-back nature of the contract between the plaintiffs and Coastal Aruba. The raison d’etre of that contract was, on the evidence and as a matter of common sense, to ensure a “flow of contracts” putting the plaintiffs and Coastal Aruba in the same position vis-a-vis each other as the defendants and the plaintiffs were towards each other. The force majeure clause was present in the contract between the plaintiffs and Coastal Aruba in case the defendants could rely on the force majeure clause in their contract with the plaintiffs. It was not there to enable the plaintiffs to set up defences against Coastal Aruba when the defendants had none vis-a-vis the plaintiffs; as the present case demonstrates, it would work to the detriment of the Coastal group rather than to its intended advantage if it were to be construed as having an independent operation of such a nature.’20 20 [1994] CLC 1019, per Mance J at 1028.

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Are force majeure clauses exception or exclusion clauses? 2.7 However, the Court of Appeal took a very different view and overturned Mance J’s decision. This demonstrates the difficulty of interpreting a force majeure clause. Saville LJ, giving judgment for the Court of Appeal, considered that Mance J focused on what he considered to be the general intention of the parties, rather than the wording of the force majeure clause. Saville LJ considered, interpreting the clause in context and with regard to the relevant factual background matrix, that: (1) ‘seller’ could only mean the seller that was party to the contract. It could not mean sellers up and down the chain. To hold otherwise would mean that the word ‘seller’ could change if and when a string of sellers was created. Quite apart from that, there was no basis for distinguishing between immediate and more distant sources of supply; and (2) he could not accept that in ‘back-to-back’ cases, all those that are contracting are contracting on the basis that liabilities will be passed up and down the chain.21

ARE FORCE MAJEURE CLAUSES EXCEPTION OR EXCLUSION CLAUSES? 2.7 There has long been a debate as to whether force majeure clauses are clauses that define/limit an obligation to perform, or are exclusion clauses that excuse a breach of an obligation to perform. This issue was most recently considered by the Court of Appeal in Classic Maritime Inc v Limbungan Makmur Sdn Bhd.22 In that case, the claimant entered into a contract of affreightment (‘COA’) with the first defendant charterer for the carriage of iron ore pellets from Tubarao or Ponta Ubu in Brazil to Port Kelang or Labuan in Malaysia. The shipments were due to take place between July 2015 and June 2016. The second defendant was the first defendant’s parent and guarantor. On 5 November 2015, the Fundao tailings dam at the Germano iron ore mine in Brazil burst. The villages below the dam were flooded with slurry. Many people lost their lives. Production at the iron ore mine stopped. The first defendant charterer sought to rely on clause 32 of the COA to excuse it from performance of transporting iron ore from Brazil to Malaysia. Clause 32 stated:

21 Coastal (Bermuda) Petroleum Ltd v VTT  Vulcan Petroleum (‘The Marine Star’) [1996] CLC 1510, per Saville LJ giving judgment for the court at 1513 and 1514. 22 [2019] EWCA Civ 1102.

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2.7  General Principles of Contractual Interpretation ‘EXCEPTIONS Neither the Vessel, her Master or Owners, nor the Charterers, Shippers or Receivers shall be Responsible for loss or damage to, or failure to supply, load, discharge or deliver the cargo resulting From: Act of God, act of war, act of public enemies, pirates or assailing thieves; arrest or restraint of princes, rulers or people; embargoes; seizure under legal process, provided bond is promptly Furnished to release the Vessel or cargo; floods; frosts; fogs; fires; epidemics; quarantine; Intervention of sanitary, customs or other constituted authorities; Blockades; Blockages; riots; insurrections; civil commotions; political disturbances; earthquakes; Landslips; explosions; collisions; strandings, and accidents of navigation; accidents at the mine or Production facility or to machinery or to loading equipment; accidents at the Receivers’ works, Port, wharf or facility; or any other causes beyond the Owners’, Charterers’, Shippers’ or Receivers’ Control; always provided that any such events directly affect the performance of either party under This Charter Party.’ Giving judgment for the court, Males LJ espoused: ‘While all will ultimately depend on the terms of the clause, in general a force majeure clause operates to qualify a party’s obligations, unlike an exceptions clause which excludes or limits liability for breach.’23 Males LJ acknowledged that although the clause was headed an ‘exceptions’ clause, it contained much of the language of a force majeure clause, referring to a number of events beyond a party’s control.24 Having regard to the language, the context, and the purpose of the clause Males LJ observed: (1) it was a general exceptions clause of mutual application; (2)

the clause heading stated ‘exceptions’. There was nothing in the contract to state that the heading should not be taken into account, however, the heading was not conclusive;

(3) the clause excuses responsibility ‘for loss or damage to, or failure to supply, load, discharge or deliver the cargo’. Essentially, the clause exempts a party from responsibility for breaching an obligation.25 Males LJ, therefore, concluded that clause 32 was an exception clause.

23 Classic Maritime Inc v Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102, per Males LJ at [28]. 24 Ibid, per Males LJ at [31]. 25 Ibid, per Males LJ at [39].

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Are force majeure clauses exception or exclusion clauses? 2.7 The leading House of Lords authority in relation to this matter is Fairclough, Dodd & Jones Ltd v JH Vantol Ltd.26 In this case, the appellant sellers had entered into a contract with the respondent buyers for the sale of 100 tons of washed cottonseed oil to be shipped during the months of December 1950/ January 1951 from Alexandria, Egypt to Rotterdam, the Netherlands. The contract was a standard form contract of the London Oil and Tallow Trades Association and contained the following important terms: ‘2. Particulars of shipment, with date of bill or bills of lading, marks and numbers of drums (if any) to be duly declared by the original seller in writing with due dispatch, but not later than 42 days from the date of the bill of lading.’ ‘11A. In the event of war, hostilities or blockade preventing shipment this contract or any unfulfilled part thereof shall be cancelled. If required sellers must produce proof to justify cancellation.’ ‘11B. Should the shipment be delayed by fire, strikes, … prohibition of export, …, the time of shipment shall be extended by two months. Should the delay exceed two months, buyers shall have the option of cancelling the contract forthwith or accepting the goods for shipment as soon as possible, but should the shipment not be possible within eight months from the date of shipment originally stipulated, contract to be void. The option to be declared as soon as shippers announce their inability to ship within the extended period of two months, a reasonable time being allowed for passing on such announcements. Should buyers fail to exercise their option in due time, contract to be void. If required sellers must produce proof to justify their claim for cancellation or extension.’ On 19 December 1950, the Egyptian Government issued a prohibition of the export of Egyptian cotton. The appellant sellers sought to rely on clause 11B above on the basis that there had been a ‘prohibition of export’ and this entitled them to an extension of a further two months beyond the end of January 1951 to make the shipment. The respondent buyers sought to terminate the contract by the end of January 1951 on the basis that the appellant sellers could only rely on clause 11B if the ‘prohibition of export’ extended right through the contract period until the end of January 1951. All of the judges ultimately considered that the construction contended for by the appellant sellers produced the most commercially sensible and reasonable outcome. That is, where ‘delay’ is caused by an event specified in clause 11B during the contract period, the period for shipment is automatically extended for two months.

26 [1957] 1 WLR 136.

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2.7  General Principles of Contractual Interpretation However, Lord Tucker’s comments on whether force majeure clauses are exclusion clauses are of most interest here: ‘Force majeure clauses are of different kinds. In the case of an exception clause it is generally true to say that it only operates on the happening of an event which would otherwise result in a breach, but there is nothing to prevent the parties providing for an extension of the time for performance or for a substituted mode of performance on the occurrence of a force majeure event whether or not such event would have prevented performance. It therefore seems to me that the words “force majeure” in the clause and their presence in the margin on the printed contract form as well as in the nature of the specified events afford little assistance in the interpretation of the words in question, more especially when clause 11B is contrasted with 11A.’27 Essentially, determining whether a force majeure clause is a clause that qualifies an obligation to perform or an exclusion clause is a matter of construction in each case. Simply using the words ‘force majeure’ in the heading or the body of the clause will not automatically determine this matter. Similarly to Classic Maritime, the use of the word ‘exception’ in the heading or the body of a clause does not automatically determine this matter either. In Fairclough, Dodd & Jones Ltd, although Lord Tucker was not explicit, he appeared to regard clause 11B as a clause that qualified the performance of the appellant seller’s obligations and granted them an extension of time to perform, rather than an exception clause that excused them from breach of their obligation to perform. Identifying the type of force majeure clause is important because an exclusion clause will be given a strict construction. There are also different consequences in relation to causation between the two types of clauses. As will be seen from the discussion below in relation to construction of force majeure clauses that are exceptions clauses, force majeure clauses that qualify an obligation to perform are often also generally given a strict construction, although there is no rule that says that this must always be the case.

What is the consequence if a force majeure clause is an exceptions clause? 2.8 The courts have traditionally taken a strict approach to the construction of exclusion clauses. Historically, they have tended to take a narrow construction in interpreting these clauses across the board, particularly in consumer contracts where one party, the consumer, is clearly in a weaker position.

27 Fairclough, Dodd & Jones Ltd v JH Vantol Ltd [1957] 1 WLR 136, per Lord Tucker at 144.

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Are force majeure clauses exception or exclusion clauses? 2.8 Lewison LJ summarised the modern approach to the construction of exclusion clauses in Interactive E-Solutions JLT v O3B Africa Ltd: 28 ‘The traditional approach of the courts towards exclusion clauses has been one of hostility. A  strict and narrow approach to their interpretation held sway. This began to change with the passing of the Unfair Contract Terms Act 1977. Since then the courts have become more accepting of such clauses, recognising (at least in commercial contracts made between parties of equal bargaining power) that exclusion and limitation clauses are an integral part of pricing and risk allocation: see Persimmon Homes Ltd v Ove Arup & Partners Ltd [2017] EWCA Civ 373, [2017] PNLR 29 at [57]. As Briggs LJ put it in Nobahar-Cookson v Hut Group Ltd [2016] EWCA Civ 128, [2016] 1 CLC 573 at [19]: “Commercial parties are entitled to allocate between them the risks of something going wrong in their contractual relationship in any way they choose. … The court must still use all its tools of linguistic, contextual, purposive and common-sense analysis to discern what the clause really means.”29 To similar effect, Christopher Clarke LJ in Scottish Power UK  Plc v BP Exploration Operating Company Ltd30 made the point that where a clause admits more than one meaning, in the first instance, the court should grapple with the language using all the interpretative tools at its disposal: ‘The fact that there are two possible meanings is the beginning of the inquiry, not its end. It is then necessary for the court to apply “all its tools of linguistic, contextual, purposive and common-sense analysis to discern what the clause really means” per Briggs LJ in NobaharCookson v The Hut Group Ltd [2016] EWCA Civ 128 [19]. If as a result of so doing the answer becomes clear the court should give effect to it …’31 Essentially, interpretation of an exclusion clause agreed between two commercial parties of equal bargaining power should be undertaken from the first principles on a fair reading of the clause. These principles were outlined earlier at para  2.2 ff. In the first instance, it is unnecessary to take a strict construction of such a clause, such that even the slightest ambiguity in the clause is resolved against the party for whose benefit the clause operates. 28 [2018] EWCA Civ 62. 29 Interactive E-Solutions JLT v O3B Africa Ltd [2018] EWCA Civ 62, per Lewison LJ at [14]. 30 [2016] EWCA Civ 1043. 31 [2016] EWCA Civ 1043 at [29].

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2.8  General Principles of Contractual Interpretation It should be noted that the courts have long ago moved away from taking a strained construction of exclusion clauses. The House of Lords case of Photo Production Ltd v Securicor Transport Ltd32 was the first to establish this. In delivering his speech, Lord Diplock said: ‘My Lords, the reports are full of cases in which what would appear to be very strained constructions have been placed upon exclusion clauses, mainly in what today would be called consumer contracts and contracts of adhesion. As Lord Wilberforce has pointed out, any need for this kind of judicial distortion of the English language has been banished by Parliament’s having made these kinds of contracts subject to the Unfair Contract Terms Act 1977. In commercial contracts negotiated between business-men capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance), it is, in my view, wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only …’33

The modern approach to the construction of an exclusion clause 2.9 The decision of Briggs LJ in Nobahar-Cookson v Hut Group Ltd34 provides a good starting point for the current approach of the courts to exclusion clauses in contracts between commercial parties: ‘recent decisions about exclusion clauses have continued to affirm the utility of the principle that, if necessary to resolve ambiguity, they should be narrowly construed, including in relation to commercial contracts. Association of British Travel Agents Ltd v British Airways plc [2000] 2 Ll Rep 209 was about an exclusion clause in a commercial contract. At paragraph 43 Clarke LJ said: “In my opinion, in all these circumstances, where there is doubt as to the true meaning of the expression ‘other charges’, it should be construed against the airlines contra proferentes both for the reasons already given and because it appears in an exclusion clause.”’ 35

32 [1980] AC 827. 33 Ibid at 851. 34 [2016] EWCA Civ 128. 35 Ibid, per Briggs LJ at [16].

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Are force majeure clauses exception or exclusion clauses? 2.10 To similar effect, Moore-Bick LJ in Transocean Drilling UK Ltd v Providence Resources Ltd36 considered that an exclusion clause negotiated between two commercial parties of equal bargaining power may be construed strictly, or contra proferentem, where: (1)

there is ambiguity in the exclusion clause in the sense that it is capable of bearing two or more equally distinct meanings; or

(2) it is very one-sided, for example, where a party can put its terms to the other on a ‘take it or leave it’ basis.37 On this point, Moore-Bick LJ espoused: ‘In my view the judge was wrong to invoke the contra proferentem principle in this case. It is an approach to construction to which resort may properly be had when the language chosen by the parties is onesided and genuinely ambiguous, that is, equally capable of bearing two distinct meanings. In such cases the application of the principle may enable the court to choose the meaning that is less favourable to the party who introduced the clause or in whose favour it operates. Unfortunately, it seems now to be used by some as synonymous with the principle in Gilbert-Ash, although the two are in fact quite distinct: see Nobahar-Cookson v The Hut Group Ltd [2016] EWCA Civ 128 per Briggs LJ at paras 12–20. It has no part to play, however, when the meaning of the words is clear, as I think they are in this case; nor does it have a role to play in relation to a clause which favours both parties equally, especially where they are of equal bargaining power. In the case of a mutual clause such as the present cl 20 it is impossible to say who is the proferens and who the proferee.’38

The more valuable the right a party is giving up, the clearer an exclusion clause needs to be 2.10 Also, there is strong authority that the more valuable a right that a party is giving up, the clearer the words that need to be used in the clause. Briggs LJ made these observations in Nobahar-Cookson v Hut Group Ltd:39 36 [2016] EWCA Civ 672. 37 Many consumer contracts would fall into this category, as would contracts in relation to software licensing. However, as pointed out in the judgment of Lewison LJ in Interactive E-Solutions JLT  v O3b Africa Ltd, the Unfair Contract Terms Act 1977 is likely to provide a statutory remedy to an ambiguous and/or one-sided clause such that it would be unnecessary to resort to construing the exclusion clause contra proferentem. It should also be noted that Moore-Bick LJ’s approach represents a slight extension of construing exclusion clauses contraproferentem. Typically it would be ambiguous clauses that are construed strictly or contra proferentem. 38 [2016] EWCA Civ 672 at [20]. 39 [2016] EWCA Civ 128.

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2.10  General Principles of Contractual Interpretation ‘In my judgment the underlying rationale for the principle that, if necessary to resolve ambiguity, exclusion clauses should be narrowly construed has nothing to do with the identification of the proferens, either of the document as a whole or of the clause in question. Nor is it a principle derived from an identification of the person seeking to rely upon it. Ambiguity in an exclusion clause may have to be resolved by a narrow construction because an exclusion clause cuts down or detracts from the ambit of some important obligation in a contract, or a remedy conferred by the general law such as (in the present case) an obligation to give effect to a contractual warranty by paying compensation for breach of it. The parties are not lightly to be taken to have intended to cut down the remedies which the law provides for breach of important contractual obligations without using clear words having that effect: see Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 per Lord Diplock at 717H, applied in Seadrill Management Services Ltd v OAO Gazprom [2010]  EWCA  Civ 691; [2010] 1  CLC  934, by Moore-Bick LJ at para 29.’40 To similar effect, Moore-Bick LJ in Stocznia Gdynia SA v Gearbulk Holdings Ltd41 stated: ‘The court is unlikely to be satisfied that a party to a contract has abandoned valuable rights arising by operation of law unless the terms of the contract make it sufficiently clear that that was intended. The more valuable the right, the clearer the language will need to be.’42

Conclusion 2.11 Essentially, in the first instance, an exclusion clause negotiated between two commercial parties of roughly equal bargaining power should be interpreted according to the first principles of contractual interpretation outlined earlier in this chapter. After going through this process, if the clause can bear two or more equally distinct meanings, it is generally ambiguous.43 An ambiguous clause should be construed strictly, that is, against the party that seeks to rely on the clause.

40 [2016] EWCA Civ 128, per Briggs LJ at [18]. 41 [2009] EWCA Civ 75. 42 Ibid, per Moore-Bick LJ at [23]. This passage was quoted with approval by Lord Clarke at [33] in the Privy Council in the case of Bahamas Oil Refining Company International Ltd v The Owners of the Cape Bari Tankschiffahrts GmbH & Co KG (Bahamas) [2016] UKPC 20. 43 Moore-Bick LJ in Transocean Drilling UK Ltd v Providence Resources Ltd [2016] EWCA Civ 672 at [20].

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Application of the contra proferentem rule to a force majeure clause 2.12 In undertaking this process, one should keep in mind that the more valuable the right it is asserted that a party is giving up, the clearer the clause must be.

APPLICATION OF THE CONTRA PROFERENTEM RULE TO A FORCE MAJEURE CLAUSE 2.12 The contra proferentem rule also has an operation as a ‘rule’ in relation to contractual interpretation generally, separately from its operation in relation to exclusion clauses. The modern operation of the contra proferentem rule was probably best summarised by Jackson LJ in the Court of Appeal in the recent case of Persimmon Homes Ltd v Ove Arup & Partners Ltd:44 ‘In relation to commercial contracts, negotiated between parties of equal bargaining power, that rule now has a very limited role. Lord Neuberger MR summarised the position succinctly in K/S  Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904; [2012] Ch 497 at [68]: “… Quite apart from raising abstruse issues as to who is the proferens (and, in particular, whether the issue turns on the precise facts of the case or hypothetical analysis), ‘rules’ of interpretation such as contra proferentem are rarely decisive as to the meaning of any provisions of a commercial contract. The words used, commercial sense, and the documentary and factual context, are, and should be, normally enough to determine the meaning of a contractual provision.”’45 Essentially, the approach of the courts when utilising the contra proferentem rule in relation to the interpretation of a contractual clause is similar to that of exclusion clauses. In relation to clauses negotiated between commercial parties of similar bargaining power, every effort should be made to discern the meaning of the clause using ordinary methods of contractual interpretation. There should be no presumption that a clause should be given a strict or strained construction such that it is interpreted to operate against a party. However, where there is genuine ambiguity as to the meaning of a clause, in the sense that it is capable of two or more equally distinct meanings,46 it is open to the court to apply the contra proferentem rule and construe the 44 [2017] EWCA Civ 373. 45 Ibid, per Jackson LJ at [52]. 46 Moore-Bick LJ in Transocean Drilling UK Ltd v Providence Resources Ltd [2016] EWCA Civ 672 at [20].

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2.12  General Principles of Contractual Interpretation clause against the party who either drafted the clause or who seeks to rely on that clause. In relation to force majeure clauses, there is no specific case that discusses the application of the contra proferentem rule to force majeure clauses. A  force majeure clause’s interpretation is derived from the first principles of contractual interpretation discussed earlier in this chapter at para 2.2. There is no express rule that states that a force majeure clause should be given a strict construction. Yet, a survey of force majeure cases reveals that they are effectively interpreted strictly. It will often take an unprecedented and catastrophic event to trigger a force majeure clause. Also, there are many other hurdles that a party must jump in order to obtain the benefit of a force majeure clause. For example, in the recent case of 2 Entertain Video Ltd v Sony DADC Europe Ltd,47 O’Farrell J considered that a fire at a warehouse in North London that was deliberately lit by rioters during the 2011 London riots was not an event ‘beyond the reasonable control’ of 2E Video Entertainment Limited (‘2E’), because 2E had failed to maintain adequate security to prevent intruders breaking into the warehouse, and also because 2E had failed to put adequate fire prevention measures in place. It is interesting to note that O’Farrell J appeared to proceed on the basis that the event was otherwise a force majeure event. The event, in that case, would most likely satisfy the definition of a riot as set out in Chapter 3 at para 3.6.

If the party claiming the benefit of an exclusion clause is negligent, what impact does this have on their ability to rely on the clause? 2.13 Where a force majeure type clause is an exclusion clause, the traditional approach has been to apply the principles outlined by Lord Morton in Canada Steamship Lines v R.48 In Canada Steamship, the appellant, Canada Steamship, had leased a freight shed from the respondent, the Canadian Government. The respondent’s employees were undertaking repair of the freight shed, as they were obliged to do under the lease. They had occasion to enlarge a hole in a steel beam. The respondent’s employees effected this using an oxyacetylene welding torch. In doing so, sparks from the welding torch fell on bales of cotton waste resulting in a fire that destroyed the shed and around C$40,000 of goods belonging to the appellant. The lease between the appellant and the respondent contained the following clauses: (1) Clause 7 provided that: ‘the lessee (Canada Steamship) shall not have any claim or demand against the lessor (the Canadian Government) for 47 [2020] EWHC 972 (TCC). 48 [1952] AC 192.

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Application of the contra proferentem rule to a force majeure clause 2.13 … damage … to the said shed … or to any … goods … at any time … being … in the said shed’; (2) Clause 17 provided: ‘That the lessee shall at all times indemnify … the lessor from and against all claims and demands, loss, costs, damages, actions, suits or other proceedings …’ On a plain reading of the clauses above, the appellant, Canada Steamship, would not have any claim against the respondent, the Canadian Government, for damage to the shed. However, at first instance, Angers J found that it was the gross negligence of the respondent that had caused the fire and that the above exclusion clauses did not apply where the respondent had been negligent. The decision was appealed, eventually to the Supreme Court of Canada, which reversed the decision of Angers J. The appellant appealed to the Privy Council. Lord Morton, giving judgment for the Privy Council, stated that the following principles should be applied when considering whether an exclusion clause, such as the above, protected the party who relied on that clause in circumstances where they had been negligent: (1) if the clauses contain language which expressly exempts the person in whose favour it is made (that is, the ‘proferens’) from the consequence of the negligence of his own servants, effect must be given to that provision; (2) if there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens; (3) if the words used are wide enough for the above purpose, the court must then consider whether ‘the head of damage may be based on some ground other than that of negligence’ to quote again Lord Greene in the Alderslade case. The ‘other ground’ must not be so fanciful or remote that the proferens cannot be supposed to have desired protection against it, but subject to this qualification, which is no doubt to be implied from Lord Greene’s words, the existence of a possible head of damage other than that of negligence is fatal to the proferens even if the words used are prima facie wide enough to cover negligence on the part of his servants’.49 Essentially, the Privy Council considered that neither the wording of clause 750 or clause 1751 made clear that they were to cover negligent acts by the respondent. As such, the respondent could not rely on them to exclude liability. There has been an ongoing debate as to how the Canada Steamship guidelines apply in more modern times. The most recent consideration of these principles 49 [1952] AC 192, per Lord Morton at 208. 50 Ibid, per Lord Morton at 211. 51 Ibid, per Lord Morton at 213 and 214.

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2.13  General Principles of Contractual Interpretation by the House of Lords/Supreme Court was in HIH  Casualty and General Insurance Ltd v Chase Manhattan Bank.52 In this case, Chase Manhatten Bank was the representative party in the case for a syndicate of banks that had made substantial loans on a non-resource basis to parties involved in making feature films. The syndicate banks required that the parties making feature films take out insurance policies in the name of the relevant syndicate bank to cover any shortfall on the repayment of the relevant loan. Heaths acted as the insurance broker between the parties. The films did not generate sufficient earnings to repay the loans that the syndicate banks made. The banks sought to claim the shortfall on their insurance policies. HIH, representing the insurance companies, repudiated liability on the grounds of misrepresentation and nondisclosure, either negligent or fraudulent, by Heaths as a broker. The trial judge ordered a trial of the preliminary question of whether HIH, representing the insurance companies, could avoid liability/rescind the contracts on the assumption that they made good their allegations that there had been either negligent or fraudulent representations on the part of Heaths as an insurance broker. Chase contended that the insurer’s right to avoid the policy was excluded by the ‘truth of statement’ clause. Clauses 7 and 8 of the ‘truth of statement’ clause stated as follows: ‘… [7] and shall have no liability of any nature to the insurers for any information provided by any other parties [8] and any such information provided by or non-disclosure by other parties including, but not limited to, Heath North America & Special Risks Ltd (other than section I of the questionnaire) shall not be a ground or grounds for avoidance of the insurers’ obligations under the policy or the cancellation thereof.’ The insurers admitted that the ‘truth of statement’ clause was deliberately very broad and was designed to prevent Chase and the other insured from losing the benefit of the policies for failing to disclose material circumstances (through themselves or their insurance broker) because, unusually, they were in no better situation to assess the risks being insured than the insurance companies.53 However, HIH, representing the insurance companies, argued that as a matter of construction the above clauses did not cover fraudulent or negligent misrepresentation. Lord Hoffmann acknowledged that:

52 [2003] UKHL 6. 53 HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, per Lord Hoffmann at [48].

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Application of the contra proferentem rule to a force majeure clause 2.13 ‘Phrases 7 and 8 do not say anything about negligence one way or the other. They simply exclude liability for “any information provided … or non-disclosure”’.54 In considering how the Canada Steamship guidelines above applied, he made a couple of important observations. First, he observed that the House of Lords applied Lord Morton’s Canada Steamship tests in Smith v South Wales Switchgear Co Ltd.55 However, he also observed that there were many words of caution about avoiding a mechanistic construction when using these tests. In particular, he observed that Lord Keith of Kinkel described the tests as ‘guidelines’ and emphasised that: ‘the matter is essentially one of the ascertaining the intention of the contracting parties from the language they have used, considered in the light of surrounding circumstances which must be taken to have been within their knowledge.’56 After a careful analysis of other recent authorities in relation to the Canada Steamship tests, he concluded: ‘The question, as it seems to me, is whether the language used by the parties, construed in the context of the whole instrument and against the admissible background, leads to the conclusion that they must have thought it went without saying that the words, although literally wide enough to cover negligence, did not do so. This in turn depends upon the precise language they have used and how inherently improbable it is in all the circumstances that they would have intended to exclude such liability.’57 Finally, Lord Hoffmann concluded that in this case, clauses 7 and 8 must have been intended to cover negligent non-disclosure: ‘… there is nothing in the language or context of phrases 7 and 8 to suggest that the parties did not intend them to cover negligence. There is no inherent improbability in such an intention. As Rix LJ said, in a case like this the question of negligence can never be all that far from the contemplation of the parties. It would be quite unrealistic to hold that when they said that Chase was have [sic] no liability for “any information provided by any other parties” or that such information or non-disclosure by any other parties should not be a ground for 54 [2003] UKHL 6, per Lord Hoffmann at [59]. 55 [1978] 1 WLR 165. 56 HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, per Lord Hoffmann at [61], quoting Lord Keith of Kinkel in Smith v South Wales Switchgear Co Ltd [1978] 1 WLR 165 at 177. 57 Ibid, per Lord Hoffmann at [63].

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2.13  General Principles of Contractual Interpretation avoidance of the policy, it went without saying that they did not contemplate negligence. Negligence is a risk which the parties could reasonably have been expected to allocate to one party or the other, so as best to achieve the commercial objectives of the contract. And it seems to me that the commercial objective of the Truth of Statement clause would be substantially undermined if Chase’s right to the policy monies depended upon an inquiry into whether Heaths had or had not taken reasonable care in checking the truth of representations or deciding which facts should be disclosed.’58 To similar effect, Lord Bingham of Cornhill espoused in relation to the Canada Steamship tests: ‘There can be no doubting the general authority of these principles, which have been applied in many cases, and the approach indicated is sound. The courts should not ordinarily infer that a contracting party has given up rights which the law confers upon him to an extent greater than the contract terms indicate he has chosen to do; and if the contract terms can take legal and practical effect without denying him the rights he would ordinarily enjoy if the other party is negligent, they will be read as not denying him those rights unless they are so expressed as to make clear that they do. But, as the insurers in argument fully recognised, Lord Morton was giving helpful guidance on the proper approach to interpretation and not laying down a code. The passage does not provide a litmus test which, applied to the terms of the contract, yields a certain and predictable result. The courts’ task of ascertaining what the particular parties intended, in their particular commercial context, remains.’59 In relation to clauses 7 and 8 of the ‘truth of statement’ and the Canada Steamship tests, Lord Scott of Foscote made the following observation: ‘116 … Lord Morton was expressing broad guidelines not prescribing rigid rules. It cannot be right mechanically to apply the guideline incorporated in his third paragraph so as to produce a result inconsistent with the commercial purpose of the contract in question. 117. Given the commercial purpose of the Truth of Statement clause, namely, to insulate Chase from representations or non-disclosures by Heaths and others material to the effecting of the TVC insurance policy, it is impossible to conclude that the parties did not intend negligent representations or non-disclosures to be covered. I  agree with my noble and learned friend Lord Hoffmann that that purpose 58 [2003] UKHL 6, per Lord Hoffmann at [67]. 59 Ibid, per Lord Bingham of Cornhill at [11], with whom Lord Steyn at [24] concurred.

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Application of the contra proferentem rule to a force majeure clause 2.13 would be substantially undermined if negligence were held to be not covered.’60 One can very clearly see the application of the first two principles of the Canada Steamship tests/guidelines above. It is difficult to determine when the third test in Canada Steamship might apply. The principles and approach of the court in HIH  Casualty and General Insurance Ltd have recently been applied by the Court of Appeal in Taberna Europe CDO II plc v Selskabet AF1 (formerly Roskilde Bank A/S).61 In that case, Taberna was an investment vehicle incorporated in Ireland. In December 2006, Taberna’s management decided to invest in subordinated callable step-up notes in Roskilde Bank with a face value of €27 million. Roskilde was a successful regional Danish bank. As a result of the upheaval resulting from the global financial crisis, the subordinated debt securities that Taberna invested in were rendered worthless. On 25 August 2008, most of the assets and liabilities of Roskilde were transferred to a vehicle called ‘New Roskilde’. However, the subordinated loan securities Taberna had purchased were not transferred. Taberna realised they were likely to recover little by proving their debt in the bankruptcy of Roskilde. Instead, Taberna sued New Roskilde, claiming that they had been induced to invest in the notes, to some extent, by a misrepresentation in an ‘investor presentation’ that had been posted on Roskilde’s website. The presentation consisted of a series of slides intended to be accompanied by an oral presentation as part of a roadshow or otherwise. The presentation contained a representation that the amount of Roskilde’s non-performing loans was DKK  57 million, or 0.14% of its total guarantee loan book. In fact, the true amount of Roskilde’s non-performing loans was approximately DKK 3.5 billion or over 8% of its total guaranteed loan book. In part, it was this misrepresentation that Taberna claimed had induced them to invest in the subordinated debt with a face value of €27 million. The trial judge was satisfied that Taberna most likely came across this misrepresentation by downloading the presentation from Roskilde’s website. The respondent/New Roskilde defended itself on the basis that it was entitled to rely on a disclaimer on the last page of its presentation that negated duties and excluded liability: ‘This presentation has been produced by [Roskilde] … solely for use by investors met during the non-deal roadshow made in connection with the release of the bank’s Q3 2007 figures and may not be reproduced or redistributed to any other person without permission. This presentation is only directed at persons who have professional experience in matters relating to investments.

60 [2003] UKHL 6, per Lord Scott of Foscote at [116]–[117]. 61 [2016] EWCA Civ 1262.

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2.13  General Principles of Contractual Interpretation This presentation may contain certain forecasts made in statements relating to the business, financial performance and results of the bank and/or the industry in which it operates. Any such statements contained in this presentation, including assumptions, opinions and views of the bank or cited from third party sources, are solely opinions and forecasts which are uncertain and subject to risks. A  number of factors can cause actual events to differ significantly from any implied or anticipated development. Neither the bank nor any officers or employees can guarantee that the assumptions underlying such statements are without errors nor does either accept any responsibility for the future accuracy of any opinions given in this presentation or the actual occurrence of any forecasted developments. No representation or warranty (expressed or implied) is made as to, and no reliance should be placed on, any information, including projections, estimates, targets and opinions, contained herein, and no liability whatsoever is accepted as to any errors, omissions or misstatements contained herein, and, accordingly, neither the bank nor any officers or employees accepts any liability whatsoever arising directly or indirectly from the use of this presentation for any purpose … The bank is under no obligation to update or revise the information contained herein and will not publicly release any amendments it may make that may result from circumstances arising after the date of this presentation. The bank accepts no responsibility for the accuracy of its sources.’62 The trial judge identified the following phrases as being of particular relevance in relation to the above disclaimer: (1) ‘This presentation has been produced by [the bank] … solely for use by investors met during the non-deal roadshow made in …’; (2) ‘No representation or warranty (express or implied) is made as to, and no reliance should be placed on, any information, including projections, estimates, targets and opinions, contained herein, …’; (3) ‘[N]o liability whatsoever is accepted as to any errors, omissions or misstatements contained herein, …’; (4) ‘[N]either the bank nor any officers or employees accepts any liability whatsoever arising directly or indirectly from the use of this presentation for any purpose …’; (5) ‘Neither this presentation nor any part of it shall form the basis of, or be relied upon in connection with any offer, or act as an 62 Taberna Europe CDO II plc v Selskabet AF1 (formerly Roskilde Bank A/S) [2016] EWCA Civ 1262 at [5].

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Application of the contra proferentem rule to a force majeure clause 2.14 inducement to enter into any contract or commitment whatsoever …’ (6) ‘The bank is under no obligation to update or revise the information contained herein …’63 Moore-Bick LJ in the Court of Appeal observed that phrases (2) and (5) were duty negating clauses, while phrases (3) and (4) were clauses that excluded liability.64 One matter in issue in relation to these clauses was whether the Canada Steamship guidelines apply. The claimants maintained that the Canada Steamship guidelines applied such that the above disclaimers did not exclude liability for negligence because they did not specifically mention negligence. Moore-Bick LJ quoted many of the above passages of the House of Lords in HIH  Casualty and General Insurance Ltd with approval. Moore-Bick LJ emphasised that the authorities showed that there had been a shift towards recognising that parties to commercial dealings are entitled to choose the terms on which they conduct business and that, even though the above clauses did not specifically mention negligence, they were sufficient to exclude liability for any negligence on the part of the respondent/New Roskilde: ‘The authorities show that there has been an increasing willingness in recent years to recognise that parties to commercial contracts are entitled to determine for themselves the terms on which they will do business. In my view Roskilde was entitled to include in the Investor presentation a disclaimer of liability for the statements contained in it. The disclaimer may, of course, be overridden by the dealings between the parties, but the judge’s findings do not go far enough for that to assist Taberna in this case. Taberna was in my view in no better position than the investors to whom the document was originally addressed and Roskilde is therefore entitled to rely on the disclaimer as an answer to its claim.’65

Do the Canada Steamship guidelines apply to a force majeure clause? 2.14 The main authority to have considered whether the Canada Steamship guidelines apply to a force majeure clause is the Court of Appeal case of J Lauritzen AS v Wijsmuller BV (‘Super Servant Two’).66

63 [2016] EWCA Civ 1262 at [13]. 64 Ibid at [14]. Also, the trial judge was prepared to accept that these clauses satisfied the ‘reasonableness’ test under s 2 of the Unfair Contracts Act 1977, as was Moore-Bick LJ at [23]. 65 Ibid at [26]. 66 [1990] 1 Lloyd’s Rep 1.

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2.14  General Principles of Contractual Interpretation The respondents, in this case, owned a drilling rig. They had contracted with the appellants to have the drilling rig carried from the Hitachi shipyard in Japan to Rotterdam around June 1981. They were to do this using one of either two specialised semi-submersible vessels named Super Servant One and Super Servant Two. The contract contained the following two clauses that were pertinent to the case: ‘16. Liability 16.1. The Principal agrees that transportation to the actual location of loading, stowage, lashing, securing, carriage, unlashing and discharge of the Cargo and the transportation to the actual location of redelivery are entirely at the Principal’s risk and that in  no circumstances whatsoever Wijsmuller, its employees and/or agents and/or subcontractors and/or servants and/or agents of such subcontractors shall be liable for any loss (direct or consequential) or damage to the Cargo howsoever caused unless caused by the deliberate act or omission of Wijsmuller. 17. Cancellation 17.1. Wijsmuller has the right to cancel its performance under this Contract whether the loading has been completed or not, in the event of force majeur [sic], Acts of God, perils or danger and accidents of the sea, acts of war, warlikeoperations, acts of public enemies, restraint of princes, rulers or people or seizure under legal process, quarantine restrictions, civil commotions, blockade, strikes, lockout, closure of the Suez or Panama Canal, congestion of harbours or any other circumstances whatsoever, causing extra-ordinary periods of delay and similar events and/or circumstances, abnormal increases in prices and wages, scarcity of fuel and similar events, which reasonably may impede, prevent or delay the performance of this contract.’ Clause 16 effectively provided the appellants with an exclusion from liability. Clause 17 was a cancellation clause that gave the respondents the right to cancel the contract on the happening of a force majeure event. Clause 17 could also effectively be described as a force majeure clause. The appellants had intended to use Super Servant Two to perform the contract. However, in January 1981, six months before they were to perform the contract, Super Servant Two became a total loss when off-loading another drilling rig in the Zaire River. The respondents alleged that the loss of Super Servant Two 28

Application of the contra proferentem rule to a force majeure clause 2.14 was because of the negligence of the appellants. The appellants denied this. The matter was still to be investigated. Bingham LJ, as he then was, considered whether clause 17 allowed the appellants to cancel the contract in the event that they had been negligent. He acknowledged that the expression ‘dangers and perils of the sea’ described a proximate cause of loss that may arise with or without negligence.67 However, Bingham LJ ultimately considered that clause 17 should not be read to cover events where the appellants had been negligent for the following reasons: (1) it was appropriate to apply the Canada Steamship guidelines to clause 17 – Bingham LJ acknowledged that clause 17 was not an exemption clause but was a force majeure clause. Nevertheless, he considered that the wide range of circumstances allowing the appellants to cancel the contract at no cost to themselves meant that the Canada Steamship guidelines should apply but was not specific as to what applying the Canada Steamship guidelines meant. Implicitly, he meant that a stricter approach to the interpretation of this clause should apply, and a stricter approach to the circumstances in which the appellants could apply this clause should be taken;68 (2) the force majeure language of clause 17.1 strongly pointed towards events ‘beyond the direct or indirect control’ of the appellants;69 (3)

clause 16.1 very clearly exempted the appellants from liability in relation to the unloading, storage and unloading of cargo, even, quite explicitly, if they were negligent. He found it anomalous to hold that the appellants had the right to cancel that contract under clause 17 where they had been negligent because clause 17 did not explicitly refer to the fact that the appellants had the right of cancellation where they had been negligent;70

(4) taking account of the commercial context, this result made sense. In relation to clause 16, the respondents could obtain insurance to guard against this risk. If clause 16 were in less stringent terms, the appellants would have to insure this risk and probably pass this cost on to the respondents in the form of an increase in the contract price. There was no reason to suppose that insurance cover would not be available. In relation to clause 17, on the other hand, it would be far more difficult to insure such a risk. It made more commercial sense for the risk in relation to clause 17 to be allocated on the basis of the respondent’s construction, that is, that it did not cover events caused, or caused in part, by the negligence of the appellants.71

67 [1990] I Lloyd’s Rep 1, per Bingham LJ at 6. 68 Ibid, per Bingham LJ at 7. 69 Ibid, per Bingham LJ at 7. 70 Ibid, per Bingham LJ at 7. 71 Ibid, per Bingham LJ at 7.

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2.14  General Principles of Contractual Interpretation Dhillon LJ, considered that the expression ‘perils or danger or accidents of the sea’ should be read subject to the qualification ‘unless caused by the negligence of the appellants or its servants’.72 The most interesting aspect of this case is that it is the only authority at an appellant level where a judge has applied the Canada Steamship guidelines to a force majeure clause. Bingham LJ was not specific about what he meant by applying the ‘broad approach taken in Canada Steamship’.73 In light of his other reason, it is implicit that he considered a strict approach should be taken to the construction of this clause. While Bingham LJ did not go into great detail about how the Canada Steamship guidelines applied to clause 17.1, his approach broadly accords with the approach he later took in the House of Lords in HIH Casualty and General Insurance Ltd above, and also that of the other Law Lords in that case. That is, to quote from his judgment in HIH  Casualty and General Insurance Ltd: ‘The courts should not ordinarily infer that a contracting party has given up rights which the law confers upon him to an extent greater than the contract terms indicate he has chosen to do; and if the contract terms can take legal and practical effect without denying him the rights he would ordinarily enjoy if the other party is negligent, they will be read as not denying him those rights unless they are so expressed as to make clear that they do.’74 However, he also made clear that the Canada Steamship guidelines were just guidance and not a code.75 In contrast to his decision in HIH  Casualty and General Insurance Ltd, applying the Canada Steamship guidelines, in this case, he concluded that the appellants who were seeking to rely on the force majeure clause were unable to do so because they had been negligent. The decisions of Lord Bingham in Super Servant Two and HIH Casualty and General Insurance Ltd are good cases in point as to the flexible approach taken to the application of the Canada Steamship guidelines in relation to both exclusion clauses and force majeure clauses. More broadly, the approach taken by the courts in the decisions of Super Servant Two, HIH Casualty and General Insurance Ltd and Taberna Europe CDO II plc, probably gives a good indication of how a court might consider whether a party can rely on a force majeure clause where their negligence has contributed to loss or damage. While it was implicit that Bingham LJ, as he then was, considered that a strict approach should be taken to the interpretation 72 [1990] 1 Lloyd’s Rep 1, per Dhillon LJ at 13. 73 [1990] 1 Lloyd’s Rep 1. 74 HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, per Lord Bingham of Cornhill at [11]. 75 Ibid, per Lord Bingham of Cornhill at [11].

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Unfair Contract Terms Act 1977 2.15 of the force majeure clause in Super Servant Two, the approach he took is broadly in line with that taken by him in HIH Casualty and General Insurance Ltd, and that the Court of Appeal followed in Taberna Europe CDO II plc. That is, recent authorities show an increased willingness to allow parties to commercial contracts to determine for themselves the terms on which they will do business. However, there is also a recurrent theme that a party should generally not be presumed to have given up valuable contractual rights unless, viewed objectively, the language of the contract makes it clear that they intended to do so.

UNFAIR CONTRACT TERMS ACT 1977 2.15 In relation to the application of the Unfair Contract Terms Act 1977 to force majeure clauses there are few reported cases. Most recently, in Target Rich International Ltd v Forex Capital Markets Ltd,76 the parties agreed that a force majeure clause needed to satisfy the ‘reasonableness test’ in the Unfair Contract Terms Act 1977.77 Target Rich International Limited (‘TRI’) was the claimant and an offshore investment vehicle incorporated in the Seychelles. The defendant, Forex Capital Markets Limited (‘FXCM’), was a retail foreign exchange trading platform offering trading in currency pairs. On 15 January 2015, TRI had taken a position on the EUR/CHF (Euro/ Swiss franc) currency pair and speculated that the Euro would appreciate. The Swiss National Bank (the Swiss central bank) unexpectedly removed their cap on the value of the Swiss franc against the Euro on 15 January 2015. This triggered a period of brief volatility in which the Swiss franc appreciated around 25% against the Euro before levelling off. Before the Swiss National Bank lifted the cap, the EUR/CHF exchange rate was around 1.2/1. TRI had stop-loss orders on its position that were to be executed at 1.117911/1. However, as a result of the volatility and illiquidity in the market, internal system circuit breakers (‘SCB’s) were triggered on FXCM’s platform that suspended both pricing and trading on FXCM’s platform. Consequently, the stop-loss orders were not executed in a timely manner. They were executed the next day at a rate of 1.03/1, resulting in losses to the claimant of over $500,000. Among other things, the claimant maintained that there were several breaches of contractual terms. Part of FXCM’s defence was relying on clause 25 of the contract between the parties, being the force majeure provision. Adrian Beltrami QC ultimately considered that there was no breach of contract by the defendant, further, he also considered that clause 25, the force majeure provision, would have been engaged, and the defendant could have relied on this clause. However, it was common ground between

76 [2020] EWHC 1544 (Comm). 77 Ibid, per Mr Adrian Beltrami QC at [133].

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2.15  General Principles of Contractual Interpretation the parties that the clause would need to satisfy the ‘reasonableness’ test in the Unfair Contract Terms Act 1977.78 Clause 25 stated as follows (the Company referring to FXCM): ‘25.1 Since the Company does not control signal power, its reception or routing via Internet, configuration of the Client’s equipment or reliability of its connections, the Company shall not be liable for any claims, losses, damages, costs or expenses, including attorney’s fees, caused directly or indirectly, by any breakdown or failure of any transmission or communication system … or for any cause preventing the Company from performing any or all [of] its obligations, any act of God, war, terrorism, malicious damage, civil commotion, industrial acts, any Exceptional Market Event, or acts and regulations of any governmental or supra national bodies or authorities which in the Company’s opinion prevent an orderly market in relation to the Client’s Orders (“a Force Majeure Event”). ‘25.2 Upon the occurrence of a Force Majeure Event, the Company shall use commercially reasonable efforts to resume performance … Upon occurrence of a Force Majeure Event, all of the Company’s obligations under these Terms of Business shall be immediately suspended for the duration of such Force Majeure Event …’ An ‘Exceptional Market Event’ was defined as ‘the suspension, closure, regulation … volatility or loss of liquidity in any relevant market …’. Adrian Beltrami QC accepted that the volatility and illiquidity caused by the actions of the Swiss National Bank in removing the cap on the Swiss franc against the Euro constituted an Exceptional Market Event and that therefore the force majeure clause was engaged.79 Further, Adrian Beltrami QC was satisfied that clause 25 satisfied the ‘reasonableness’ test in the Unfair Contract Terms Act 1977 because: (1) although there was a subjective test at the end of clause 25.1 that could potentially be unreasonable, it had no operation when the definition of an Exceptional Market Event was satisfied; and (2) an Exceptional Market Event could affect both FXCM and its clients. Considering this term in the contract as a whole, there was nothing inherently unreasonable with FXCM obtaining the benefit of this clause when an Exceptional Market Event occurred. Implicit in this conclusion were findings that Adrian Beltrami QC made earlier 78 [2020] EWHC 1544 (Comm), per Mr Adrian Beltrami QC at [133]. Presuming the parties had the Unfair Contract Terms Act 1977, s 3 in mind that applies where one party deals ‘on the other’s written standard terms of business’. 79 Ibid, per Mr Adrian Beltrami QC at [131]–[132].

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Unfair Contract Terms Act 1977 2.15 in his judgment that SCB’s were standard in the foreign exchange industry and, among other things, acted like ‘seatbelts’ to protect clients and ensure trades were executed in a legitimate way rather than an aberrant way.80 It is not easy to conceive of situations in which the Unfair Contract Terms Act 1977 might apply between sophisticated commercial parties of equal bargaining power.

80 [2020] EWHC 1544 (Comm), per Mr Adrian Beltrami QC at [28], [134] and [135].

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Chapter 3

What Constitutes a ‘Force Majeure’ Event?

INTRODUCTION 3.1 It is trite law that ‘force majeure’ is not a term of art in English law.1 It is an expression that has been imported from French civil law. The International Chambers of Commerce (ICC) 2020 long-form clause is probably the best starting point to break down how a force majeure clause could potentially be interpreted. The ICC 2020 long-form clause was agreed by a working party within the ICC at the end of 2019 as an update to the 2003 clause. It is unlikely many commercial contracts, if any, would incorporate all the terms of the ICC’s 2020 clause. First, the clause has only just been updated. Second, it is only since the outbreak of the Covid-19 pandemic that many parties have begun paying close attention to their force majeure clauses. Third, a force majeure clause is often an outcome of a ‘bargaining’ process between each party’s lawyers. It will never reflect a ‘model’ clause that a particular party might desire. Regardless, the ICC 2020 long form clause is a good starting point to break down the interpretation of all the issues that arise in the interpretation of a force majeure clause.

ICC 2020 LONG-FORM FORCE MAJEURE CLAUSE 3.2 The ICC  2020 long-form force majeure clause (with some minor modifications) is set out below: 1. Definition. ‘Force Majeure’ means the occurrence of an event or circumstance (‘Force Majeure Event’) that prevents or impedes a party from performing one or more of its contractual obligations

1 Tandrin Aviation Holdings Ltd v Aero Toy Store LLC [2010] EWHC 40 (Comm), per Hamblen J at [43].

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ICC 2020 long-form force majeure clause 3.2 under the contract, if and to the extent that the party affected by the impediment (‘the Affected Party’) proves: (a) that such impediment is beyond its reasonable control; and (b) that it could not reasonably have been foreseen at the time of the conclusion of the contract; and (c) that the effects of the impediment could not reasonably have been avoided or overcome by the Affected Party. 2. Non-performance by third parties. Where a contracting party fails to perform one or more of its contractual obligations because of default by a third party whom it has engaged to perform the whole or part of the contract, the contracting party may invoke Force Majeure only to the extent that the requirements under paragraph 1 of this Clause are established both for the contracting party and for the third party. 3. Presumed Force Majeure Events. In the absence of proof to the contrary, the following events affecting a party shall be presumed to fulfil conditions (a) and (b) under paragraph 1 of this Clause, and the Affected Party only needs to prove that condition (c) of paragraph 1 is satisfied: (a) war (whether declared or not), hostilities, invasion, act of foreign enemies, extensive military mobilisation; (b) civil war, riot, rebellion and revolution, military or usurped power, insurrection, act of terrorism, sabotage or piracy; (c) currency and trade restriction, embargo, sanction; (d) act of authority whether lawful or unlawful, compliance with any law or governmental order, expropriation, seizure of works, requisition, nationalisation; (e) plague, virus outbreak, epidemic, pandemic, natural disaster or extreme natural event; (f) explosion, fire, destruction of equipment, prolonged breakdown of transport, telecommunication, information system or energy; (g) general labour disturbance such as boycott, strike and lockout, go-slow, occupation of factories and premises; (h) an act of god; (i) any other event beyond the control of the parties. 4. Notification. The Affected Party shall give notice of the event without delay to the other party. 35

3.2  What Constitutes a ‘Force Majeure’ Event? 5. Consequences of Force Majeure. A party successfully invoking this Clause is relieved from its duty to perform its obligations under the Contract and from any liability in damages or from any other contractual remedy for breach of contract, from the time at which the impediment causes inability to perform, provided that the notice thereof is given without delay. If notice thereof is not given without delay, the relief is effective from the time at which notice thereof reaches the other party. The other party may suspend the performance of its obligations, if applicable, from the date of the notice. 6. Temporary impediment. Where the effect of the impediment or event invoked is temporary, the consequences set out under paragraph  5 above shall apply only as long as the impediment invoked prevents performance by the Affected Party of its contractual obligations. The Affected Party must notify the other party as soon as the impediment ceases to impede performance of its contractual obligations. 7. Duty to mitigate. The Affected Party is under an obligation to take all reasonable measures to limit the effect of the event invoked upon performance of the contract. 8. Contract termination. Where the duration of the impediment invoked has the effect of substantially depriving the contracting parties of what they were reasonably entitled to expect under the contract, either party has the right to terminate the contract by notification within a reasonable period to the other party. Unless otherwise agreed, the parties expressly agree that the contract may be terminated by either party if the duration of the impediment exceeds 120 days. This paragraph  8 establishes a general rule for determining in each particular case when the duration of the impediment is unsustainable and entitles the parties to terminate the contract. In order to increase certainty and foreseeability, a maximum duration of 120 days has been provided, which can of course be changed by agreement of the parties at any time according to their needs. 9. Unjust enrichment. Where paragraph  8 above applies and where either contracting party has, by reason of anything done by another contracting party in the performance of the contract, derived a benefit before the termination of the contract, the party deriving such a benefit shall pay to the other party a sum of money equivalent to the value of such benefit. 36

ICC 2020 long-form force majeure clause 3.4

There must be a force majeure ‘event’ 3.3 Clause 3 above defines a fairly comprehensive list of force majeure events. Each clause will be different. Anecdotally, clauses drafted from 2011 onwards tend to include the term ‘virus outbreak’, ‘epidemic’ or ‘pandemic’ more frequently than clauses drafted before that time. This may have occurred after the rather uneventful swine flu pandemic of 2009 and 2010. However, the omission of these terms does not automatically mean that a pandemic will not be considered a force majeure event. It could potentially fall within the event of ‘act of god’ (which is noticeably absent from the ICC 2020 long form clause). In many cases, it will also fall within the ‘sweeper’ clause. Typically these clauses are widely drafted. Generally, they refer to significant disruptive events rather than day-to-day events. The various events mentioned in clause 3 are considered below.

What is meant by ‘war’? 3.4 Kawasaki Kisen Kabushiki Kaisha of Kobe v Bantham Steamship Company Ltd2 (Kawasaki v Bantham) is the leading authority on the meaning of ‘war’ in relation to a force majeure type clause. The defendant was the owner of a steamer and had agreed with the plaintiff/ claimant, by a time charterparty dated 2  June 1936, that the plaintiff could charter the vessel for 12 months from delivery with an option to extend for a further six months. Clause 31 of the charterparty stated: ‘Chartered and owners to have the liberty of cancelling this charterparty if war breaks out involving Japan.’ On 18 September 1937, the defendant owner of the steamer sought to cancel the charterparty pursuant to clause 31 as hostilities broke out between China and Japan. The plaintiff sued for damages claiming the defendant was in breach of the contract they had both signed. The primary dispute concerned whether China and Japan were at ‘war’. The matter was referred to arbitration. The Court of Appeal summarised the umpire’s finding as to the position between Japan and China on 18 September 1937: (1)

50,000 Japanese troops were on the ground in the Shanghai area supported by the Japanese Navy and Japanese Air Force and were engaged in a battle with Chinese forces of around 1.5 million over a 30-mile front. Many soldiers had been killed and wounded on both sides;

(2) three Japanese armies numbering around 100,000 soldiers were advancing in North China fully equipped with aeroplanes, tanks and 2 [1939] 2 KB 544.

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3.4  What Constitutes a ‘Force Majeure’ Event? heavy artillery and were advancing in the teeth of opposition from around 300,000 Chinese soldiers; (3) over 50 battles were fought between 30  August 1937 and 16 September 1937; (4) the Japanese air force had control of the sky and had been bombing Chinese military and air force targets as well as civilian targets. They frequently attacked Chinese lines of communications; and (5) since 25  August 1937, the Japanese Navy had maintained a naval blockade over a 1,000 mile stretch of the coast of China and occupied certain islands.3 By contrast, the defendant maintained that ‘war’ had not broken out because: (1) there had been no declaration of war by either Japan or China; (2) Japan and China had continued to maintain diplomatic relations; (3)

one of the parties inquired of the Foreign Office of the British Government as to whether China and Japan were at war. The response received from the foreign office as to whether Japan and China were at war stated that ‘the current situation in China is anomalous and indeterminate’.4

Sir Wilfrid Greene MR, giving judgment for the Court of Appeal, was satisfied that this was a very clear case where Japan and China were at war.5 He considered that the meaning of ‘war’ in the charterparty was simply a matter of construction of the charterparty based on general principles. He considered that war, in this case, had no settled meaning in international law,6 and the meaning to be given to it would be what is now referred to as the ‘business common sense’ meaning of the term by the reasonable commercial person.7 While it was clear in the case of Kawasaki v Bantham that Japan and China were at war, there may be difficult borderline cases in determining when war starts and ends. These will ultimately be questions of fact in each case. Some force majeure clauses may also use language like ‘extensive military mobilisation’ that catch events leading up to the start of a war.

What is meant by ‘extensive military mobilisation’? 3.5 The term ‘extensive military mobilisation’ has never been the subject of judicial consideration in relation to a force majeure clause. However, older 3 Kawasaki Kisen Kabushiki Kaisha of Kobe v Bantham Steamship Company Ltd [1938] 3 All ER 80, per Goddard J at 81. 4 Ibid, per Goddard J at 82. 5 Kawasaki Kisen Kabushiki Kaisha of Kobe v Bantham Steamship Company Ltd [1939] 2 KB 544, per Sir Wilfrid Greene MR at 552. 6 Ibid, per Sir Wilfrid Greene MR at 556. 7 Ibid, per Sir Wilfrid Greene MR at 558 and 559.

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ICC 2020 long-form force majeure clause 3.5 force majeure clauses and shipping insurance contracts sometimes refer to ‘warlike operations’. ‘Warlike operations’ has been the subject of judicial consideration. The term ‘extensive military mobilisation’ could be seen as a modernisation of this term in the context of force majeure. The best guide to how the term ‘warlike operations’ might be construed is the shipping insurance case of Clan Line Steamers Ltd v Liverpool and London War Risks Insurance Association Ltd8 (Clan Line Steamers). It was settled law that where a collision occurs between two ships, and the ship at fault is involved in a warlike operation, the damage arising from the collision will be taken to arise from a ‘warlike operation’ for marine insurance purposes. The Clan Line Steamers case concerned a merchant ship carrying steel rounds destined for a factory in France to be manufactured into artillery shells for the joint British and French effort to fight the advancing German army. The merchant ship was at fault in a collision with another ship in the English Channel. The issue was whether the merchant ship at fault could be said to be involved in ‘warlike operations’. Atkinson J espoused the following in relation to ‘warlike operations’: ‘The conclusion at which I have arrived from a careful examination of the authorities is that a warlike operation is one which forms part of an actual or intended belligerent act or series of acts by combatant forces. It may be performed preparatory to the actual act or acts of belligerency, or it may be performed after such act or acts, but there must be a connexion sufficiently close between the act in question and the belligerent act or acts to enable a tribunal to say, with at least some modicum of Lord Dunedin’s common sense, that it formed part of acts of belligerency. If military equipment is being taken in a ship to a place behind the fighting front from which the forces engaged, or about to be engaged on that front, may be supplied, that ship may beyond question be said to be taking part in a warlike operation. If a ship is bringing home such equipment after it has been employed on a fighting front or has been lying available for and at the service of a fighting front, again beyond question, she is taking part in a military operation, but to hold that to carry steel rounds on behalf of the French Armament Mission from Manchester to a port mainly used for commercial purposes, albeit also used at times for receiving supplies of munitions of war, for carriage to some factory or factories doubtless to be chosen because of their distance from the fighting front is a warlike operation would be to hold something which, in my judgment, would be completely out of harmony with the substance of everything said since the decision of Britain Steamship Co, Ld v The King .’9 8 [1943] KB 209. 9 Ibid, per Atkinson J at 221 and 222.

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3.5  What Constitutes a ‘Force Majeure’ Event? Effectively, there has to be a more or less direct connection between the operation and the military activity of fighting a war for an operation to be described as a ‘warlike operation’. The reference to common sense could be taken to be business common sense as a reasonable commercial person would understand this term to mean in the context of a commercial contract. It is likely that the expression ‘extensive military mobilisation’ is wider than the expression ‘warlike operation’.

What amounts to a ‘riot’? 3.6 The Oxford English Dictionary defines ‘riot’ to mean: ‘a violent disturbance of the peace by the crowd’. The most comprehensive definition of the term riot was made by Phillimore and Bray JJ in  Field v Metropolitan Police Receiver,10 where the Divisional Court discussed the ingredients of the criminal offence of riot at common law. After a review of the authoritative texts and cases, they distilled the following five elements in relation to the offence of riot at common law: (1) at least three persons; (2) a common purpose; (3) the execution or inception of the common purpose; (4) an intention to help one another, by force if necessary, against any person who might oppose them in the execution of the common purpose; and (5) force or violence displayed in such a manner as to alarm at least one person of reasonable firmness and courage.11 This formulation of riot in relation to the criminal common law offence of riot was referred to in Mitsui Sumitomo Insurance Co (Europe) Ltd v Mayor’s Office for Policing and Crime12 without disapproval.13 It was also explicitly adopted by Straughton J in Athens Maritime Enterprises Corp v The Hellenic Mutual War Risks Association.14 The plaintiffs, in that case, had insured their vessel and its machinery with a standard form English marine insurance contract with respect to loss resulting from riot and ‘piracy’. The plaintiffs were also insured for war risks, essentially covering loss and damage arising from events not covered by their standard marine insurance policy, through a mutual insurer, the War Risks Association. The plaintiff’s vessel was moored within the port limits and territorial limits of Bangladesh on 22  June 1977. During the evening, a group of thieves began stealing equipment. They were disturbed 10 [1907] 2 KB 853. 11 [1907] 2 KB 853, per Phillimore and Bray JJ at 860. 12 [2014] EWCA Civ 682. 13 Ibid, per Lord Dyson MR at [22]. 14 [1983] 1 All ER 590.

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ICC 2020 long-form force majeure clause 3.7 by the vessel’s crew. The thieves at first offered resistance as they were armed with knives. However, members of the crew were also armed, and the thieves fled. At issue was whether the actions of the thieves amounted to either ‘riot’ or ‘piracy’. Straughton J adopted the above formulation to determine the meaning of the word ‘riot’ for the purposes of a marine insurance policy. However, in that case, he considered that even if the acts of violence could be said to amount to a ‘riot’, they occurred after the theft of the valuables had taken place, and therefore the loss could not be said to be caused by a riot.15 In the case of 2 Entertain Video Ltd v Sony DADC Europe Ltd,16 2 Entertain signed a contract with Sony to provide logistics services, including storage and distribution facilities at a warehouse in Enfield. During the 2011 London riots, the warehouse in Enfield was broken into by a gang of youths and looted. The warehouse was also set alight. A fire burned for around ten days and almost completely destroyed the warehouse. 2 Entertain lost around £40 million. Sony’s insurers only reimbursed 2 Entertain for around £8 million. 2 Entertain sued Sony for lost profits, business interruption costs, and increased working costs as a result of the fire. Sony sought to defend itself, among other things, by relying on clause 14, the force majeure clause, that stated: ‘14.1 Neither party shall be liable for its failure or delay in performing any of its obligations hereunder if such failure or delay is caused by circumstances beyond the reasonable control of the party affected including but not limited to industrial action (at either party), fire, flood, wars, armed conflict, terrorist act, riot, civil commotion, malicious damage, explosion, unavailability of fuel, pandemic or governmental or other regulatory action.’ It was accepted without argument in 2 Entertain Video Ltd v Sony DADC Europe Ltd that the 2011 London riots were clearly riots. It was common ground between the parties that the riots were unforeseen and unprecedented.17 The event would most definitely have satisfied the term ‘riot’ in the force majeure clause of the contract that was the subject of the dispute. The defendant, in that case, failed to establish its force majeure defence because it ultimately did not establish that the break-in at the warehouse was an event beyond its reasonable control.18

What constitutes ‘piracy’? 3.7 The Oxford English dictionary defines ‘piracy’ to be: ‘the act of attacking and robbing ships at sea’. 15 [1983] 1 All ER 590, per Straughton J at 600 and 601. 16 [2020] EWHC 972 (TCC). 17 2 Entertain Video Ltd v Sony DADC Europe Ltd [2020] EWHC 972 (TCC), per O’Farrell J at [207]. 18 Ibid, per O’Farrell J at [208].

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3.7  What Constitutes a ‘Force Majeure’ Event? However, the term ‘piracy’ may vary with the context of the contract within which it is contained. In a commercial context, the term ‘piracy’ has been most frequently considered in the context of marine insurance. The leading modern authority on this matter is Athens Maritime Enterprises Corp v The Hellenic Mutual War Risks Association.19 Straughton J conducted an extensive review of authorities to determine what constituted ‘piracy’ for the purposes of a policy of marine insurance. Essentially, Straughton J considered that piracy for the purposes of a marine insurance policy consisted of the following elements: (1) force, or at least the threat of force, was necessary in order for an act to constitute ‘piracy’;20 and (2)

in general, a ship must be ‘at sea’ or in a place where it could be considered that a ‘maritime offence’ could be committed against the vessel, although the precise wording may depend on the insurance policy.21

As above, the plaintiffs in Athens Maritime Enterprises Corp v The Hellenic Mutual War Risks Association22 had insured their vessel and its machinery with a standard form English marine insurance contract with respect to loss resulting from riot and ‘piracy’. As above, the thieves, in that case, began stealing equipment by stealth. The equipment that was lost to theft was stolen before a physical confrontation took place. Therefore, Straughton J considered that the loss, being the wrongful appropriation of the goods on board the ship, had occurred before any acts of violence took place. For that reason, the loss could not be said to have been caused by ‘piracy’. Straughton J did acknowledge that this was a very borderline case.23 An older case that considered the term ‘piracy’ in relation to a marine insurance policy was Republic of Bolivia v Indemnity Mutual Marine Insurance Company Ltd.24 In this case, the Bolivian Government had provisions and stores shipped from the mouth of the Amazon up along a tributary to an area of Bolivia that bordered with Brazil. The provisions were for the Bolivian military who were engaged in establishing the authority of the Bolivian Government in that region. Brazilian settlers who desired that the Bolivian Government should not establish their authority in this region patrolled the tributary in armed vessels. 19 [1983] 1 All ER 590. 20 [1983] 1 All ER 590, per Straughton J at 599. He was assisted in this view by the judgment of the Privy Council in Re Piracy Jure Gentium [1934] AC 586 at 600 where the Privy Council concluded in relation to the crime of piracy that: ‘actual robbery is not an essential element in the crime of piracy jure gentium, and that a frustrated attempt to commit piratical robbery is equally piracy jure gentium that actual robbery’. And Lord Denning MR to a similar effect in Shell International Petroleum Co Ltd v Gibbs [1982] 1 All ER 1057 at 1062. 21 [1983] 1 All ER 590, per Straughton J at 598. Kennedy LJ in Republic of Bolivia v Indemnity Mutual Marine Insurance Company Ltd [1909] 1 KB 785 at 802 considered that the policy in that case must clearly have been intended to cover a tributary to the Amazon. 22 [1983] 1 All ER 590. 23 [1983] 1 All ER 590 at 600. 24 [1909] 1 KB 785.

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ICC 2020 long-form force majeure clause 3.9 One particular vessel intercepted a ship and stole provisions destined for the Bolivian military. Ultimately, all judges considered that the acts, in this case, did not constitute ‘piracy’ for the purposes of an insurance policy because the Brazilian settlors’ actions were inspired by political motives rather than indiscriminately plundering for private gain.25

What is the meaning of an ‘embargo’? 3.8 The Oxford English Legal Dictionary defines ‘embargo’ to mean: ‘an official ban on trade or commercial activity with a particular country’. This is precisely the meaning of the word ‘embargo’ based on the context in which it appears in the 2020 ICC long form force majeure clause, the context being that clause 3(c) refers to similar restrictions like ‘currency and trade restrictions’ and ‘sanctions’. ‘Embargo’ in this context has generally been taken to mean a ‘prohibition on export’.26 The terms are used almost interchangeably in relation to cases that have considered this issue.27 It should be observed that the term ‘embargo’ may be used in the context of a shipping commercial contract to mean ‘the arrest or detention of a ship by a public authority’ or ‘an order preventing a ship from putting to sea or entering certain ports’.

What is the meaning of an ‘act of authority’? 3.9 The main case in the common law world to have considered the meaning of ‘authority’ was the Australian High Court decision of Federal Commission of Taxation v Silverton Tramway Co Ltd.28 Dixon CJ espoused that: ‘The word “authority” has long been used to describe a body or person exercising power or command. No doubt this has come about by a transfer of meaning from the abstract conception of power or command to the body or person possessing it. But in relation to such a public affair as public transport the use of the word “authority” as a description of a person or body implies he or it is an agency or instrument set up to exercise control or execute a function in the public interest whether as an emanation of the general government or 25 Republic of Bolivia v Indemnity Mutual Marine Insurance Company Ltd [1909] 1 KB 785, per Vaughan Williams LJ at 796 and Kennedy LJ at 803. 26 Usually on goods, but potentially on services. 27 Bremer Handelsgesellschaft mbH v C Mackprang Jr (No 1) [1979] 1 Lloyd’s Rep 221 (CA), per Lord Denning MR at 223; Bunge SA v Deutsche Conti Handelsgesellschaft mbH [1979] 2 Lloyd’s Rep 435 (CA), per Lord Denning MR at 437. 28 [1953] 88 CLR 559.

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3.9  What Constitutes a ‘Force Majeure’ Event? as an adjunct of local government or as a specially constituted officer or body’.29 Essentially, the above definition of ‘authority’ focuses more on the function that the body does. That is, exercising control of executing a function. It is clear that it covers action by emanations of central government, such as ministerial and non-ministerial departments, local authorities and also non-governmental public bodies. The dividing line between a non-governmental public body and a purely private body can be difficult to draw. This matter is often considered by reference to authorities examining whether a body is a public body susceptible to judicial review. Two leading authorities are frequently cited in relation to this matter. The first is the 1987 decision of the Court of Appeal in R v Panel on Takeovers and Mergers, ex p Datafin Plc.30 In that case, the Court of Appeal considered that the Takeover Panel was a public body susceptible to judicial review. The Court of Appeal observed that although the Takeover Panel’s power was ostensibly derived from the consent of those over who it exercised power, it was an integral part of a regulatory system performing an important public function. The Takeover Panel would very likely satisfy ‘authority’ in the sense of an authority that exercises a public function. The second case is the 1993 Court of Appeal decision of R v Disciplinary Committee of the Jockey Club, ex p Aga Khan.31 The Court of Appeal considered that the Jockey Club, the body responsible for the organisation and control of racing activities in the UK, was a private body. The club’s powers and function did not derive from primary or secondary legislation. Its power over the industry was ostensibly derived through the contractual arrangements it had with its members. This was in spite of the fact that it exercised many functions, such as trying to maintain the integrity of the racing industry, that could be considered to be in the public interest. It is a matter of examining the source of the body’s powers – ie, does its power derive from statute, contract or some other source; and also examining the nature of the body’s powers – ie does the body exercise a ‘public’ function. To some degree, the judgment of whether a body is ‘public’ in nature is impressionistic. As the above cases demonstrate, there are many borderline cases that are difficult to determine. David LJ and Warby J, sitting in the High Court, examined the above authorities and other similar authorities in R  (Liberal Democrats) v ITV  Broadcasting Ltd.32 In that case, they were considering whether ITV was susceptible to judicial review for a decision they made to exclude the Liberal Democrats and the Scottish National Party from live televised debates during the December 2019 general Parliamentary elections. They ultimately considered that ITV was not amenable to judicial 29 [1953] 88 CLR 559, per Dixon CJ at 565 and 566. 30 [1987] QB 815. 31 [1993] 1 WLR 909. 32 [2019] EWHC 3282 (Admin).

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ICC 2020 long-form force majeure clause 3.10 review in relation to its decision to exclude the Liberal Democrats and the Scottish National Party from the live televised debates. They set out the following propositions that were derived from the majority decision of the House of Lords in YL  v Birmingham City Council (Secretary of State for Constitutional Affairs intervening)33 and set out in the judgment of Arden LJ in R (Holmcroft Properties Ltd) v KPMG llp:34 (1)

the fact that a service is for the public benefit does not mean that providing the service is a public function;

(2) the fact that a function has a public connection with a statutory duty of a public body does not necessarily mean that the function is itself public; (3) the fact that a public authority could have performed the function does not mean that the function is a public one if done by a private body; (4) the private profit-making motivation behind a private body’s operations points against treating it as a person with a function of a public nature; (5) functions of a public character are essentially functions which are governmental in nature. There is no perfect test as to whether a body is one that is ‘public’ in nature and therefore capable of being an ‘authority’. To some degree, the judgment will always be one that is impressionistic.

What is the meaning of ‘plague, disease outbreak, epidemic or pandemic’? Definitions of ‘pandemic’ 3.10 The Oxford English Dictionary defines ‘pandemic’ as being an adjective describing: ‘(a disease) prevalent over the whole country or the world’. It is interesting to note that the Dictionary of Epidemiology defines ‘pandemic’ to mean: ‘an epidemic occurring over a very wide area, crossing international boundaries, and usually affecting a large number of people’. Of all the expressions in relation to a disease outbreak that might be used in a force majeure clause, pandemic is likely to be the most difficult to satisfy. On the Oxford English Dictionary definition, the disease in concern must be prevalent at a minimum over an entire country to satisfy this definition. On the Dictionary of Epidemiology definition, the disease in question must be

33 [2007]  UKHL  27 the majority consisting of Lord Scott of Foscote, Lord Mance and Lord Neuberger of Abbotsbury. 34 [2018]  EWCA  Civ 2093, per Arden LJ at [36]. Although Arden LJ was summarising the submissions of counsel for the FCA, she did refer to these propositions as being ‘helpful’ at [46].

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3.10  What Constitutes a ‘Force Majeure’ Event? prevalent over more than one country. Essentially, it must be more than just the localised outbreak of a disease.

Definitions of ‘epidemic’ 3.11 The Oxford English Dictionary defines ‘epidemic’ to mean: ‘a widespread occurrence of a disease in a particular community at a particular time’. The Dictionary of Epidemiology defines ‘epidemic’ to mean: ‘The occurrence in a community or region of cases of an illness, specific health-related behaviour, or other health-related events clearly in excess of normal expectancy [author’s emphasis]. The community or region and the period in which the cases occur must be specified precisely. The number of cases indicating the presence of an epidemic varies according to the agent, size, and type of population exposed; previous experience or lack of exposure to the disease; and time and place of occurrence. Epidemicity is thus relative to usual frequency of the disease in the same area, among the specified population, at the same season of the year.’ It will be easier for a disease outbreak to satisfy the definition of ‘epidemic’ than ‘pandemic’. An ‘epidemic’ occurs over a much smaller area, a community or a region. However, it must create health events in excess of normal expectancy to qualify as an epidemic. For instance, regular seasonal flu would not qualify as an ‘epidemic’.

Definitions of ‘plague’ 3.12 The Oxford English Dictionary defines ‘plague’ to mean: ‘any contagious diseases that spreads and rapidly kills many people’. The word ‘plague’ arguably has similar connotations to ‘epidemic’. It is a disease that kills more people than would normally be expected. Arguably, it could occur over a more limited area than a pandemic.

Definitions of ‘disease outbreak’ 3.13 The Oxford English Dictionary defines the word ‘disease’ to mean: ‘a disorder of structure or function in a human, animal or plant, especially one that produces specific symptoms or that affects a specific location and is not simply a direct result of physical injury.’ 46

ICC 2020 long-form force majeure clause 3.14 The Oxford English Dictionary defines ‘outbreak’ to mean: ‘a sudden occurrence of something unwelcome, such as war or disease’. The word ‘virus outbreak’ in a force majeure clause should be easier to satisfy than either the words ‘epidemic’ or ‘pandemic’ because a virus outbreak can occur over a far more localised area. Of course, interpretation of this term is always in the context within which it is used in the contract having regard to the background factual matrix.

What is the meaning of an ‘act of god’? 3.14 Ultimately, the meaning of the term ‘act of god’ in relation to a contract will depend on its meaning in relation to that particular contract. From first principles, it is necessary to ascertain the objective meaning of the term ‘act of god’ that a reasonable person would understand the term to mean in the context of the particular contract, where that meaning would make the most sense from a business common sense point of view.35 In relation to any particular contract, the meaning of the term ‘act of god’ at common law provides the best basis for ascertaining the meaning of the term in a particular contract. Originally, the term ‘act of god’ provided a defence to someone at common law where a duty had been cast on them by the common law, usually on a strict liability basis.36 The meaning of the term ‘act of god’ at common law was basically settled by the 1800s. It is these authorities that are most pertinent in deriving the meaning of the term an ‘act of god’. Probably the best general definition was stated by James LJ37 in the 1876 case of Nugent v Smith:38 ‘The “act of god” is a mere short way of expressing this proposition. A common carrier is not liable for any accident as to which he can shew that it is due to natural causes directly and exclusively, without human intervention, and that it could not have been prevented by any amount of foresight and pains and care reasonably to be expected from him. In this case the defendant has made this out.’39

35 See Chapter  2 at paras 2.2 to 2.7, particularly the references to Wood v Capita Insurance Services Ltd [2017] UKSC 24 and Rainy Sky SA v Kookmin Bank [2011] UKSC 50. 36 See particularly, Transco Plc v Stockport Metropolitan Borough Council [2004] 2 AC 1 Lord Hobhouse of Woodborough at 25 and Great Western Railway Company Appellants v Owners of SS Mostyn Respondents [1928] AC 57, per Viscount Dunedin at 74–76. Viscount Dunedin noted that this exception did not apply in relation to a duty cast by statute or a liability created by contract where the statute or the contract did not expressly provide relief from liability/ performance due to an ‘act of god’. 37 Although this statement was delivered by Mellish LJ on his behalf. 38 (1876) 1 CPD 423. 39 (1876) 1 CPD 423 at 444.

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3.14  What Constitutes a ‘Force Majeure’ Event? There was general agreement of the judges in the Court of Appeal in Nugent v Smith40 that a party was required to exercise reasonable foresight and reasonable care in trying to resist the event in question, to avail themselves of this defence. A  party was not required to show that it was absolutely impossible for the party to have prevented the event. That is, a party is not required to show that no amount of skill and care, and implicitly foresight, could have resisted the natural event in order to avail themselves of the ‘act of god’ defence.41 Lord Esher MR in the Court of Appeal in Pandorf v Hamilton42 in 1886 provided the following insightful comments in relation to events that fell within the ‘act of god’ defence at common law, although his definition was not as tight as those laid out above: ‘I shall not now enter into a discussion, which at one time was rather rife, as to what was the exact meaning of the term “the act of God.” In the older, simpler days I have myself never had any doubt but that it did not mean the act of God in the ecclesiastical and biblical sense, according to which almost everything is said to be the act of God, but that in a mercantile sense it meant an extraordinary circumstance which could not be foreseen, and which could not be guarded against. But in this case there cannot possibly be any foundation for any such suggestion as that this gnawing of a pipe by rats and letting in seawater is, within the terms of the bills of lading and charterparty, the act of God’.43 In relation to damage caused by an exceptionally high tide Fry J  in NitroPhosphate and Odam’s Chemical Manure Co v London and St Katharine Docks Company44 pointed out that an event, in that case, an extraordinarily high tide, being 4ft above the Trinity high watermark, could still be an ‘act of god’ even though a similar event had occurred 18 months earlier. Fry J considered that it was simply necessary that the event was: (a) extraordinary; and (b) could not have reasonably been anticipated. The fact that the event had occurred 18 months earlier was just a factual matter to be considered in determining whether these two criteria had been satisfied. Fry J espoused (and on appeal this statement was endorsed by the Court of Appeal): ‘I do not think that the mere fact that a phenomenon has happened once, when it does not carry with it or import any probability of a recurrence – when, in other words, it does not imply any law from which its recurrence can be inferred – places that phenomenon out 40 (1876) 1 CPD 423. 41 Nugent v Smith (1876) 1 CPD 423, per Cockburn CJ at 438, Mellish LJ at 440 and 441, and Clearsby B at 443. 42 (1886) 17 QBD 670. 43 (1886) 17 QBD 670, per Lord Esher MR at 675. 44 (1878) 9 Ch D 503.

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ICC 2020 long-form force majeure clause 3.14 of the operation of the rule of law with regard to the act of God. In order that the phenomenon should fall within that rule it is not, in my opinion, necessary that it should be unique, that it should happen for the first time; it is enough that it is extraordinary, and such as could not reasonably be anticipated.’45 Modern authorities have broadly endorsed the authorities from the 1800s on the meaning of an ‘act of god’ at common law. Lord Hobhouse of Woodborough, in the 2004 House of Lords case of Transco Plc v Stockport Metropolitan Borough Council46 stated: ‘Thus “act of God” was always a common law exception. It was metaphorical phrase (like “fate”) with a religious origin used to describe those events which involved no human agency and which it was not realistically possible for a human to guard against: an accident which the defendant can show is due to natural causes, directly and exclusively, without human intervention and could not have been prevented by any amount of foresight, pains and care, reasonably to be expected of him (Nugent v Smith (1876) 1 CPD 423; see also The Mostyn [1928] AC 57 explaining River Wear Comrs v Adamson (1877) LR 2 App Cas 743).’47 It is clear from the above authorities that it is generally a high bar for an event to satisfy the term an ‘act of god’. For example, Lord Esher MR in the Court of Appeal in Pandorf v Hamilton48 considered that the event of rats gnawing at pipes such that the pipes allowed seawater in was not an ‘act of god’. In relation to the meaning of an ‘act of god’ in a force majeure clause in a contract, each contract turns on its own wording and background factual matrix. In most cases, one would expect that the Covid-19 pandemic would constitute an ‘act of god’ because: (1) it was an event that transpired through natural processes and there has not yet been proof it was initiated by human intervention. It is thought that the coronavirus that causes Covid-19 jumped from bats or an intermediate host to humans; (2) it is an extraordinary event; (3) for the overwhelming majority of organisations, and particularly given the limited experience of most organisations and countries with a serious epidemic or pandemic, there is a good argument that they were unable to reasonably foresee the Covid-19 pandemic; and 45 (1878) 9 Ch D 503, per Fry J at 515 and 516 whose judgment was quoted by the court of appeal and affirmed on this point in the same reported judgment per James LJ at 520. 46 [2004] 2 AC 1. 47 [2004] 2 AC 1, per Lord Hobhouse of Woodborough at 25. 48 (1886) 17 QBD 670.

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3.14  What Constitutes a ‘Force Majeure’ Event? (4) for the overwhelming majority of organisations, and particularly given the limited experience of most organisations and countries with a serious epidemic or pandemic, there is a good argument that they were unable to reasonably guard against the consequences of the pandemic. Consequently, it would be expected that in most cases, the Covid-19 pandemic would satisfy the term ‘act of god’ in a force majeure clause.

What events does a ‘sweeper’ clause catch’? 3.15 Unusually, the ICC 2020 long form clause does not contain a ‘sweeper’ clause. For instance, most ‘boilerplate’ force majeure clauses will typically contain wording at the end of the events clause covering: ‘… or any other events beyond the party’s reasonable control’. The burning question is whether these clauses should be construed as covering events similar to the specified events that appear before the clause or whether they can cover a broader range of events. Ultimately each case turns on its own facts.

The case that a ‘sweeper’ clause covers a broader range of events than the events that appear before it 3.16 The leading authority for this view is Chandris v Isbrandtsen-Moller Co Inc.49 Chandris was not actually a force majeure case – it was concerned with a dispute in relation to a charterparty. Clause 26 of the charterparty provided that the cargo was to ‘consist of lawful general, merchandise, excluding acids, explosives, arms, ammunition or other dangerous goods’ [emphasis added]. The charterer loaded the ship in Jacksonville, USA, with, among other goods, around 1,546 tons of turpentine. The vessel arrived at Liverpool and began discharging its cargo. However, upon discovery of the turpentine, The Port Emergency Committee asked the vessel to unload in the Mersey into other craft. This caused the discharge of cargo to take 16 days longer than it otherwise would have done, and resulted in total loading and unloading time exceeding the laytime by over 22 days. The shipowner sued for damages for the delay, based on, among other things, a breach of clause 26 of the charterparty. That is, on the basis, the turpentine fell within the meaning of ‘other dangerous goods’. At issue was whether the term ‘other dangerous goods’ should be construed according to the ejusdem generis rule such that it is restricted to the things of the same kind of the items that preceded it, or whether it should be given a broader meaning to include any goods that could be considered dangerous.

49 [1951] 1 KB 240.

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ICC 2020 long-form force majeure clause 3.16 After a careful examination of authority, Justice Devlin, later Lord Devlin sitting in the House of Lords, considered that it was the latter interpretation that was to be preferred. First, he considered himself bound by the decision of the Court of Appeal in the family law case of Anderson v Anderson.50 The Court of Appeal considered that general words in a post-nuptial settlement should not be constructed, ejusdem generis, such that their meaning was restricted by the words that preceded them unless there was something more in the deed to show that the words should be restricted in this way. It was also a decision with which he said he entirely agreed.51 More generally, Devlin J  (as he then was) considered that there was little justification for applying the ejusdem generis in relation to commercial contracts. He pointed out that the main argument that had justified the application of the ejusdem generis rule was that if general words are given an unrestricted meaning, the enumerated items are surplusage.52 After a careful review of authority, he pointed out that the presumption against surplusage and restricting the meaning of general words had little value in ascertaining the intention of the parties to a commercial contract.53 A notable exception to this is the decision of Purchas LJ in Sonat Offshore SA v Amerada Hess Development Ltd and Texaco (Britain) Ltd.54 Sonat Offshore leased an offshore drilling rig to Texaco for Texaco’s use in the North Sea. While Texaco was operating this rig, an explosion broke out. A dispute ensued as to what compensation Texaco was due. Although it was not directly in point, there was some discussion about the force majeure clause. The force majeure clause was worded as follows: ‘Neither party hereto shall be liable except under the indemnities provided herein and for the payment of monies due hereunder for failure to perform the terms of the Agreement when performance is hindered or prevented by strikes (except Contractor induced strikes by Contractor’s personnel) or lockout, riot, war (declared or undeclared) act of God, insurrection, civil disturbances, fire, interference by any Government or Authority or other cause beyond the reasonable control of such party.’[emphasis added] Purchas LJ stated: ‘In the ordinary commercial sense I  cannot accept the submission that the words “other cause beyond the reasonable control of such party” can be construed disjunctively. It offends against the concept of force majeure as a reason why the payments should be continued to 50 [1895] 1 QB 749. 51 [1951] 1 KB 240 at 244. 52 [1951] 1 KB 240 at 245. 53 Ibid. 54 [1988] 1 Lloyd’s Rep 145.

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3.16  What Constitutes a ‘Force Majeure’ Event? be paid notwithstanding the absence of any service or work supplied. If it is to extend to an ephemeral breakdown or failure in contractor’s equipment as well as the major events listed but not attributable to the negligence or wilful default of Sonat, then it will apply to an electric valve or condenser or similar component which spontaneously fails and which cannot be immediately reinstated.’ While Purchas LJ stated that he felt he could not read ‘or other cause beyond the reasonable control of such party’ disjunctively, it is important to note that he considered force majeure clauses to cover major events, rather than events concerned with more minor misadventure. Tandrin Aviation Holdings Ltd v Aero Toy Store LLC55 is the most recent force majeure case to have considered a ‘sweeper’ clause. Tandrin Aviation contracted to sell a Bombardier jet to Aero Toy Store for $31.75 million. Aero Toy Store paid a $3 million deposit but then failed to complete the transaction apparently because of financial difficulties owing to a poor economy. Tandrin Aviation exercised their right to rescind the contract and forfeit the deposit as liquidated damages under the contract. Aero Toy Store failed to appear to defend the matter. Nevertheless, Hamblen J  considered the potential application of the following force majeure clause in their absence: ‘Neither party shall be liable to the other as a result of any failure of, or delay in the performance of, its obligations hereunder, for the period that such failure or delay is due to: Acts of God or the public enemy; war, insurrection or riots; fires; governmental actions; strikes or labor disputes; inability to obtain aircraft materials, accessories, equipment or parts from vendors; or any other cause beyond the Seller’s reasonable control’. Hamblen J observed that there was no requirement to treat ‘or any other cause beyond the Seller’s reasonable control’ as subject to the ejusdem generis rule or being read as restricted to the same genus of the events that have preceded it. However, he observed that none of the previous events was even remotely connected with an economic downturn or financial hardship. Hamblen J considered that the ‘sweeper’ clause could not be considered to cover such events.56 This finding is not surprising. As Hamblen J  observed, since Earl Loreburn’s judgment in Tennants (Lancashire) Ltd v CS Wilson & Co Ltd,57 it has long been held that a force majeure clause will not provide relief in relation to a transaction that has become economically unprofitable unless somewhere in the contract it is plainly expressed to do so.58 55 [2010] EWHC 40 (Comm). 56 Ibid, per Hamblen J at [44]. 57 [1917] AC 495. 58 Tandrin Aviation Holdings Ltd v Aero Toy Store LLC [2010] EWHC 40 (Comm), per Hamblen J at [49] discussing [1917] AC 495 Earl Loreburn at 510, see also Lord Finlay LC at 509.

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ICC 2020 long-form force majeure clause 3.17

A force majeure clause that requires one party to form an opinion on whether a force majeure event has occurred 3.17 The recent case of Dwyer (UK  Franchising) Ltd v Fredbar Ltd and Mr Shaun Rowland Bartlett59 is a good example of a case concerning a force majeure clause that gave a party the power to declare a force majeure event. The force majeure clause of the franchise agreement read: ‘This Agreement will be suspended during any period that either of the parties is prevented or hindered from complying with their respective obligations under any part of this Agreement by any cause which the Franchisor designates as force majeure including strikes, disruption to the supply chain, political unrest, financial distress, terrorism, fuel shortages, war, civil disorder, and natural disasters.’ The force majeure clause gave the franchisor, in this case the claimant, Dwyer, the power to exercise a discretion and form an opinion as to whether a force majeure event had occurred. Jones J  held that Dwyer had to exercise this discretion in accordance with the principles in Braganza v BP Shipping Ltd60 (‘the Braganza principles’).61 In Braganza, Lady Hale, giving judgment for the majority in the Supreme Court, ruled that, where a contract gives one party the power to exercise a discretion, it was not for the court to rewrite the parties’ bargain or to substitute its own judgment as to how the discretion should be exercised.62 Lady Hale held that a court would generally imply a term that the decision making process in relation to the discretion was to be exercised lawfully and rationally in the public law sense. That is, the decision was made: (1) rationally; (2) taking account of relevant considerations, and ignoring irrelevant considerations; (3) in good faith; and (4) consistently with the purpose of the contract.63 However, Lady Hale pointed out that what would be implied would depend on the contractual context.64 She also thought the standard to which a party 59 [2021] EWHC 1218 (Ch). 60 [2015] UKSC 17. 61 Dwyer (UK Franchising) Ltd v Fredbar Ltd and Mr Shaun Rowland Bartlett [2021] EWHC 1218 (Ch), per Jones J at [263]. 62 Braganza v BP Shipping Ltd [2015] UKSC 17, per Lady Hale at [18]. 63 Ibid, per Lady Hale at [29] and [30]. 64 Ibid, per Lady Hale at [31].

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3.17  What Constitutes a ‘Force Majeure’ Event? exercised a discretion under a contract would be somewhat lower than the standard expected of decision makers in the modern state.65 Returning to the case of Dwyer (UK Franchising) Ltd v Fredbar Ltd and Mr Shaun Rowland Bartlett,66 the claimant was the franchisor of ‘Drain Doctor’, a plumbing and drain repair business that it had franchised out. Dwyer was a substantial business and had more than 30 franchisees over 60 territories. The first defendant, Fredbar Ltd, had been incorporated specifically to purchase an exclusive franchise for the ‘Drain Doctor’ business for nine specified Cardiff postcodes. The second defendant, Mr Shaun Rowland Bartlett, formed the first defendant solely for this purpose and was the main director. Fredbar Ltd entered into a franchise agreement with the claimant on 4 October 2018. Mr Bartlett stood as guarantor of the first defendant. Mr Bartlett had never undertaken plumbing work or been the director of a company. Mr Bartlett relied on a short training course provided by the claimant to learn his trade. Fredbar Ltd entered into a franchise agreement with the claimant on 4 October 2018. On 27 March 2020, Mr Bartlett emailed Mr Craig, his franchise advisor who was employed by Dwyer, and referred to a lack of calls and business over the previous ten days and suggesting a suspension under clause 30 of the franchise agreement. Mr Craig’s response was neutral but referred to emergency drainage and plumbing being a key business. On 30 March 2020, Mr Bartlett notified Dwyer that he had received notification from the chief medical officer of England and Wales that his young son was vulnerable to Covid-19 and that he and his family should stay at home and isolate for 12 weeks. In a letter from Dwyer dated 2 April 2020, Fredbar Ltd and Mr Bartlett were offered the choice between ceasing trade completely and not having to pay franchise fees during this time, or trading and paying certain minimal franchise fees. On 24 April 2020, Mr Bartlett indicated he was self-isolating and effectively accepted the offer of 2 April 2020. However, while the suspension was still in force, Mr Bartlett, by a letter dated 16 July 2020, purported to terminate the franchise agreement and maintained that he was no longer bound by its terms. The claimant terminated the franchise agreement because, among other reasons, the claimant had failed to comply with and properly exercise clause 30 of the franchise agreement. Clause 30 was the force majeure clause. The claimant also terminated the agreement by a letter dated 19 August 2020 and sought damages for breach of the agreement, delivery up of franchise property and an injunction to enforce the restrictive covenants in the franchise agreement against the defendants. At trial, the judge considered that Dwyer was in breach of clause 30 because they failed to consider the impact of Mr Bartlett and his family’s need to selfisolate and refusing to exercise clause 30. He considered that this was a breach of an important term going to the root of the contract that would either terminate the contract if clause 30 was a fundamental term, or give rise to a potential right 65 [2015] UKSC 17, per Lady Hale at [31]. 66 [2021] EWHC 1218 (Ch).

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ICC 2020 long-form force majeure clause 3.17 of recission on the part of Fredbar Ltd if it was an intermediate term because this was arguably a serious breach.67 However, Jones J ultimately found that because Fredbar Ltd and Mr Bartlett had accepted Dwyer’s offer of 2 April 2020 to suspend the contract, they had affirmed the franchise agreement. This was so even though the suspension was not one exercised through clause 30 of the franchise agreement. Therefore Fredbar Ltd and Mr Bartlett had no reason to terminate the contract on 16  July 2020 while the suspension was still in force.68

67 [2021] EWHC 1218 (Ch), per Jones J at [272] and [273]. 68 Ibid, per Jones J at [274].

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Chapter 4

Prevent, Hinder and/or Delay

INTRODUCTION 4.1 A  typical boilerplate force majeure clause will contain the following opening words before defining a list of specific force majeure events: ‘Force Majeure means any event or sequence of events that was beyond a party’s reasonable control and not foreseeable which prevents it from, hinders it in or delays it in, performing its obligations under this Agreement including, but not limited to: [a list of defined force majeure events follows].’ After answering the threshold question of whether there has been a force majeure event, the above force majeure clause then generally requires a party to show that: (1) they have been prevented, hindered or delayed in performing their obligation; (2) the failure to perform their obligation was beyond their reasonable control; (3) potentially, the force majeure clause may require that they could not foresee these problems at the time they concluded the contract; (4) the effects of the event could not have reasonably been avoided or mitigated. It is implicit in criteria (1), (2) and (4) that the party relying on the force majeure clause must show that the event in question caused its non-performance. This chapter considers criteria (1): that is, when a party will be considered to have been prevented, hindered or delayed in performing their obligation. Criteria (2) and (3) are addressed in Chapter 5. Criteria (4) and the issue of ‘causation’ are addressed in Chapter 6.

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‘Prevention’/‘prohibition’ as compared with ‘hindering’ 4.2

‘PREVENTION’/‘PROHIBITION’ AS COMPARED WITH ‘HINDERING’ WHEN PERFORMING A CONTRACTUAL OBLIGATION 4.2 Ultimately, the construction of a force majeure clause is a separate exercise in each case. Construction is undertaken according to the principles in Wood v Capita.1 Essentially, it is an objective exercise by which the court must consider what a hypothetical reasonable person would interpret the language to mean, having regard to all the background information that the parties would have reasonably had available to them at the time the contract was concluded. If there is more than one possible interpretation, each interpretation should be checked against the other and the interpretation that is most consistent with business common sense should be preferred. As the case law below illustrates, a force majeure clause that uses the word ‘prevent’ will generally be more difficult to satisfy than a clause that uses the word ‘hinder’. The case of Tennants (Lancashire) Ltd v CS Wilson and Co Ltd2 was the first House of Lords decision to consider the meaning of ‘prevent’ in relation to a force majeure clause. Lord Shaw of Dunfermline set out the relevant facts. By a contract dated 12 December 2013, the respondents contracted to purchase ‘their requirements of magnesium chloride over 1914, estimated at 400 to 600 tons,’ and the contract time of delivery was to be ‘in equal monthly quantities’.3 The appellants had been obtaining magnesium manufactured in both the UK and Germany to fulfil their contracts with the respondents, although the greater source of their supply was Germany. War broke out between the UK and Germany on 4 August 1914. It became illegal for the appellants to trade with Germany and obtain magnesium chloride from Germany. The amount of magnesium chloride manufactured in the UK actually fell, but the appellants could have obtained a quantity of 240 tonnes of magnesium chloride at a far higher price in the UK. Just after the outbreak of war, the appellants gave notice under what was a force majeure type contractual clause. The appellants did have other supply contracts to fulfil, but all their other clients waived any claim to delivery after receipt of this notice. However, the respondents made a commercial decision to insist on the supply of the magnesium chloride. The appellants failed to deliver the remaining 240 tonnes of magnesium chloride to the respondents. The respondents sued for damages for this failure. The appellants defended the matter on the basis that delivery had been lawfully suspended in accordance with the following contractual condition: ‘deliveries may be suspended pending any contingencies beyond the control of the sellers or buyers (such as … war …), causing a short 1 [2017] UKSC 24. 2 [1917] AC 495. 3 Ibid, per Lord Finlay LC at 501.

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4.2  Prevent, Hinder and/or Delay supply of labour, fuel, raw material, or manufactured produce, or otherwise preventing or hindering the manufacture or delivery of the article.’4 Lord Finlay LC espoused: ‘“prevention” in such a clause must refer to physical or legal prevention and not an economical unprofitableness’.5 The other Law Lords concurred to a similar effect.6 In relation to the expression ‘hinder’, Lord Finlay LC held: ‘“hindering” must refer to an interference with the manufacture or delivery from the same cause as “preventing,” but interference of a less degree’.7 Lord Atkinson opined on the meaning of ‘prevention’ and ‘hinder’ that: ‘“Preventing” delivery means, in my view, rendering delivery impossible; and “hindering” delivery means something less than this, namely, rendering delivery more or less difficult, but not impossible. Increase of the price of the article is altogether an ambiguous matter.’8 Lord Finlay LC dissented and concluded that the appellants had not been either ‘prevented’ or ‘hindered’ from purchasing magnesium chloride to satisfy their contractual commitment to the respondents because all the appellant’s other clients had waived their right to receive magnesium chloride once they had received the appellant’s force majeure notice. He considered that sufficient magnesium chloride had been available for the appellants to purchase, albeit at an inflated price. As such, he considered that the appellants had been neither ‘prevented’ nor ‘hindered’ from fulfilling their obligations under the contract.9 All other judges, however, considered that the appellants had been ‘hindered’ in supplying the respondents with magnesium chloride because the outbreak of war had caused a shortage of supply. The appellants could not possibly have satisfied all their customers.10 The issue of whether a supplier can obtain the benefit of a force majeure clause when they face a shortage of supply was also discussed in Tennants 4 [1917] AC 495, per Lord Shaw of Dunfermline at 521. 5 Ibid, per Lord Finlay LC at 509. An identical definition of ‘prevention’ in a force majeure context was given by Parker LJ in Channel Island Ferries Ltd v Sealink UK  Ltd [1988] 1 Lloyd’s Rep 323 at 326 and most recently cited in Dunavant Enterprises Inc v Olympia Spinning and Weaving Mills Ltd [2011] EWHC 2028 (Comm), per Burton J at 626 and also by Lord Guest in the Privy Council in Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93 at 135. 6 Ibid, per Earl Loreburn at 510, implicit in Viscount Haldane’s decision at 511, implicit in Lord Shaw of Dunfermline’s decision at 522, implicit in Lord Wrenbury’s decision at 526 and 527. 7 Ibid, per Lord Finlay LC at 509. 8 Ibid, per Lord Atkinson at 518. 9 Ibid, per Lord Finlay C at 508 and 509. 10 Ibid, per Lord Dunedin at 514, Lord Atkinson at 519, Lord Shaw of Dunferline at 522, Lord Wrenbury at 526 and 527. All judges also generally acknowledged that a mere fluctuation in price would generally not constitute such a hinderance.

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‘Prevention’/‘prohibition’ as compared with ‘hindering’ 4.2 (Lancashire) Ltd v CS Wilson and Co Ltd.11 Very broadly, where a supplier is under a continuing obligation to supply, they should be able to allocate their remaining supply proportionately, or in some reasonable way, between their customers.12 A majority of the House of Lords specifically acknowledged that this situation would generally amount to a ‘hindrance’ in relation to a force majeure clause.13 Earl Loreburn held that: ‘To place a merchant in the position of being unable to deliver unless he dislocates his business and breaks his other contracts in order to fulfil one surely hinders delivery.’14 In Fairclough, Clough, Dodd & Jones Ltd v JH Vantol15 the House of Lords considered the interpretation of clause 11A, the contractual frustration clause, and clause 11B, the force majeure clause, of the standard form of the London Oil and Tallow Trades Association for oriental oils cif terms continental. These clauses were cast in the following terms: ‘11A. In the event of war, hostilities or blockade preventing shipment this contract or any unfulfilled part thereof shall be cancelled. …’ ‘11B. Should the shipment be delayed by fire, strikes, …, or any other cause comprehended in the term force majeure other than war, hostilities, blockade, the time of shipment shall be extended by two months.’ First, Lord Tucker, reading the word ‘delayed’ in the context of clause 11B considered that ‘delayed’ meant just that, and he did not consider that it should mean ‘shipment by the contract date be prevented’.16 It is clear from the judgments above that the threshold for ‘prevention’ is generally set at a very high bar. It is also clear that the words ‘hinder’ and ‘delay’ are set at a somewhat lower threshold. However, a party cannot rely on profitability considerations or the economics of the situation alone to satisfy any of these terms. It will be an exercise of construction of the force majeure clause in each case to determine what the requirements are to satisfy the terms ‘prevent’, ‘hinder’, or ‘delay’. It will be a question of mixed fact and law in each case as to whether the requirements of a particular force majeure clause are satisfied in relation to these matters. 11 [1917] AC 495. 12 Ibid, per Viscount Haldane at 511 and 512. 13 Ibid, per Earl Loreburn at 510 and Lord Dunedin at 516, Lord Atkinson at 520, implicit in Lord Shaw of Dunfermline’s decision at 522. 14 Ibid, per Earl Loreburn at 510. 15 [1957] 1 WLR 136. 16 Ibid, per Lord Tucker at 143.

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4.2  Prevent, Hinder and/or Delay It is often said that ‘prevention’ in relation to a force majeure clause is a very high bar for a party seeking to invoke the clause to surmount. This is very well illustrated in the discussion of the ‘Mississippi flood’ cases (see para 4.3 below).

PROHIBITION/PREVENTION – GRAIN AND FOOD TRADE ASSOCIATION 100 FORM Background to the 1973 Mississippi flood cases 4.3 The chaos and disruption caused to the soya bean market by the 1973 Mississippi floods triggered an avalanche of litigation, in particular, in relation to the prohibition and force majeure clauses of the Grain and Feed Trade Association (‘GAFTA’) 100 form. These cases represent the most extensive source of English case law in relation to force majeure provisions and probably the most extensive source of case law in relation to whether performance of an obligation has been ‘prevented’ and ‘delayed’. The background to these cases was that severe flooding occurred in the lower delta region of the Mississippi River, USA, from around March to May 1973. The fertile soil, moderate climate, and abundant water supply in this area provides an ideal place to grow many types of crops. However, the lower delta region of the Mississippi River is also prone to floods. The 1973 floods resulted in great damage to property, livestock, crops and great loss of life. Soya bean crops were severely damaged. The US Government became concerned about whether there would be enough soya bean meal available for US domestic consumption. On 27 June 1973, the US Government imposed an embargo on the export of soya bean meal with the following exception: ‘… on lighter destined for an exporting vessel or for which loading aboardd an exporting vessel had actually commenced as of 5 pm EDT June 27, 1973 …’ This exception, referred to as a ‘loophole’, was unavailable to the sellers, however. On 2  July 1973, by Bulletin 88, the US  Government introduced a licensing system that allowed the export of 40% of any outstanding soya bean meal contract.17 The events of 1973 caused severe disruption in the supply of soya bean meal and wild swings in the price of soya bean meal as a result of the embargo. Buyers and sellers in this market typically use the GAFTA  100 form to

17 Bremer Handelsgesellschaft Schaft mbH v Vanden Avenne Izegem PVBA [1978] 2 Lloyd’s Rep 109, per Lord Wilberforce at 112.

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Prohibition/prevention – Grain and Food Trade Association 100 form 4.3 conclude agreements. The ‘prohibition’ and ‘force majeure’ clauses in the GAFTA 100 form, effective 1 September 2010, were in similar terms and are extracted below: ‘19. PROHIBITION In case of prohibition of export, blockade or hostilities or in case of any executive or legislative act done by or on behalf of the government of the country of origin or of the territory where the port or ports of shipment named herein is/are situate, restricting export, whether partially or otherwise, any such restriction shall be deemed by both parties to apply to this contract and to the extent of such total or partial restriction to prevent fulfilment whether by shipment or by any other means whatsoever and to that extent this contract or any unfulfilled portion thereof shall be cancelled. Sellers shall advise Buyers without delay with the reasons therefore and, if required, Sellers must produce proof to justify the cancellation. 20. FORCE MAJEURE, STRIKES, ETC Sellers shall not be responsible for delay in shipment of the goods or any part thereof occasioned by any Act of God, strike, lockout, riot or civil commotion, combination of workmen, breakdown of machinery, fire, or unforeseeable and unavoidable impediment to navigation, or any cause comprehended in the term “force majeure”. If delay in shipment is likely to occur for any of the above reasons, the Shipper shall serve a notice on Buyers within 7 consecutive days of the occurrence, or not less than 21 consecutive days before the commencement of the contract period, whichever is the later. The notice shall state the reason(s) for the anticipated delay. If after serving such notice an extension to the shipping period is required, then the Shipper shall serve a further notice not later than the last day of the contract period of shipment stating the port or ports of loading from which the goods were intended to be shipped, and shipments effected after the contract period shall be limited to the port or ports so nominated. If shipment be delayed for more than 30 consecutive days, Buyers shall have the option of cancelling the delayed portion of the contract, such option to be exercised by Buyers serving notice to be received by Sellers not later than the first business day after the additional 30 consecutive days. If Buyers do not exercise this option, such delayed portion shall be automatically extended for a further period of 30 consecutive days. If shipment under this clause be prevented during the further 30 consecutive days extension, the contract shall be considered void. Buyers shall have no claim against Sellers for delay or non-shipment under this clause, provided that Sellers shall have supplied to Buyers, if required, satisfactory evidence justifying the delay or non-fulfilment.’ 61

4.4  Prevent, Hinder and/or Delay

Burden of proof 4.4 The issue of which party bears the burden of proof in relation to either a prohibition clause or a force majeure clause is discussed in Chapter 5. In the first instance, a party relying on the prohibition clause or the force majeure clause must bring themselves within the clause. That is, they must show that the relevant event prevented/hindered their performance. A  more difficult question is whether that party also must demonstrate that they are ready and willing to perform. In relation to a ‘prohibition’ clause, a party will typically not be required to show that they were ready and willing to perform. In relation to a force majeure clause, this is a matter of construction of the clause in each case. This matter is addressed in more detail in Chapter 6 from para 6.5 ff. However, although the seller was not required to show that they were ready and able to perform, they were required to ‘close the loopholes’. That is, the seller was required to prove by way of evidence on balance that they had no soya bean on a lighter, or that they were not able to obtain an export licence for any soya bean that they had on hand.18 Thus, in the case of Bremer Handelsgesellschaft mbH  v Raiffeisen Hauptgenossenschaft EG19 the seller failed to provide evidence of whether soya bean was on a lighter destined for an export vessel and therefore failed to ‘close the loopholes’.20 The Court of Appeal would not allow them to rely on the ‘prohibition’ clause.

Proof of ‘prevention’ in relation to clause 21 or clause 22 of the GAFTA 100 form 4.5 It is often said that proving ‘prevention’ is a very high bar. This is particularly true in the case of the Mississippi flood cases. Like many commodities, the price of soya bean was, and remains, very volatile. This gave rise to speculative trading opportunities, with many commodities traders, as well as physical ‘shippers’, buying and selling soya bean meal and becoming part of very long ‘strings’ of contracts to buy and sell soya bean meal. During the 1970s, trading in soya bean meal took place by way of paper contracts.21 This sometimes resulted in a hundred or more buyers and sellers in a ‘string’

18 Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1977] 2 Lloyd’s Rep 329, per Megaw LJ at 337 and Bremer Handelsgesellschaft mbH v Continental Grain Co [1983] 1 Lloyd’s Rep 269, per Ackner LJ at 283. 19 [1982] 1 Lloyd’s Rep 599. 20 Ibid, per Kerr LJ at 603. 21 Soya bean futures trading, along with trading of most other futures, now takes place in ‘over the counter’ markets where execution is undertaken electronically. Electronic trading has greatly contributed to market efficiency and greatly reduced paper trading/pit trading, see Carley Garner, A Trader’s First Book on Commodities, pp 45–48.

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Mitigation 4.6 contracting to buy and sell soya bean meal.22 As will be seen, the nature of buying and selling soya bean meal in the context of the GAFTA  100 form makes it very difficult for a particular seller to establish ‘prevention’ under what is now clause 21 (prohibition) or clause 22 (force majeure) of the GAFTA 100 form. The seller must establish three things: (1) it must trace back through the chain of buyers and sellers, in some cases there may be a hundred or more parties, and show that the shipper/buyer at the start of the chain had been ‘prevented’ from shipping soya bean meal in whole or in part; (2) the original shipper/relevant shipper had no ‘loophole’ goods available, eg soya bean meal on a lighter already destined for an exporting vessel or for which loading on an export vessel had already commenced; and (3) that neither the original shipper/relevant shipper nor the seller had soya bean meal ‘afloat’ that they could have used to satisfy parties to whom they had sold goods.23 Ackner LJ in Bremer Handelsgesellschaft MBH  v Continental Grain Co24 observed that these requirements were extremely difficult to satisfy where there were many different parties in a chain, and this difficulty was exacerbated by the fact that many parties would not know how they might close out their forward position at the time of a prohibition.25 Unsurprisingly, many sellers in the Mississippi flood cases failed to prove the above requirements and were unable to rely on either the prohibition or force majeure clause in their contracts.26

MITIGATION 4.6 Related to the issue of whether an event causes a party to be ‘prevented’, ‘hindered’, or ‘delayed’ in performing its obligations is whether that party has

22 Bremer Handelsgesellschaft mbH  v Continental Grain Co [1983] 1 Lloyd’s Rep 269, per Ackner LJ at 283 quoting Cook Industries Inc v Meunerie Liegeois [1981] 1 Lloyd’s Rep 359, per Mustill J at 364. 23 Bremer Handelsgesellschaft mbH v Bunge Corp [1983] 1 Lloyd’s Rep 476, per Robert Goff LJ at 481; and Bremer Handelsgesellschaft mbH v Continental Grain Co [1983] 1 Lloyd’s Rep 269, per Ackner LJ at 283. 24 [1983] 1 Lloyd’s Rep 269. 25 Ibid, per Ackner LJ at 283. 26 See Bremer Handelsgesellschaft mbH v Continental Grain Co [1983] 1 Lloyd’s Rep 269, per Ackner LJ at 290 for an example of a case where a seller tried to string three contracts together in the hope of satisfying the term ‘prevention’ and failed. For an example of a case where it was accepted that the seller had established a force majeure event, see Bunge SA v Fuga AG [1980] 2 Lloyd’s Rep 513, per Lloyd J at 520.

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4.6  Prevent, Hinder and/or Delay a duty to ‘take reasonable steps’ to avoid the operation of the force majeure event. This is also often referred to as a ‘duty to mitigate’.27 There is tremendous conjecture in relation to whether a party has an obligation to ‘take reasonable steps’ to avoid the operation of a force majeure event, and if so, what this duty might be. As with all matters related to force majeure, it really is a question of construction of the force majeure clause in each case. The Court of Appeal in Channel Island Ferries Ltd v Sealink UK Ltd28 held that, based on the force majeure clause in that case, Sealink had a duty to ‘take all reasonable steps’ to avoid its operation or mitigate its results.29 By contrast, it is interesting to observe that in Regent National Enterprises Ltd v Goldlion Properties Ltd,30 the Hong Kong Final Court of Appeal considered that, on the construction of the force majeure clause in question there was no requirement for the party relying on it to ‘take reasonable steps’ to avoid an event that ‘materially hindered’ the performance of that party’s obligation. However, the court did acknowledge that a requirement to ‘take reasonable steps’ would generally exist when considering whether a party was ‘prevented’ from performing an obligation in relation to a force majeure clause. The matter would always be considered on the basis of the construction of the force majeure clause in each case and on consideration of the relevant factual issues.31 The Hong Kong Final Court of Appeal had to consider the question of whether a party had to ‘take reasonable steps’ in order to fall squarely within a force majeure clause because this was the basis on which the Hong Kong Court of Appeal had decided this issue, and it is questionable whether this matter should have featured in the case at all. The decision of the Hong Kong Final Court of Appeal in Regent National Enterprises is discussed in Chapter 9 (see para 9.13). It should be noted that the use of the words to the effect that ‘every effort will be made to carry the contract’ will make it far more likely that a court will find that a party relying on a force majeure clause is under a duty to ‘take reasonable steps’ to avoid the operation of the force majeure clause.32

27 This duty also arguably overlaps with the issue of whether an event is ‘beyond the reasonable control’ of a party. 28 [1988] 1 Lloyd’s Rep 323. 29 Ibid, per Parker LJ at 327 and Ralph Gibson LJ at 328; Sealink also accepted this in argument. 30 [2009] 5 HKC 67, per Robeiro PJJ at [91], with Bokhary and Chan PJJ at [22], Nazareth NPJ at [155], and Sir Gerard Brennan NPJ at [156] agreeing. 31 Ibid, per Robeiro PJJ at [102], with Nazareth NPJ at [155], and Sir Gerard Brennan NPJ at [156] agreeing. 32 See particularly B  & S  Contracts and Design Ltd v Victor Green Publications Ltd [1984] ICR 419, per Eveleigh LJ at 424.

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Alternative sources of supply/performance 4.8

ALTERNATIVE SOURCES OF SUPPLY/PERFORMANCE 4.7 As with many issues related to force majeure, the issue of whether the party relying on the clause must demonstrate that they had no other source of supply, or could not perform another way, is a mixed question of law and fact. First, it is about interpreting the relevant contractual provision as a matter of law. Second, it is about applying the facts found in the case to the relevant legal issues.

Cattle Food Trade Association (Inc) contracts 4.8 Mocatta J  considered the expression ‘delay’ in European Grain & Shipping Ltd v JH Rayner & Co Ltd.33 This case concerned a seller who had intended to ship 1000 tons of Indian groundnut extraction from India to the UK. They intended to make the shipment during the month of March 1968 from a port in Calcutta. A dock strike occurred in Calcutta from 29 March 1968 to 4 April 1968. The sellers had always intended to make the shipment up until 29 March. The sellers served a notice pursuant to clause 19, the force majeure clause of contract no 6 for imported cakes and meals of the Cattle Food Trade Association (Inc). The sellers were claiming an extension of time to make their shipment on the basis that there had been ‘delay’. They nominated Calcutta as the port out of which shipment would be made. The buyers denied that the sellers were entitled to such an extension. The seller made an appropriation to the contract on 24 April of four parcels of Indian groundnut extract on the basis that they were entitled to the benefit of clause 19, the force majeure clause. The buyers rejected this and sued the sellers for damages for repudiation of the contract. Clause 19, the force majeure clause, of contract no 6 for imported cakes and meals of the Cattle Food Association (Inc) stated: ‘Force majeure, strikes etc – 1.

Sellers shall not be responsible for delay in shipment of the goods or any part thereof occasioned by any Act of God, strike, lockout, riot or civil commotion, combination of workmen, breakdown of machinery, fire or any cause comprehended in the term “force majeure”.

2.

If delay in shipment is likely to occur for any of the above reasons, shippers shall give notice to their buyers by cable or similar advice within seven days of the occurrence, or not less than twenty-one days before the commencement of the contract period, whichever is later.

3.

The notice shall state the reason(s) for the anticipated delay.

33 [1970] 2 Lloyd’s Rep 239.

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4.9  Prevent, Hinder and/or Delay 4.

If after giving such notice an extension to the shipping period is required, then shippers shall give further notice not later than two days after the last day of the contract period of shipment stating the port or ports of loading from which the goods were intended to be shipped, and shipments effected after the contract period shall be limited to the port or ports so nominated.

5.

If shipment be delayed for more than one calendar month, buyers shall have the option of cancelling the delayed portion of the contract, such option to be exercised by buyers giving notice to be received by sellers not later than the first business day after the additional calendar month.

6.

If buyers do not exercise this option such delayed portion shall be automatically extended for a further period of one month.

7.

If shipment under this clause be prevented during the further one month’s extension, the contract shall be considered void.

8.

Buyers shall have no claim against sellers for delay or nonshipment under this clause provided that sellers shall have supplied to buyers, if required, satisfactory evidence justifying the delay or non-fulfilment.’

‘Strike’ is very clearly listed as a force majeure event at clause 19(1). However, while a strike could be said to cause a delay, the specific question for determination was whether the sellers could maintain that there was ‘delay’ when they had put on no evidence of whether they might have been able to make shipment out of another port. Mocatta J concluded that the sellers in this case did not need to show that they could have shipped out of an alternative port. It was a matter of construction of the clause in each case. Paragraph 4 of clause 19 above obliged the seller only to specify the ports from which it would ship in the event of delay. The clause did not oblige the seller to consider other methods of performance.34

Grain and Feed Trade Association (‘GAFTA’) 100 form Allocation of goods in the face of scarcity of supply 4.9 If a seller is short on particular goods and has to satisfy contractual commitments to more than one buyer, the seller will generally be able to rely on the force majeure clause, provided they have distributed the goods in some reasonable way.35 Distributing goods on a pro-rata basis between 34 [1970] 2 Lloyd’s Rep 239, per Mocatta J at 246. 35 Bremer Handelsgesellschaft mbH  v Continental Grain Co [1983] 1 Lloyd’s Rep 269, per Ackner LJ at 293.

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Alternative sources of supply/performance 4.10 buyers would generally be a reasonable way for a seller to allocate goods to contractual commitments to suppliers in the face of scarcity, but it is not the only reasonable method by which a seller may distribute goods to its suppliers in this situation.36

Is there an obligation to buy goods ‘afloat’ when relying on the GAFTA 100 form force majeure clause? 4.10 In general, if a party is prohibited or prevented from acquiring goods from one source, it is expected to acquire goods from an alternative source. However, a party’s obligation to acquire alternative goods is a question of construction of the force majeure clause in each case. The general requirements of a seller in relation to a GAFTA 100 contract can be nicely summarised in line with the judgment of Robert Goff J in Continental Grain Export Corp v STM Grain Ltd (Charles E Ford Ltd):37 (1) the seller had no goods of the contract description available to them to fulfil the contract; (2) following receipt of notice of the event, the seller could not obtain any such goods by the exercise of any means reasonably open to them.38 The second principle is of most significant interest, particularly in relation to ‘circle’ contracts where there is a chain of buyers and sellers. Lord Denning MR in Tradax Export SA  v Andre & Cie SA39 considered the position where a seller was in a chain and was relying on either the prohibition clause40 or the force majeure clause41 in the GAFTA 100 form. A seller in a string was not bound to demonstrate that they could not buy goods afloat to obtain the benefit of these clauses.42 Lord Wilberforce in Bremer Handelsgesellschaft Schaft MBH  v Vanden Avenne Izegem PVBA43 agreed with Lord Denning’s statement that buying goods afloat in this situation was ‘impractical and commercially unsuitable’.44

36 [1983] 1 Lloyd’s Rep 269, per Ackner LJ at 293 citing Robert Goff J in Westfalische CentralGenossenschaft v GmbH Seabright Chemicals Ltd (unreported, 1979, High Court). 37 [1979] 2 Lloyd’s Rep 460. 38 Ibid, per Robert Goff J at 473. Robert Goff J formulated these principles in relation to what was clause 23 of the Federation of Oilseeds, Oils and Fats Agreement (FOSFA) 24 form, the prohibition clause. This is similar to what is now clause 19 of the GAFTA 100 form, the prohibition clause. 39 [1976] 1 Lloyd’s Rep 416. 40 Then clause 21 of the GAFTA 100 form. 41 Then clause 22 of the GAFTA 100 form. 42 [1976] 1 Lloyd’s Rep 416, per Lord Denning MR at 423. 43 [1978] 2 Lloyd’s Rep 109. 44 Ibid, per Lord Wilberforce at 115.

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4.11  Prevent, Hinder and/or Delay

Can a dramatic increase in price amount to ‘prevention’ or ‘hindrance’ in relation to a force majeure clause? 4.11 Historically, courts have had an aversion to finding that the economics or profitability of a transaction can amount to a force majeure event. Price or profitability alone cannot trigger a force majeure event. This can be traced back to the 1917 decision of the House of Lords in Tennants (Lancashire) Ltd v CS Wilson and Co Ltd.45 Lord Atkinson opined on the meaning of ‘prevention’ and ‘hinder’ that: ‘“Preventing” delivery means, in my view, rendering delivery impossible; and “hindering” delivery means something less than this, namely, rendering delivery more or less difficult, but not impossible. Increase of the price of the article is altogether an ambiguous matter.’46 Lord Dunedin’s speech was in a similar vein: ‘Where I  think, with deference to the learned judges, the majority of the Court below have gone wrong is that they have seemingly assumed that price was the only drawback. I do not think that price as price has anything to do with it. Price may be evidence, but it is only one of many kinds of evidence as to shortage. If the appellants had alleged nothing but advanced price they would have failed. But they have shown much more. They have shown a total failure of what after all was the main source of supply to their business, namely, the German article.’47 However, as above, when coupled with other evidence, the price may be good evidence that there is ‘prevention’ or ‘hindrance’ for the purposes of a force majeure clause. The decision of Lord Denning in Tradax Export SA v Andre et Cie48 discussed above in relation to whether a shipper had an obligation to buy goods afloat, referred with approval to the judgment of Donaldson J in Tradax Export SA v Andre & Cie SA,49 that to compel a shipper to buy goods afloat: ‘… might well be that large numbers of buyers would be chasing very few goods and the price would reach unheard of levels.’50

45 [1917] AC 495. 46 Ibid, per Lord Atkinson at 518. 47 Ibid, per Lord Dunedin at 516. 48 [1976] 1 Lloyd’s Rep 416. 49 [1975] 2 Lloyd’s Rep 516. 50 Tradax Export SA  v Andre & Cie SA  [1975] 2 Lloyd’s Rep 516, per Donaldson J  at 533 endorsed by Tradax Export SA v Andre et Cie SA [1976] 1 Lloyd’s Rep 416, per Lord Denning MR at 423.

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Alternative sources of supply/performance 4.12 Implicitly, this lends support to the view that a dramatic increase in the price of a good or service is evidence of ‘prevention’ or ‘hindrance’ from a commercial point of view. Nevertheless, it is always prudent to present lead evidence of physical or legal ‘prevention’ or ‘hindrance’ and supplement this with evidence of a dramatic price rise to substantiate the fact that performance was ‘impractical and commercially unsuitable’.51

Can a dramatic increase in price amount to frustration? 4.12 In the alternative, there is also authority that a dramatic price increase can amount to frustration and discharge the parties from their contractual obligations. The case of Brauer & Co (Gt Britain) Ltd v James Clark (Brush Materials) Ltd52 offers some authority for this. In Brauer & Co, the sellers had contracted with the buyers to supply 90 tonnes of Bahia piassava, a large tropical palm tree, from Brazil at prices ranging from £118 per tonne to £163 per tonne. After the contract had been signed, the Bank of Brazil directed that Bahia piassava could only be exported at prices ranging from £135 per tonne to £180 per tonne. The sellers notified the buyers of a force majeure event. The buyers consequently sued for damages. Neither the trial judge nor the Court of Appeal considered that these circumstances gave rise to a force majeure event, yet Lord Denning agreed with the trial judge that if the price to export Bahia piassava rose to one hundred times the contract price, this would be a ‘fundamentally different situation’ which had unexpectedly emerged, and the sellers would be relieved of their obligations to perform. Lord Denning cited the House of Lords case of British Movietonews Ltd v London and District Cinemas Ltd.53 Here, Viscount Simon set out the general principles on which parties may be discharged from their contractual obligations because the contract is frustrated as a consequence of a fundamental change in the circumstances in which they are required to perform from those that existed when they signed the contract. Viscount Simon espoused: ‘… that a fundamental alteration in circumstances may sometimes bring a contract to a premature end has long been recognised. The general principle upon which the court acts is well settled; so Lord Finlay LC stated in Bank Line Ltd v Arthur Capel & Co. It can be found, for example, as Lord Porter observed in Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd, in Earl Loreburn’s judgment 51 Bremer Handelsgesellschaft Schaft mbH v Vanden Avenne Izegem PVBA, per Lord Wilberforce at 115 endorsing the judgment of Tradax Export SA v Andre et Cie SA [1976] 1 Lloyd’s Rep 416, per Lord Denning MR at 423, however, without referring specifically to a dramatic increase in price. 52 [1952] 2 Lloyd’s Rep 147. 53 [1952] AC 166.

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4.12  Prevent, Hinder and/or Delay in FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd, where it is thus expressed: “But a court can and ought to examine the contract and the circumstances in which it was made, not of course to vary, but only to explain it, in order to see whether or not from the nature of it the parties must have made their bargain on the footing that a particular thing or state of things would continue to exist and if they must have done so, then a term to that effect will be implied, though it be not expressed in the contract. … No court has an absolving power, but it can infer from the nature of the contract and the surrounding circumstances that a condition which is not expressed was a foundation on which the parties contracted.” While the principle remains the same, particular applications of it may greatly vary, and theoretical lawyers may debate whether the rule should be regarded as arising from an implied term, or because the basis of the contract no longer exists. In any view, it is a question of construction, as Lord Wright pointed out in Constantine’s case, and as has been repeatedly asserted by other masters of the law.’54 He continued: ‘If, on the other hand, a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point – not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation. When it is said that in such circumstances the court reaches a conclusion which is “just and reasonable” (Lord Wright in Constantine’s case) or one “which justice demands” (Lord Sumner in Hirji Mulji v Cheong Yue Steamship Co Ltd), this result is arrived at by putting a just construction upon the contract in accordance with an “implication … from the presumed common intention of the parties” (Lord Sumner in Bank Line Ltd v Arthur Capel & Co).’55 Like all matters related to force majeure and frustration, it will be a mixed question of fact and law in each case as to whether a dramatic price rise can amount to frustration of a contract.

54 [1952] AC 166, per Viscount Simon at 183 and 184 giving judgment for the court. 55 Ibid, per Viscount Simon at 185 and 186 giving judgment for the court.

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Chapter 5

Beyond Reasonable Control

INTRODUCTION 5.1 It is for the party who relies on the clause to show that the force majeure event that they rely on was beyond their reasonable control.1 Longmore LJ in Great Elephant Corp v Trafigura Beheer BV (‘The Crudesky’)2 observed that corporations have a relatively high degree of control over their operations, and it is a high threshold for a corporation to show that a particular matter or event is ‘beyond their control’.3 He then went on to consider whether the event, in that case, was ‘beyond the reasonable control’ of the party seeking to rely on the force majeure clause. This demonstrates that ‘beyond control’ will generally be a high threshold for a corporation to surmount in order to satisfy a force majeure clause. As with all matters related to contractual interpretation, the meaning of ‘beyond the control’ of a party or ‘beyond the reasonable control’ of a party in a force majeure clause must be interpreted according to the principles in Wood v Capita.4 Essentially, this task is an objective exercise undertaken from the point of view of the reasonable person having regard to the admissible background factual matrix and the terms of the contract as a whole. If there are two or more competing interpretations, the interpretation that is most consistent with business common sense should be chosen. Satisfying a force majeure clause using the expression ‘beyond the reasonable control’ of a party is likely to be a lower threshold for a party than satisfying a force majeure clause using the expression ‘beyond the control’. However, from a practical point of view, the difference between these two expressions is likely to make little difference in most cases.

1 Channel Island Ferries Ltd v Sealink UK Ltd [1988] 1 Lloyd’s Rep 323, per Parker LJ at 327, Ralph Gibson LJ at 328. 2 [2013] EWCA Civ 905. 3 Ibid, per Longmore LJ at [25]. 4 [2017] UKSC 24. These principles are explained in some detail in Chapter 2.

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5.2  Beyond Reasonable Control

EVENTS BEYOND THE REASONABLE CONTROL OF A PARTY 5.2 There are two questions that are of particular interest when considering whether a party can demonstrate that an event is ‘beyond their control’: (1) Where a party’s performance is dependent on a third party, can they claim that a failure by a third party to perform a task is a matter that is ‘beyond their control’? (2) Where a party is negligent, can they still claim the event is ‘beyond their control’?

PERFORMANCE IS DEPENDENT ON A THIRD PARTY – IS THIS A MATTER ‘BEYOND THE CONTROL’ OF A PARTY? 5.3 As with all matters related to force majeure contracts, whether a party can say that the failure by a third party to perform a task is a matter ‘beyond their control’ and rely on the force majeure clause is a matter of interpretation of the clause in each case.

Cases illustrating where a party has assumed this risk of performing an obligation 5.4 First, it is necessary to consider what a party has contracted to be responsible for. This is best illustrated by recent cases where a party has entered into a ‘free on board’ shipping contract to effect sale from the seller to the buyer. Each party to such a contract assumes other obligations; for example, the seller will often assume responsibility for loading the vessel. Once the vessel is loaded, title to the goods will transfer to the buyer, who will also often have assumed other obligations such as providing a well maintained ship, or seeking certain clearances.5 Second, it is a matter of construction of the force majeure clause as to whether a party’s performance can be excused. Often this will involve an ‘allocation of the risk’ to establish which party should bear the detriment arising from an unexpected event. In relation to the term ‘beyond the control’, and having regard to the first issue of what obligations a party was responsible for, this will involve considering: (1) whether the party itself can claim to be excused under the force majeure clause for an obligation that they were responsible for performing; or 5 Great Elephant Corp v Trafigura Beheer BV (‘The Crudesky’) [2013]  EWCA  Civ 905, per Longmore LJ at [39] where these issues are discussed in relation to shipping cases dealing with carriage of goods.

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Performance is dependent on a third party etc 5.5 (2) in the case where that party was relying on a third party to perform an obligation, and that third party failed to perform their obligation, whether that party can rely on a force majeure clause to excuse their performance because of the third party’s failure to perform their obligation.

Great Elephant Corp v Trafigura Beheer BV (‘The Crudesky’) 5.5 The issue of force majeure clauses in relation to a ‘free on board’ contract was most recently considered by the Court of Appeal in Great Elephant Corp v Trafigura Beheer BV (‘The Crudesky’).6 In the case, Trafigura had purchased a quantity of crude oil from Vitol on free on board (‘FOB’) terms who in turn contracted with further counterparties for the purchase of that quantity of oil. Trafigura had chartered The Crudesky from the respondent/ claimant owners in order to transport the crude oil cargo. On 31 August 2009, The Crudesky berthed at a terminal operated by Total just off Port Harcourt in Nigeria. Approval was required from the Nigerian Department of Petroleum Resources (‘DPR’) before The Crudesky could begin loading. The local DPR representative who had been on-site at Total’s terminal unexpectedly left the terminal on 29 August 2009. On 31 August 2009, Total’s supervisor, Mr Bankhole, telephoned the head of the DPR in Port Harcourt, Mr Pepple. Mr Pepple told Mr Bankhole that the DPR’s local representative would not arrive in Port Harcourt until the next day, 1 September 2009. Mr Bankhole asked if they could come to another arrangement to begin loading The Crudesky. Verbal authority was given to begin loading The Crudesky, although written signed authority had not been given.7 Trafigura did not have The Crudesky leave port as expected on 1 September 2009 because they did not have documentation from the Nigerian authorities to evidence the quantity of crude oil that had been loaded. To depart in these circumstances would have been an offence under the Crude Oil (Transportation and Shipment) Regulations 1984 (Nigeria). On 7 September 2009, the head office of the DPR in Lagos informed Total that its action was an economic crime and ordered the navy to ensure The Crudesky did not leave port. The Nigerian navy duly did so. Vitol gave Trafigura notice of a force majeure event on 2 October 2009 as a result of government action that it claimed was beyond its/Total’s control.8 On 9 October 2009, the Ministry of Petroleum Resources wrote to Total, advising that the Minister had approved a ‘fine’ of $12 million. Total paid the fine, and The Crudesky was released from detention on 13 October 2009. The owners of The Crudesky, Great Elephant Corporation, brought various claims against Trafigura as a result of the delay.

6 [2013] EWCA Civ 905. 7 This was confirmed by an independent surveyor’s report, Great Elephant Corp v Trafigura Beheer BV (‘The Crudesky’) [2012] EWHC 1745 (Comm), per Teare J at [6]. 8 Ibid, per Teare J at [119].

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5.5  Beyond Reasonable Control Trafigura sought to defend the claim for demurrage by Great Elephant Corporation by relying on the force majeure clause in the charterparty. The force majeure clause was contained in Article 21 of the charterparty and stated: ‘21. Laytime/Demurrage/Force Majeure Any delay(s) arising from adverse weather … or failure of equipment, plant or machinery in or about ports or places of loading and/or discharge, Act of God, … or restraint of princes, rulers or peoples shall, provided always that the cause of the delay(s) was not within the reasonable control of Charterers or Owners or their respective servants or agents, count as one half laytime or, if the Vessel is on demurrage, at one half of the demurrage rate.’ At first instance, Teare J  considered that Trafigura had effectively delegated loading of The Crudesky to Total. Total was akin to an agent. To determine whether something was ‘beyond the reasonable control’ of Trafigura, it was necessary to determine whether an event was ‘beyond the reasonable control’ of Total.9 Upon hearing evidence from a range of witnesses, including Nigerian law experts, Teare J  at first instance considered that up until 7  September 2009, the delay in The Crudesky departing had most definitely been caused by a ‘restraint of princes’ because the Nigerian government had not provided it with cargo documents in order that it could leave port.10 In relation to the period from 7 September 2009 onwards, Teare J considered that the Minister for Petroleum Resources did not have statutory power to levy a fine of $12 million on Total. He considered that from 7 September 2009, the delay in The Crudesky leaving port was also caused by an ‘arrest or restraint of princes’. Therefore, he considered that the delay was ‘beyond the reasonable control’ of Total and consequently ‘beyond the reasonable control’ of Trafigura.11 The case went to appeal, and Teare J’s decision was overturned. Most importantly, though, Longmore LJ, giving judgment for the Court of Appeal, did agree with Teare J that Total was an ‘agent’ of Trafigura for the purposes of Article 21, being the force majeure clause of the charterparty. He acknowledged that a strict literalist would say that Total was a sub-sub-sub agent of Trafigura for the purposes of Article  21 because there was a chain of counterparties between Trafigura and Total. Consequently, a strict literalist would say that because the sub-sub-sub agent had not been mentioned in Article  21, Total could not be Trafigura’s agent in any way, shape or form.12 However, taking a purposive construction of Article 21, Longmore LJ considered that the purpose of the charterparty was that Trafigura should take responsibility for the loading 9 [2012] EWHC 1745 (Comm), per Teare J at [66]. 10 Ibid, per Teare J at [65]. 11 Ibid, per Teare J at [66]. 12 Great Elephant Corp v Trafigura Beheer BV (‘The Crudesky’) [2013]  EWCA  Civ 905, per Longmore LJ at [29].

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Performance is dependent on a third party etc 5.6 of the vessel, and this included taking responsibility for the actions of any party, in this case Total, to whom it had delegated responsibility for loading the vessel. He espoused: ‘… if anything went wrong with the loading operation for any reason, that was the charterers’ responsibility.’13 Furthermore, he held that Trafigura could not escape liability by claiming that Vitol was their agent, and it was relevant to consider whether the event was beyond their ‘reasonable control’. Vitol also had an obligation to put the cargo free on board (FOB) the vessel. In the same way as Trafigura, Vitol was responsible for loading the cargo and was generally liable for any misadventure in failing to load the cargo on time. Effectively, Vitol had to show that the event was ‘beyond the reasonable control’ of Total to show that the event was ‘beyond the reasonable control’ of Vitol and their agents.14 Even if this were too controversial a construction, Longmore LJ observed that Vitol had incorporated the Nigerian National Petroleum Corporation (‘NNPC’) General Conditions into its contract with Trafigura. Pursuant to clause 18.1 of the NNPC conditions, Vitol had agreed in its contract with Trafigura to comply with all rules, regulations, valid directions and policies and byelaws in performing its obligations. Drawing on the findings of Teare J, he considered that Vitol’s agent (‘the contractor’), had caused Vitol to breach these conditions in three material respects: (a) the contractor had loaded the vessel without proper clearances from the DPR in Lagos; (b) they had cut the locks on the loading valves when the DPR should have done this; and (c) they had failed to load the vessel in the presence of a DPR representative.15 These were serious breaches. Longmore LJ considered that effectively Vitol’s agent’s breaches had caused the events that had taken place, and it would be impermissible to allow them to take advantage of their own wrong in excusing themselves by relying on the force majeure clause.

Fyffes Group Ltd and Caribbean Gold Ltd v Reefer Express Lintes Pty Ltd and Reefkrit Shipping Inc (‘The Kriti Rex’) 5.6 Similarly, Moore-Bick J in Fyffes Group Ltd and Caribbean Gold Ltd v Reefer Express Lintes Pty Ltd and Reefkrit Shipping Inc (‘The Kriti Rex’)16 considered that the force majeure clause under scrutiny would not excuse the performance of a party who was contractually obliged to provide a seaworthy vessel by which it could load and transport bananas. Effectively, that party would not be able to maintain that the event was ‘beyond their control’ on the basis they had delegated the task of performing that obligation to a third party. In The Kriti Rex, the claimant, Fyffes, a well-known importer of bananas to the UK, entered into a contract of affreightment (‘COA’) with the 13 [2013] EWCA Civ 905, per Longmore LJ at [30]. 14 Ibid, per Longmore LJ at [37]. 15 Ibid, per Teare J at [49]. 16 [1996] 2 Lloyd’s Rep 171.

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5.6  Beyond Reasonable Control defendants. The defendants were to provide a vessel, The Kriti Rex, to enable Fyffes to transport bananas they had purchased from various ports in Central America to Europe. The Kriti Rex collected a cargo of bananas at the first port, Manzanillo in Mexico. However, after it left Manzanillo, The Kriti Rex developed engine problems due to the failure of a main bearing caused by unusually high concentrations of particulate matter in its lubricating oil. It took refuge in a port in Honduras. There it was determined that its cargo of bananas was not in a state that it could be transported to Europe and that the vessel was unseaworthy and would not continue on to the other Central American ports. Fyffes sued the defendants for breach of the COA and failure to tender the vessel at the remaining Central American ports. Fyffes claimed damages in respect of the bananas it had contracted to purchase but was unable to transport. In respect of the contract that Fyffes had entered into with the Belize Banana Board, the defendants sought to defend themselves from this claim by arguing Fyffes could have used the force majeure clause to avoid the purchase of these bananas. Clause 15.3 of that contract defined a force majeure event as follows: ‘The term “force majeure” as used herein shall include: Acts of God, strikes, lockouts, acts of public enemy, wars, mobilization, blockades, piracy, insurrections, riots, epidemics, landslides, earthquakes, fires, storms, floods, washouts, restraint of rulers, civil disturbances, explosions, shipwreck, unreachability on account of ship’s safety and other events beyond the control of the parties which affect the production, sale, shipping, exportation … of bananas either to, at, or from the place of exportation.’ In relation to the sweeper clause, ‘other events beyond the control of the parties’, Moore-Bick J observed that: ‘The specific examples of force majeure events indicate that what the parties had in mind were supervening events which did not arise out of aspects of the performance of the contract for which they were directly or indirectly responsible.’17 There are two crucial aspects to the reasoning of Moore-Bick J above: (1) in relation to the force majeure clause under consideration, it referred to a diverse range of large, supervening catastrophic events. MooreBick J  construed the words ‘beyond control’ in light of these events. Essentially, he considered that the misadventure of the type The Kriti Rex encountered, an engine failure, could not be considered to be a significant, catastrophic, supervening event similar to the other events that had been listed in the force majeure clause;

17 [1996] 2 Lloyd’s Rep 171, per Moore-Bick J at 196.

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Can a party rely on a force majeure clause where they are negligent? 5.7 (2) as part of the FOB contract that Fyffes had entered into, it had assumed the obligation to provide a seaworthy vessel. The force majeure clause could not be construed in a way that the failure by a third party to maintain the ship properly would excuse Fyffes’ obligation as between itself and the Belize Banana Board to provide a seaworthy ship to collect the bananas.

CAN A PARTY RELY ON A FORCE MAJEURE CLAUSE WHERE THEY ARE NEGLIGENT? 5.7 The most recent case which considers whether a party who had been negligent could satisfy the expression ‘beyond the reasonable control’ of another party and obtain the benefit of a force majeure clause is that of 2 Entertain Video Ltd v Sony DADC Europe Ltd.18 This case arose as the result of the theft of goods from a specialist warehouse in North London during the 2011 London riots. The claimant, 2 Entertain, had signed a contract with Sony for the provision of logistics services, including storage and distribution facilities. Sony provided these services through a specialist warehouse in Enfield. During the 2011 London riots, the warehouse in Enfield was broken into by a gang of youths and looted. A gang of at least 20 youths gained access to the warehouse by kicking in the fire door at the south-west corner of the warehouse facility, attacking the door with a hoe and sticks, and throwing stones at it. It took less than 60 seconds for the gang to gain access to the warehouse.19 The warehouse was also set alight. A fire burned for around ten days and almost completely destroyed the warehouse. 2 Entertain lost around £40 million. Sony’s insurers only reimbursed 2 Entertain for around £8 million. 2 Entertain sued Sony for lost profits, business interruption costs, and increased working costs as a result of the fire. Sony sought to defend itself, among other things, by relying on clause 14, the force majeure clause that stated: ‘14.1 Neither party shall be liable for its failure or delay in performing any of its obligations hereunder if such failure or delay is caused by circumstances beyond the reasonable control of the party affected including but not limited to industrial action (at either party), fire, flood, wars, armed conflict, terrorist act, riot, civil commotion, malicious damage, explosion, unavailability of fuel, pandemic or governmental or other regulatory action.’ O’Farrell J heard extensive factual evidence about previous security issues at the Sony warehouse and remedial action Sony had taken to try and secure the warehouse in light of these incidents. She also heard expert evidence from both 18 [2020] EWHC 972 (TCC). 19 Ibid, per O’Farrell J at [37] and [91]

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5.7  Beyond Reasonable Control sides in relation to the adequacy of security measures at the time of the 2011 London riots. O’Farrell J ultimately concluded that Sony had failed to take reasonable steps to prevent a break-in at the warehouse. Essentially, she found that the security measures Sony had taken were completely inadequate, enabling a gang to break into the warehouse in less than 60 seconds.20 It was clear that she considered Sony had been negligent in failing to secure the warehouse and prevent a breakin.21 Similarly, she found that Sony had failed to take reasonable precautions to contain the fire that effectively destroyed the warehouse.22 Consequently, O’Farrell J considered that the break-in and the resulting fire was not ‘beyond the reasonable control’ of Sony23 and, therefore, Sony could not rely on the force majeure clause set out above as a defence. The Court of Appeal in Sonat Offshore SA v Amerada Hess Development Ltd and Texaco (Britain) Ltd24 observed, obiter, that the force majeure clause, in that case, would not cover negligence on the part of one party. In that case, Sonat Offshore leased an offshore drilling rig to Texaco for Texaco’s use in an oilfield in the North Sea. The rig included drilling equipment. While Texaco was operating this rig, an explosion broke out. A dispute ensued as to what compensation Texaco was due. Although it was not directly in point, there was some discussion about the force majeure clause, Article  22 of the contract, which stated: ‘Neither party hereto shall be liable except under the indemnities provided herein and for the payment of monies due hereunder for failure to perform the terms of the Agreement when performance is hindered or prevented by strikes … act of God, … , interference by any Government Authority or other cause beyond the reasonable control of such party.’ Where a force majeure event occurred, Texaco was obliged to pay Sonat Offshore for the hire of the rig and drilling equipment at the ‘force majeure rate’. This was defined in Article 8.8 of the contract to be £78,288 per day. Purchase LJ observed that although the clauses (including the force majeure clause) were not exclusion clauses,25 he would apply Lord Morton’s Canada Steamship guidelines discussed in Chapter 2 (see para 2.13), with the result that it was highly unlikely to construe an event as being ‘beyond the reasonable control’ of a party where that event had arisen from its negligence or wilful 20 [2020] EWHC 972 (TCC), per O’Farrell J at [112]–[118]. 21 Ibid, per O’Farrell J at [112]–[118], it should be noted that she did not specifically use the word negligent anywhere in her judgment. 22 Ibid, per O’Farrell J at [178]–[204]. 23 Ibid, per O’Farrell J at [208]. 24 [1988] 1 Lloyd’s Rep 145. 25 Ibid, per Purchase LJ at 156.

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Can a party rely on a force majeure clause where they are negligent? 5.9 default.26 While not expressly commenting on the force majeure clause, it was clear that Stocker LJ and Parker LJ were sympathetic to these observations.27 Stocker LJ observed that if the parties had intended that one party would continue to make payments to the other party for services carried out due to the other party’s negligence or wilful default, one would expect such an intention to be clearly stated in the contract.28 Finally, Parker LJ observed that even if a party had exercised reasonable care, this did not automatically mean that their actions satisfied the expression ‘beyond the reasonable’ control of a party.29

Prevention principle and negligence 5.8 More generally, there is a much authority supporting what has become known as the ‘prevention principle’ that suggests that it will be difficult for a party to rely on a force majeure clause where their own negligence has contributed to the event.30 The essence of the prevention principle is that a party should not be able to take advantage of its own breach of a contract. In relation to force majeure, a party whose negligence has caused a breach of a contract should not be able to rely on the force majeure clause in that contract unless the contrary is clear from a fair contextual reading of the force majeure clause.

Case law on the prevention principle 5.9 The prevention principle is a rule of interpretation in relation to contracts. The prevention principle was succinctly summarised by Lord Diplock in Cheall v Association of Professional Executive and Clerical and Computer Staff:31 ‘… except in the unlikely case that the contract contains clear express provisions to the contrary, it is to be presumed that it was not the intention of the parties that either party should be entitled to rely upon his own breaches of his primary obligations as bringing the contract to an end, ie  as terminating any further primary obligations on his part then remaining unperformed. This rule of construction, which is paralleled by the rule of law that a contracting party cannot rely 26 [1988] 1 Lloyd’s Rep 145, per Purchase LJ at 157. 27 Ibid, per Parker LJ at 162; and Stocker LJ at 162 and 163. 28 Ibid, per Stocker LJ at 162. 29 Ibid, per Parker LJ at 162. 30 The prevention principle is also often used in construction industry disputes and is not directly relevant here. It is used to describe the principle that a party who has made it impossible for the other party to perform their obligations on time cannot insist that the time limit for performing that obligation be strictly adhered to. 31 [1983] 2 AC 180.

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5.9  Beyond Reasonable Control upon an event brought about by his own breach of contract as having terminated a contract by frustration, is often expressed in broad language as: “A man cannot be permitted to take advantage of his own wrong.” But this may be misleading if it is adopted without defining the breach of duty to which the pejorative word “wrong” is intended to refer and the person to whom the duty is owed.’32 Lord Diplock drew on the earlier House of Lords case of New Zealand Shipping Co Ltd v Société des Ateliers et Chantiers de France.33 That case concerned a French company that had contracted in 1913 to build a steamer for a UK shipping company to be completed by the end of January 1915. The force majeure clause in the contract stated: ‘… unless the construction thereof shall be delayed by fire, strike, or lock-out of workmen, or any other unpreventable cause beyond the control of the Builders … [the steamer] shall be completed ready for trial by the 30th January, 1915, … In the event of the said vessel not being completed and ready for trial on or before 30th January, 1915, … In case the Builders … shall fail or be unable to deliver the steamer within eight months from the date agreed by this contract, thereupon this contract shall become void and all money paid by the Purchasers shall be repaid to them with interest accrued thereupon at 5 per cent. Except only in the event of France becoming engaged in a European war, then the above limit of eight months shall be extended equal to the duration of the said war, but in no case to exceed eighteen months in all.’34 France became involved in a European war in August 1914. The French company was unable to complete the construction of the vessel by 30  July 1916. At first instance, Bailhache J considered that the French company should be able to treat the contract as void because a force majeure event, a war, had prevented it from fulfilling its obligations. The Special Case stated for the House of Lords was whether that decision was correct. The House of Lords agreed with the decision of Bailhache J that the French company was entitled to treat the contract as void because it had been prevented from completing construction of the vessel by a force majeure event that was beyond its control, a war. At least two judges implied that a party could not generally invoke a force majeure clause unless they could show they were ‘blameless’ or the event was not one for which they were responsible.35 More generally, at least two judges espoused what is now known as the ‘prevention principle’. Lord Finlay LC held that there were many illustrations of: 32 [1983] 2 AC 180, per Lord Diplock at 189. 33 [1919] AC 1. 34 Ibid, per Lord Finlay LC at 3. 35 Ibid, per Lord Atkinson at 9; and Lord Shaw of Dunfermline at 11.

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Foreseeability 5.10 ‘the very old principle laid down by Lord Coke (Co Litt 206b) that a man shall not be allowed to take advantage of a condition which he himself brought about.’36 Lord Atkinson espoused: ‘But if the stipulation be that the contract shall be void on the happening of an event which one or either of them can by his own act or omission bring about, then the party, who by his own act or omission brings that event about, cannot be permitted either to insist upon the stipulation himself or to compel the other party, who is blameless, to insist upon it, because to permit the blameable party to do either would be to permit him to take advantage of his own wrong, in the one case directly, and in the other case indirectly in a roundabout way, but in either way putting an end to the contract.’37 More recently, the House of Lords in Alghussein Establishment v Eton College38 upheld the principle that ‘a party should not be able to take advantage of its own wrong’ was a rule of construction that applied as a presumption in interpreting a contract in relation to a breach of contract. The presumption could be displaced where there were clear words to the contrary.39 In sum, there is ample authority for the proposition that a party who is negligent should not be able to use a force majeure clause as a defence to a breach of contract unless there are clear words to the contrary.

FORESEEABILITY Is there a general rule that the force majeure event must not be foreseeable? 5.10 The issue of whether a party is denied the benefit of a force majeure clause where the event was foreseeable is one that often blurs with the issue of whether they should have ‘taken reasonable steps’ to avoid or mitigate the event. As with all issues related to force majeure, whether the event should be unforeseeable, and precisely what is required to satisfy this requirement, is very much a matter of interpretation of the clause as applied to the factual

36 [1919] AC 1, per Lord Finlay LC at 8. 37 Ibid, per Lord Atkinson at 9. 38 [1988] 1 WLR 587. 39 Lord Jauncey of Tullichettle giving judgment for the House of Lords particularly at 591 and 594.

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5.10  Beyond Reasonable Control circumstances of that case. In general, it will be far more difficult to obtain the benefit of a force majeure clause where the event was foreseeable. The Privy Council in Hoecheong Products Co Ltd v Cargill Hong Kong Ltd40 observed that the cases on force majeure and foreseeability were not straightforward and that it may be arguable that a party should obtain the benefit of a force majeure clause even if they knew of a grave risk of a force majeure event at the time that they signed the contract. The Privy Council did not express a concluded view on the issue but also observed that it was very much a matter of the interpretation of the force majeure clause in that case, as applied to the facts found, that would resolve the matter at issue.41 In that case, the force majeure clause did not mention that the force majeure event should be foreseeable, or that a party should take reasonable steps to avoid its consequences. Parker LJ in Channel Island Ferries v Sealink UK  Ltd,42 without giving a concluded view, observed that he thought that the proposition that precontractual improvidence on the part of a party should deny them the benefit of a force majeure clause was too wide.43 The force majeure clause, in that case, did refer to events ‘beyond the control’ of a party but did not use the words ‘unforeseeable’ or that a party should take ‘reasonable steps’ to avoid the situation. It should be noted that Ralph Gibson LJ, in the same case, considered that it was both ‘logical and just’ for a party to take reasonable steps, prior to signing the contract to assist it in performing its obligations. Further, he considered that a party should take reasonable steps to avoid or mitigate the consequences of the incident, after signing, to obtain the benefit of the force majeure clause.44 Straughton J  in Navrom v Callitsis Ship Management SA (‘The Radauti’)45 characterised the issue of foreseeability as being one of causation. Grappling with a clause that neither specifically mentioned that the force majeure event should be ‘unforeseeable’ or that a party should take ‘reasonable steps’ to avoid the event, he doubted that these were general requirements in relation to obtaining the benefit of a force majeure clause. He stated: ‘Some wars may be foreseen, some strikes and some abnormal tempests or storms. I would suggest it is more a question of causation, whether the incidence of a particular peril which could have been foreseen can really be said to have caused one party’s failure of performance’.46 40 [1995] 1 WLR 404. 41 Ibid, per Lord Mustill at 408 giving judgment for the Privy Council. 42 [1998] 1 Lloyd’s Rep 323. 43 Ibid, per Parker LJ at 328. 44 Ibid, per Ralph Gibson LJ at 329. 45 [1987] 2 Lloyd’s Rep 276. 46 Ibid, per Straughton J at 282.

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Foreseeability 5.10 While the determination of whether a party should obtain the benefit of a force majeure clause is very much a matter of interpretation in each case, recent case law suggests that force majeure events are generally large catastrophic events. Such events by their nature, will often be unforeseeable. In Great Elephant Corp v Trafigura Beheer BV (‘The Crudesky’)47 Article 21 of the General Conditions of the Nigerian National Petroleum Corporation (‘NNPC’), the force majeure clause, stated: ‘Neither the Seller nor the Buyer shall be held liable for failure or delay in the performance of its obligations under this Contract, if such performance is delayed or hindered by the occurrence of an unforeseeable act or event which is beyond the reasonable control of either party (“Force Majeure”) … 21.1 The act or event constituting Force Majeure shall include, but not [be] limited to I. Act of God II. Act of Government intervention, directive, or policy (whether war, Federal or State Government).’ Longmore LJ, giving judgment for the Court of Appeal, considered that: ‘the word “unforeseeable” adds much to the concept of “within  … reasonable control”.’48 Further, he stressed the importance of interpreting the word ‘unforeseeable’ in light of what would generally be large catastrophic events listed in clause 21.1: ‘The truth is that the word “unforeseeable” is a general word intended to encompass the sort of events listed in cl 21 of the charterparty as shown by the non-exclusive instances of events given in art 21.1 of the NNPC terms.’49 Most recently, in 2 Entertain Video Ltd v Sony DADC Europe Ltd,50 O’Farrell J acknowledged that the 2011 London riots were an unprecedented and unforeseeable event.51 Nevertheless, she was comfortable to conclude that a break-in at Sony’s warehouse in Enfield was a foreseeable event because intruders had attempted and gained entry prior to the riots. Similarly, Sony had other reports commissioned that showed their fire prevention measures at 47 [2013] EWCA Civ 905. 48 Ibid, per Longmore LJ at [32]. 49 Ibid, per Longmore LJ at [32]. 50 [2020] EWHC 972 (TCC). 51 Ibid, per O’Farrell J at [207].

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5.10  Beyond Reasonable Control the warehouse were inadequate. Therefore, the risk of fire at the premises and the distribution of stock should have been foreseeable.52 The force majeure clause, in that case, did not mention that the event had to be foreseeable. O’Farrell J ultimately concluded that the events in question were not ‘beyond the reasonable control’ of Sony. However, her references to foreseeability suggest this was a matter that she considered relevant in the context of that case and demonstrated how difficult it can be for a party to surmount the hurdle of ‘foreseeability’ in relation to a force majeure clause.

52 [2020] EWHC 972 (TCC), per O’Farrell J at [207].

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Chapter 6

Causation

INTRODUCTION In relation to clauses in a commercial contract 6.1 Causation has always been an issue that is diabolically complicated in relation to both contract and tort. Causation in relation to force majeure clauses and exception clauses is no less complex. The matter was most recently discussed by Lord Mance DPSC (with whom Lord Sumption, Lord Hughes, Lord Hodge and Lord Briggs JJSC agreed) in Atlasnavios-Navegação, LDA (formerly Bnavios-Navegação, LDA) v Navigators Insurance Co Ltd1 considering an exclusion clause in an insurance contract: ‘What is required is an exercise of construction of the particular wording, giving effect at each stage to the natural meaning of the words in their context.’2 Lord Sumption (with whom Lord Clarke of Stone-cum-Ebony JSC concurred) espoused almost identical reasoning when considering causation in relation to an indemnity clause in a charterparty in ENE Kos 1 Ltd v Petroleo Brasileiro SA (No 2):3 ‘Like all questions of causation, this one is sensitive to the legal context in which it arises. It depends on the intended scope of the indemnity as a matter of construction, which is necessarily informed by its purpose.’4 Essentially, each clause must be construed in accordance with the principles in Wood v Capital (outlined in Chapter 2, particularly para 2.2 ff) to determine the correct causation test. The causation test will vary depending on the wording of the clause. The relevant causation must then be applied to the facts of the case. 1 [2018] UKSC 26. 2 [2018] UKSC 26, per Lord Mance JSC at [40]. 3 [2012] UKSC 17. 4 Ibid, per Lord Sumption JSC (with Lord Walker of Gestingthorpe JSC agreeing) at [12].

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6.1  Causation As the recent Supreme Court case of ENE Kos 1 Ltd v Petroleo Brasileiro SA (No 2)5 demonstrates, these are both matters on which great legal minds cannot always agree. Causation remains a matter that is potentially very complicated.

The ‘common sense’ approach 6.2 Regardless of what construction of a contractual cause is chosen in relation to causation, it is still necessary to apply common law principles to determine whether a particular event can be said to have caused a breach of contract. In a broad philosophical sense, there may be many causes of a breach of contract. However, the common law is not concerned with causation in a philosophical sense, nor with analysing causes in the way a scientist or metaphysician might analyse them. The common law is essentially concerned with what, on a broad view, the ordinary person in the street would choose as the ‘common sense’ cause of a breach of contract. The ‘common sense’ causation test is widely used to determine what caused a contractual breach. The classic statement of the ‘common sense’ test of causation is contained in Yorkshire Dale Steamship Co Ltd v Minister of War Transport (‘The Coxwold’).6 In Yorkshire Dale, the appellants were the owners of a motor vessel called The Coxwold. The appellants entered into a standard form charterparty with the respondents on 7  September 1939. This standard form charterparty left the responsibility for insuring the vessel with the appellants, subject to the following exceptions clause: ‘The risks of war which are taken by the charterer are: (a) Those risks which would be excluded from an ordinary English policy of marine insurance by the following, or similar, but not more extensive clause: Warranted free of capture, seizure, arrest, restraint, or detainment and the consequences thereof or of any attempt thereat, also from the consequences of hostilities or warlike operations, whether there be a declaration of war or not, civil war, revolution, rebellion, insurrection or civil strife arising therefrom or piracy; (b) loss of or damage to the ship hereby chartered caused by: (i) hostilities, warlike operations, civil war, revolution, rebellion, insurrection or civil strife arising therefrom; (ii) mines, torpedoes, bombs or other engines of war.’ The appellants and respondents agreed that the effect of this provision was that the respondents would have the obligation to insure the vessel against the risks of war.

5 [2012] UKSC 17. 6 [1942] 2 All ER 6.

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Introduction 6.2 On the evening of 6  May 1940 and the early morning of 7  May 1940, The Coxwold was in a convoy of four merchant vessels. The convoy was under the orders of a naval officer and guarded by four destroyers. The Coxwold travelled from a military base in Greenock in the UK to another military base in Narvik, Norway. It was carrying a cargo of tins of petrol destined for British forces in Norway. Effectively, The Coxwold was engaged in a ‘warlike operation’. At around 7.15 pm on 6 May 1940, the convoy made a sharp turn to the right to avoid what was believed to be an enemy submarine. They continued on this course for around half an hour and then resumed travelling towards Norway north or northeast. However, the convoy also continued to zig-zag to avoid enemy submarines as they continued on their course. At around 1.25 am on 7 May, The Coxwold gradually lost sight of the stern light of the lead convoy ship owing to poor visibility. The Coxwold continued on her course, but an unexpected and unexplained tidal set carried The Coxwold to the east. Those on board did not detect the tidal set, but the arbitrator found that there was no negligence on their part in failing to detect this tidal set. The eastward drift of The Coxwold that resulted from the unexpected tides resulted in the grounding of The Coxwold on the Damsel Rocks around 2.45 am on 7 May 1940. The dispute between the parties turned on what had caused the grounding of The Coxwold. The appellant ship owners maintained that the grounding of The Coxwold was caused by a ‘warlike operation’. Therefore, this fell within the exception clause of the charterparty, and the respondent was responsible for insuring this risk. The respondent charterers maintained that the unexpected and unexplained tidal set that carried The Coxwold to the east was the cause of the grounding of The Coxwold. Therefore, this was a risk that the appellant charterers bore under the charterparty. The arbitrator, at first instance, found that the grounding of The Coxwold was a direct consequence of the warlike operation. The Court of Appeal reversed this finding, holding that it was the unexpected and unexplained tidal set that caused the grounding of The Coxwold. The owners of The Coxwold appealed to the House of Lords. Lord Wright espoused the following formulation of the common sense test of causation which is generally widely cited in relation to causation matters: ‘This choice of the real or efficient cause from out of the whole complex of the facts must be made by applying commonsense standards. Causation is to be understood as the man in the street, and not as either the scientist or the metaphysician, would understand it. Cause here means what a business or seafaring man would take to be the cause without too microscopic analysis but on a broad view. Thus in the Lonides case, the court held that the cause of the loss was the fact that the captain was out of his reckoning to the extent of about 50 miles when he changed his course and that the extinction of the light was not the cause, though there was a remote chance that, if it had 87

6.2  Causation been alight as in peace time it used to be, the stranding might have been averted. The question always is what is the cause, not merely what is a cause. The cause so ascertained must then be within the description of consequences of warlike operations if the shipowner is to recover.’7 To similar effect, Lord Macmillan ruled: ‘No formula can be devised which will provide a universal touchstone for the infinite variety of circumstances which may arise. Each case must be judged in light of its own facts and by resorting, not to the refinements of the philosophical doctrine of causation, but to the commonplace tests which the ordinary businessman conversant with such matters would adopt.’8 Lord Wright extensively examined the authorities in relation to ‘warlike operation’. He concluded that a merchant ship, like The Coxwold, could be said to be involved in a ‘warlike operation’ because it was transporting petrol for use by British forces between two different military bases. The Coxwold was being put to use in a ‘warlike operation’. The other judges concurred. Applying the common sense test, all judges considered that The Coxwold was under the charge of a naval officer. The fact that it was zig-zagging to avoid enemy submarines was sufficient for the arbitrator to conclude that this was the proximate cause of her stranding. The unexpected tide was not sufficient to be the proximate cause of The Coxwold’s stranding. 9 It should be noted that while the common sense causation test is widely used, it is not the only test for resolving a causation issue.

In relation to a force majeure event 6.3 The decision of Teare J  in Seadrill Ghana Operations Ltd v Tullow Ghana Ltd10 is the most recent case to consider causation in relation to force majeure clauses. Tullow was the operator of two oil fields, TEN and Jubilee, on behalf of itself and its joint venture partners. The Government of Ghana had granted Tullow concessions to exploit these oil fields. Tullow hired a sixth generation ultradeepwater semi-submersible rig, West Leo from Seadrill. Tullow entered into the contract on 3 November 2011. Initially, it was for a period of one year, later extended to three years with an option to increase for 7 [1942] 2 All ER 6, per Lord Wright at 15. 8 Ibid, per Lord Macmillan at 12. 9 Ibid, per Viscount Simon LC at 10, Lord MacMillan at 12, and Lord Wright at 18. 10 [2018] EWHC 1640 (Comm).

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Introduction 6.3 a further two years. The option was exercised on 15 December 2012, so that the three-year contract became a five-year contract. The rig was hired at a rate of $600,000 per day. In May 2013, the Government of Ghana approved the TEN  Plan of Development. Tullow began to use the rig, West Leo, in the TEN oil field. First oil was expected to flow in August 2016. In September 2014, Ghana and Côte d’Ivoire entered into an arbitration pursuant to the United Nations Convention on the Law of the Sea to resolve a dispute between them as to precisely where the offshore boundary between the two states lay. This arbitration affected the TEN oil field as it lay in the disputed area. Côte d’Ivoire also obtained a ‘provisional management order’ (PMO) by which the tribunal ordered that ‘Ghana shall take all necessary steps to ensure that no new drilling either by Ghana or under its control takes place in the disputed area’. Following the PMO, it was understood that wells that had been ‘spudded’ in the disputed area could be completed. However, it was understood that no new wells in the disputed area were allowed to be ‘spudded’. ‘Spudding’ is the process by which a new well is drilled. After spudding, the well is completed to extract oil, assuming that the well actually produces oil. Tullow had several wells that it had spudded and remained to be completed in the TEN oil field in September 2014. It intended to use the West Leo rig to complete these wells. It was expected that the last such well would be completed in September 2016. It was then expected that Tullow would utilise West Leo in the Jubilee Field. The Ghanian Government sent a letter to Tullow dated 4  May 2015 asking Tullow to take steps to comply with the PMO and effectively imposed a drilling moratorium. Tullow clarified in a letter dated 11 June 2015 that this meant that no new wells could be drilled in the TEN oil field. In February 2016, a technical problem occurred with a Floating Production Storage and Offloading (FPSO) unit, a converted vessel used for processing and storing oil. The problem with the FPSO caused the Ghanian Government to fail to approve the drilling plan for the Greater Jubilee Field. Tullow sent a letter to Seadrill dated 1  September 2016 stating that it was unable to fulfil its obligations in relation to the hire of West Leo because of a force majeure event. Tullow cited the Government’s decision to impose a moratorium on drilling in the TEN oil field. Tullow also stated that the decision of the Ghanian Government to fail to reject its Greater Jubilee Plan ‘either individually or cumulatively, gave rise to a force majeure occurrence’.11 Tullow ceased drilling in October 2016 and terminated its rig hire contract with Seadrill at the time, in accordance with its stated decision in its letter to Seadrill of 1 September 2016 declaring a force majeure event. 11 [2018] EWHC 1640 (Comm), per Teare J at [56].

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6.3  Causation Seadrill claimed $277.4 million, essentially being the hire of the West Leo rig at $600,000 a day from September 2016 through to June 2018. Seadrill’s case was that there had been a collapse in the oil price in 2014. This led to a reduction in the hire rate for rigs from around $600,000 a day to around $150,000 a day by the end of 2016. Seadrill’s case was that it suited Tullow to try and terminate the contract because of these events: Seadrill maintained that they had effectively repudiated the contract and it was not validly brought to an end by a force majeure event. Clause 27 of the hire agreement between Tullow and Seadrill stated: ‘27.1 Neither COMPANY nor CONTRACTOR shall be responsible for any failure to fulfil any term or condition of the Contract if and to the extent that fulfilment has been delayed or temporarily prevented by an occurrence, as hereunder defined as FORCE MAJEURE, which has been notified in accordance with this Clause 27 and which is beyond the control and without the fault or negligence of the party affected and which, by the exercise of reasonable diligence, the said party is unable to prevent or provide against. Both parties shall use their reasonable endeavours to mitigate, avoid, circumvent, or overcome the circumstances of FORCE MAJEURE. 27.2 For the purpose of the Contract, Force majeure shall be limited to the following: (h) Drilling moratorium imposed by the government. 27.5 In the event of force majeure occurrence, the party that is or may be delayed in performing the Contract shall notify the other party without delay giving the full particulars thereof and shall use all reasonable endeavours to remedy the situation without delay. 27.8 In the event that a FORCE MAJEURE condition prevails for a period of sixty (60) consecutive days then COMPANY may terminate the CONTRACT forthwith by giving notice, or may elect keeping CONTRACTOR under CONTRACT and keep paying the DAILY FORCE MAJEURE RATE.’ Teare J espoused that causation in relation to force majeure is a matter of the legal context, and he preferred the common sense test to causation: ‘Questions of causation are sensitive to the legal context in which the question arises: see ENE  Kos v Petroleo Brasileiro [2013] 1 CLC 1; [2012] 2 AC 164 at paragraph 12 per Lord Sumption and at paragraph 76 per Lord Clarke. They are to be resolved by reference to common sense: see The Eurus [1998] CLC 90 at p 103 per Straughton LJ and also ENE  Kos v Petroleo Brasileiro at paragraph  74 where 90

Introduction 6.4 Lord Clarke approved a statement in an earlier case that causation was to be determined by a “broad common sense view of the whole position”.’12 Taking a common sense approach, Teare J held that during October 2016, Tullow had been prevented from drilling the EN10 field in the TEN oil field as a result of the Ghanaian Government’s decision to impose a drilling moratorium.13 However, Teare J  considered that the FPSO’s failure caused the Ghanaian Government to refuse to approve their drilling plan, which meant Tullow were unable to commence drilling in October 2016 as they had desired. Tullow had worked assiduously towards obtaining approval to work in the Greater Jubilee Field. This was apparent from the rig schedules on which West Leo was expecting to operate, moving from the TEN oil field to the Jubilee Field around October 2016. When the Ghanaian Government failed to approve the Greater Jubilee Plan in December 2015, Tullow expected an agreement to be reached on terms. Management at Tullow believed an agreement could be reached by no later than the summer of 2016. Yet, due to the FPSO problems in February 2016, the Ghanaian Government decided not to approve work in the Greater Jubilee Field. Adopting a broad common sense approach to causation, it was the decision by the Ghanaian Government, in the wake of the FPSO problems in February 2016, that resulted in the Ghanaian Government failing to approve Tullow’s plan to drill for oil in the Greater Jubilee Field. The force majeure event whereby the Ghanaian Government imposed a drilling mortarium in the disputed offshore area had nothing at all to do with the Greater Jubilee Field. The force majeure event could not then be said to have caused Tullow to have been prevented from drilling in the Greater Jubilee Field.14

In relation to an exclusion clause using force majeure type language in a commercial contract 6.4 This above reasoning was applied by Males LJ (with whom Rose LJ and Haddon-Cave LJ agreed) in the Court of Appeal in the recent case of Classic Maritime Inc v Limbungan Makmur SDN BHD.15 In that case, the court considered an exclusion clause that contained force majeure type language in a charterparty. On the question of causation, Males J espoused: ‘Undoubtedly the question is one of construction of clause 32 in this contract, and the answer to that question is determined by the language of the clause which the parties have chosen, having regard to the context and purpose of the clause.’16 12 [2018] EWHC 1640 (Comm), per Teare J at [69]. 13 Ibid, per Teare J at [71]. 14 Ibid, per Teare J at [77]. 15 [2019] EWCA Civ 1102. 16 Ibid, per Males LJ at [32].

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6.4  Causation Essentially Males LJ considered that the court should follow the approach laid down by the Supreme Court in Wood v Capita Insurance Services Ltd:17 ‘… which requires the court to check its provisional conclusions against the terms of the contract as a whole and the commercial consequences of the proposed construction.18 Males LJ’s construction of clause 32 is a good example of the modern approach to determining how causation applies in relation to a specific matter in a commercial contract. The facts of Classic Maritime Inc bear repeating to illustrate the approach of Males LJ to the issue of causation. In Classic Maritime Inc, the claimant entered into a contract of affreightment (‘COA’) with the first defendant charterer for the carriage of iron ore pellets. They were to be shipped from a choice of two different ports in Brazil, either Tubarao or Ponta Ubu, to two potential ports in Malaysia, either Port Kelang or Labuan. The second defendant was the first defendant’s parent and guarantor. The shipments were to take place between July 2015 and June 2016. In fact, no shipments had taken place in the second half of June 2015 because there had been a collapse in demand at the Malaysian steel mills for which the cargo was intended. On 5 November 2015, the Fundao tailings dam at the Germano iron ore mine in Brazil burst. The villages below the dam were flooded with a slurry, and many people lost their lives. Production at the iron ore mined stopped. The mine had been operated by Samarco Mineracao SA, who had been the sole supplier of iron ore pellets for shipment to Pontu Ubu since 2011. It was this event that sparked litigation between the shipowner and the charterer. As a result of the mine ceasing production, it was impossible to ship iron ore pellets from Pontu Ubu from 5 November 2015 onwards. Shipments from Tubarao, where Vale SA was the supplier, could still have taken place. However, at first instance, Teare J found that the defendant charterer never asked Vale if it was prepared to supply iron ore pellets and that even it if had, Teare J  found that it was more likely than not that Vale would have refused to supply them. Effectively, Teare J found that: (1)

it was impossible for the defendant charterer to ship iron ore pellets from either of the two nominated ports to Malaysia from 5 November 2015;

(2) the defendant charterer would not have shipped the iron ore pellets even if it physically could have done so because there was a collapse in demand for iron ore pellets from the Malaysian steel mills that started in the first half of 2015 and continued until at least June 2016.19

17 [2017] AC 1173. 18 [2019] EWCA Civ 1102, per Males LJ at [56]. 19 Ibid, per Males LJ at [4]–[10].

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Introduction 6.4 The first defendant charterer invoked clause 32 of the COA to excuse it from performing the contract. Clause 32 of the COA stated: ‘EXCEPTIONS Neither the Vessel, her Master or Owners, nor the Charterers, Shippers or Receivers shall be Responsible for loss or damage to, or failure to supply, load, discharge or deliver the cargo resulting From: Act of God, act of war, act of public enemies, pirates or assailing thieves; arrest or restraint of princes, rulers or people; embargoes; seizure under legal process, provided bond is promptly Furnished to release the Vessel or cargo; floods; frosts; fogs; fires; epidemics; quarantine; Intervention of sanitary, customs or other constituted authorities; Blockades; Blockages; riots; insurrections; civil commotions; political disturbances; earthquakes; Landslips; explosions; collisions; strandings, and accidents of navigation; accidents at the mine or Production facility or to machinery or to loading equipment; accidents at the Receivers’ works, Port, wharf or facility; or any other causes beyond the Owners’, Charterers’, Shippers’ or Receivers’ Control; always provided that any such events directly affect the performance of either party under This Charter Party. If any time is lost due to such events or causes such time shall not count as Laytime or demurrage (unless the Vessel is already on demurrage in which case only half time to count).’ [emphasis added] As discussed in Chapter 2 at para 2.7, on a plain reading of the clause, Males LJ considered that the above clause was an exception clause. Specifically, this was because the use of the words ‘for loss or damage to, or failure to supply, load, discharge or deliver the cargo’ were in the nature of an exclusion clause excusing a party from liability/damage for breach/failing to perform an obligation.20 The first consequence of this finding was that the defendant charterer failed to persuade the Court of Appeal that clause 32 was a force majeure qualifying its obligation to perform. In turn, this has an impact on causation. Males LJ seemed somewhat sympathetic to the view that a force majeure clause that qualified an obligation to perform should have a straightforward causation test such that each parties’ obligations to perform ended immediately upon the clause being triggered. The party relying on the clause would not need to show that they were ready and willing to perform in order to obtain the benefit of the clause.21 Males LJ went on to observe that there was much conjecture

20 [2019] EWCA Civ 1102, per Males LJ at [39]. The fact that the clause was headed ‘exceptions’ served to reinforce this finding. 21 Ibid, per Males LJ at [57], essentially, the causation test would be the same as for a ‘contractual frustration’ clause. This is discussed further below at para 6.6.

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6.4  Causation in the ‘1973 Mississippi flood’ cases22 as to whether clause 22, the then force majeure provision in the GAFTA  100 form, required a party to show that it would have performed ‘but for’ the force majeure event.23 At least on the judgment of Viscount Dilhorne in Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA,24 it would appear that the correct construction of clause 22 was not argued before the House of Lords.25 The matter does not appear to be settled. Specifically, in relation to causation, Males LJ considered that the construction of clause 32 in the present case meant that a ‘but for’ test applied. He reached this conclusion for the following reasons: (1) the words ‘loss or damage to … cargo’ referred to a particular cargo that was lost or damaged as a result of one or more of the force majeure events. He considered that there was no scope for these words to apply unless ‘but for’ the event in question, the cargo was lost or damaged;26 (2) a similar reasoning applied to the words ‘failure to … load, discharge or deliver the cargo’. Males LJ considered that the most appropriate way to read this phrase was that ‘but for’ the force majeure event in question, the cargo would not have been ‘lost or destroyed’ but would have been loaded, discharged or delivered. He also considered that the use of the definite article ‘the’ also suggested that a particular cargo is referred to; and that ‘but for’ the force majeure event in question, the cargo would not have been ‘lost or damaged’ (or as the case may be) would have been loaded, discharged or delivered. Males LJ considered that although the same could not necessarily be said in relation to ‘supply’, he could see no reason to treat ‘supply’ differently from a causation point of view;27 (3) the use of the words ‘resulting from’ the relevant force majeure event, coupled with the further requirement that the event ‘directly affect the performance of either party’ and the phrases ‘any other causes’ and ‘such events or causes’, suggest not merely events that have occurred, but events that impact on performance. Together, these phrases suggest a more demanding causation requirement. They are more consistent with a ‘but for’ causation test;28

22 Discussed more extensively in Chapter 4 at para 4.3 ff. 23 [2019] EWCA Civ 1102, per Males LJ at [59]. 24 [1978] 2 Lloyd’s Rep 109. 25 Ibid, per Viscount Dilhorne at 121. This is something that cannot have escaped the attention of Males LJ in Classic Maritime Inc v Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102. 26 Classic Maritime Inc v Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102, per Males LJ at [41]. 27 Ibid, per Males LJ at [42]. With great respect, it is hard to see why ‘supply’ could be treated different in relation to clause 22. A failure to supply must still ‘result from’ one of the specified force majeure events. 28 Ibid, per Males LJ at [45].

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Burden of proof 6.5 (4) the ‘but for’ causation test is the only sensible construction of the ‘time lost’ provision in the final sentence. Time can only be lost ‘but for’ the event;29 and (5) more generally, in relation to causation, it is fair to say that a failure to supply cargo does not ‘result from’ a force majeure event if the defendant charterer was not going to perform anyway. In addition, if the accident at the mine did not cause the defendant charterer to do anything differently because it was not going to perform anyway, then it cannot be said that the defendant charterer’s performance was directly affected by the force majeure event.30

BURDEN OF PROOF In relation to an exclusion clause – did the charterer bear the onus of proving that they were ready to perform? 6.5 Undertaking a construction of the clause based on the principles in Wood v Capita, Males LJ (with whom Rose LJ and Haddon-Cave LJ agreed) in Classic Maritime Inc31 considered that the exclusion clause was such that even if the relevant force majeure event prevented the defendants’ charterers performance, they still bore the onus of showing that they were ready and willing to perform. Males LJ inferred this because the clause could only be constructed sensibly in respect of some force majeure events on the basis that the defendant charterer was ready to perform, even though its performance had been prevented or hindered. For instance, it would only make sense that the defendant charterer was ready and able to perform (ie pay the bond) in relation to the force majeure event, ie ‘seizure under legal process, provided bond is promptly furnished to release the Vessel or cargo’.32 However, Males LJ did observe that some force majeure events could be sensibly constructed along the lines of construction of either party. That is, either on the basis: (1) that the defendant charterer had to show they were ready and willing to perform; or (2) once the defendant charterer showed that they had been prevented from performing by a force majeure event, the onus shifted to the claimant shipper to prove that they would not have performed at any event.33

29 [2019] EWCA Civ 1102, per Males LJ at [46]. 30 Ibid, per Males LJ at [45]. 31 Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102. 32 Ibid, per Males LJ at [44]. 33 Ibid, per Males LJ at [44].

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6.6  Causation

In relation to force majeure clauses 6.6 It has long been held that it is for the party that relies on a force majeure clause to bring itself within the terms of that clause.34 Essentially, a party bears the burden of proving that it had been prevented or delayed in performing its obligations as a result of a force majeure event. However, there is an interesting point raised in Classic Maritime Inc35 as to which party has the burden of proving that the party who relied on the force majeure clause was ready and willing to perform in any event. The defendant charterer in the above case sought to argue that there was a settled line of authority stemming from Bremer Handelsgesellschaft mbH  v Vanden Avenne-Izegem PVBA36 that laid down the principle that once a party had brought itself within the force majeure clause, the burden of proof then shifted to the other party to show that the party relying on the force majeure clause was not ready, willing and able to perform. Males LJ doubted that this principle was settled law, but he decided that this issue was removed from anything he had to decide, and he did not want to enter the debate.37 The Court of Appeal in Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA38 definitely considered that this was the case in relation to a ‘prohibition’ clause.39 Yet, from the speech of Viscount Dilhorne, it appears that the matter was not argued before the House of Lords and that, at least in his view, the outcome may have been different if: ‘… the question of the proper construction to be placed on cl 22 (the force majeure clause) was not raised in this appeal and if it had been, the result might have been different.’40 None of the other House of Lords judgments appear to consider this particular issue in relation to what was then clause 22 of the GAFTA 100 form. However, Lord Wilberforce’s judgment (with whom Lord Keith of Kinkel agreed) did address this issue in respect of the then clause 21 of the GAFTA 100 form. Clause 21 stated:

34 Parker LJ in Channel Island Ferries Ltd v Sealink UK Ltd [1988] 1 Lloyd’s Rep 323 at 327 is generally considered to be the leading modern authority on this. Also see Aikens J  in Mamidoil-Jetoil v Okta [2003] 1 Lloyd’s Rep 1 at 11, this point was confirmed by Longmore LJ in Mamidoil-Jetoil v Okta [2003] 2 Lloyd’s Rep 635 at 638. 35 Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102. 36 [1978] 2 Lloyd’s Rep 109. 37 Ibid, per Males LJ at [58] and [59]. 38 [1977] 2 Lloyd’s Rep 329. 39 Ibid, per Megaw LJ at 337. 40 Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109 at 121.

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Burden of proof 6.6 ‘21. PROHIBITION. In case of prohibition of export, blockade or hostilities or in case of any executive or legislative act done by or on behalf of the Government of the country of origin or of the territory where the port or ports of shipment named herein is/are situate, preventing fulfilment, this Contract or any unfulfilled portion thereof so affected shall be cancelled. In the event of shipment proving impossible during the contract period by reason of any of the causes enumerated herein, Sellers shall advise Buyers without delay with the reasons therefor. If required, Sellers must produce proof to justify their claim for cancellation.’ Lord Wilberforce observed that clause 21 is essentially a contractual frustration clause: that is, the agreement is automatically cancelled upon the happening of the frustrating event, a prohibition of export. Consequently, there is no need for the seller to prove that they are ready and willing to perform to obtain the benefit of this clause, provided that the seller complies with the relevant notice requirements.41 Lord Wilberforce observed that the authorities demonstrated this, and it was a view with which he agreed.42 Males LJ in Classic Maritime Inc43 commented on Lord Wilberforce’s judgment. He observed that there was a good rationale for having a simple causation test in relation to contractual frustration clauses that cause the contract to come immediately to an end upon the happening of the specified frustrating event: ‘It seems to me that where the effect of a clause is to discharge the parties from an obligation to perform in the future, as distinct from to relieve them from liability to pay damages for a past breach, that may well have at least a bearing on the nature of the causative effect on a party’s performance which an event is required to have. In such a case, both parties need to know at once when the event occurs whether they are under any continuing obligation. There is, therefore, much to be said for a simple and straightforward causation requirement (an embargo which makes it impossible for any goods to be shipped) without requiring investigation of matters known only to one party, such as whether it was able and willing to perform if the event had not occurred. Such a consideration has much less force after the event when the time for performance is over, and the only question is whether a party is liable to pay damages. Although none of this is spelled out in Lord Wilberforce’s speech, it provides in my judgment a compelling justification for understanding his reasoning 41 [1978] 2 Lloyd’s Rep 109 at 114. 42 Ibid at 114 citing Devlin J  in Ross T  Smyth v. Lindsay  [1953] 2 Lloyd’s Rep 378, [1953] 1 WLR 1280 at 381 and 1284; Browne LJ in Tradax v Andre [1976] 1 Lloyd’s Rep 216 at 426; and Megaw LJ in Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 329 at 337. 43 Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102.

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6.6  Causation as I would understand it and as Kerr LJ in Tradax Export SA v Cook Industries Inc [1982] 1 Lloyd’s Rep 385 did understand it. So too, it would appear, did Donaldson LJ in Bremer Handelsgesellschaft mbH v Westzucker GmbH (No 2) [1981] 2 Lloyd’s Rep 130.’44

Observations in Classic Maritime Inc on causation and force majeure clauses 6.7 Although the clause under consideration in Classic Maritime Inc45 was not a force majeure clause, applying the above reasoning, after examining the House of Lords decision in Bremer Handelsgesellschaft mbH  v Vanden Avenne-Izegem PVBA,46 Males LJ considered that there was no general test for causation in relation to a force majeure clause and it was a matter of constructing the wording of the clause in each case: ‘In any event, even if it were correct to characterise clause 32 as a force majeure clause, the House of Lords (in Bremer Handelsgesellschaft mbH  v Vanden Avenne-Izegem PVBA  [1978] 2 Lloyd’s Rep 109) did not purport to lay down any rules as to the construction of force majeure clauses generally.’47 The approach of Males LJ is a great recent example of the interpretation of a force majeure clause in accordance with the principles of Wood v Capita and recent authority from the Supreme Court on contractual construction and causation referred to at para 6.4 above.

Causation where there are two causes of equal efficiency 6.8 Potentially, where there are two competing causes of equal efficiency, it may be sufficient for one to trigger a force majeure clause. This would ultimately depend on the construction of the clause. Heskell v Continental Express Ltd48 is a case commonly cited for the principle that in relation to causation and contracts, where two causes are cooperating and both of equal efficiency, one of them is sufficient to cause a breach of contract. In Heskell, the plaintiff, an export and shipping merchant, agreed to sell three bales of poplin to a Persian firm called Mishan. The plaintiff instructed the first defendants, Continental Express, who were warehousing the goods, to dispatch 44 [2019] EWCA Civ 1102, per Males LJ at [57]. 45 Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102. 46 [1978] 2 Lloyd’s Rep 109. 47 [2019] EWCA Civ 1102, per Males LJ at [58]. 48 [1950] 1 All ER 1033.

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Burden of proof 6.9 the goods to a dock in Manchester in preparation for shipping. Continental Express negligently failed to dispatch the goods. The second defendant had allocated cargo space to the plaintiff for its bales of poplin. In ignorance of the first defendant’s failure, the plaintiff applied through forwarding agents for a bill of lading. The second defendant shipowners negligently issued a bill of lading, despite never having received the goods. The plaintiff provided this to the Persian buyer, who promptly made payment. The ship arrived in the Persian Gulf without the goods. The plaintiff at first assumed they were either lost or misdelivered. After an extensive search, the plaintiff discovered that the goods had never left the warehouse. The plaintiff had to compensate the buyer in the Persian Gulf for lost profits. The plaintiff then sued the first defendant and second defendant for negligence and sought compensation for the damages it had to pay the Persian Gulf buyer. Effectively, Devlin J  found that there were two cooperating causes of equal efficacy in this case. First, it was caused by the first defendant failing to deliver the goods to the dock. Second, an equal and cooperating cause was the second defendant shipper’s negligent issue of the bill of lading. He said: ‘It may be that the term “a cause” is, whether in tort or in contract, not rightly used as a term of legal significance unless it denotes a cause of equal efficacy with one or more other causes. Whatever the true rule of causation maybe I am satisfied that if a breach of contract is one of two causes, both co-operating and both of equal efficacy, as I find in this case, it is sufficient to carry judgment for damages’.49 Devlin J  considered that this accorded with the common sense test of the ordinary man laid down in Yorkshire Dale SS  Co Ltd v Minister of War Transport.50 The above approach could potentially be taken in relation to a force majeure case.

Applicability of principles relating to exclusion clauses Atlasnavios-Navegação, LDA (formerly Bnavios-Navegação, LDA) v Navigators Insurance Co Ltd51 6.9 The Supreme Court case of Atlasnavios-Navegação, LDA (formerly Bnavios-Navegação, LDA) v Navigators Insurance Co Ltd considered whether a loss in relation to a standard war risk insurance policy could be caused by two concurrent causes, one that fell within an insured peril, and one that fell with the exclusion clause. 49 [1950] 1 All ER 1033, per Devlin J at 1048. 50 [1942] AC 691. 51 [2018] UKSC 26.

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6.9  Causation The appellants in Atlasnavios-Navegação were the owners of a vessel that was detained in August 2007 in a port in Venezuela. Divers discovered bags of cocaine strapped to the vessel’s hull below the waterline. The Venezuelan authorities detained the vessel, arrested the crew and charged the master and second officer with complicity in drug smuggling, for which they were later convicted. The vessel was detained for over six months, and the owners abandoned it and claimed the loss on their standard war risk insurance policy. Clause 1.5 of the standard war risk insurance policy covered: ‘loss or damage to the vessel caused by … any person acting maliciously’. The exclusion clause in 4.1.5 stated that the insurance policy did not cover ‘detainment by reason of infringement of any customs … regulations’. Lord Mance DPSC giving judgment considered that the act of drug smuggling (or being complicit in drug smuggling) at first blush could amount to an act causing a ‘loss to the vessel by … malicious act’, and also cause ‘detainment (of the vessel) by reason of infringement of any customs … regulations’.52 Second, he held that even if there was a meaningful distinction between clause 1.5 that discussed a ‘malicious act’ and clause 4.1.5 that discussed ‘detainment by reason of infringement of any customs … regulations’, whether the act of drug smuggling fell within either clause was not a binary choice: it was a matter of construction of the clause, giving effect at each stage to the natural meaning of the words in their context.53 Further, Lord Mance considered that while the general aim of insurance law is to identify a single real, effective, or proximate cause of any loss, the correct analysis in some cases is that there are two concurrent causes. He considered this to be particularly true where there is an exceptions clause that takes certain perils out of prima facie cover.54 He also endorsed the decision of Devlin J (as he then was) in the Royal Greek Government v Minister of Transport (‘The Ann Stathatos’):55 ‘Devlin J  pointed out that the existence of an exceptions clause is itself likely to affect what falls to be regarded as dominant, proximate or relevant; and that this is because “the whole of what one might call the area naturally appurtenant to the excepted event must be granted to it”’.56 Lord Mance concluded that the act of drug smuggling constituted a ‘malicious act’ within clause 1.5. However, he considered that this was only one element of the causative events leading to the loss. Further, he considered that detainment 52 [2018] UKSC 26, per Lord Mance at [39] and [40]. 53 [2018] UKSC 26 at [40]. 54 Ibid, at [43]. 55 (1949) 83 Lloyd’s Law Rep 228 at 237. 56 [2018] UKSC 26 at [42].

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Burden of proof 6.9 of the vessel for six months was an event that was equally causative of the loss.57 As the act of drug smuggling also fell within the exceptions clause and was equally causative of the loss, the shipowners were not insured under their insurance policy. While the operation of a force majeure clause that is an exception clause in a general commercial contract is different to the operation of an exception clause in an insurance contract, the above discussion of causation could still potentially be relevant to a force majeure clause, depending on the circumstances of the particular case.

57 [2018] UKSC 26 at [43].

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Chapter 7

Notice

INTRODUCTION 7.1 Most force majeure clauses contain a ‘notice’ provision by which the affected party is obliged to provide the other party with written notice of a force majeure event in order to be able to obtain the benefit of the force majeure provision. These notice provisions may require that the affected party provide particulars of the force majeure event, or that notice is provided within a particular time frame, or – in the case of the Grain and Feed Trade Association 100 form (GAFTA 100 form) force majeure clause – that the affected party be able to make delivery to alternative ports. Where notice provisions are not strictly complied with by the party seeking to rely on the force majeure provision, the other party may seek to deny them the benefit of the force majeure clause. Also, anecdotally, many parties during the Covid-19 pandemic have been filing force majeure notices provisionally; it is doubtful whether this will be effective. The legal principles that govern the issues of notice will be discussed in this chapter.

IS A NOTICE PROVISION A CONDITION PRECEDENT OR AN INTERMEDIATE TERM? 7.2 The chief issue in relation to a force majeure clause notice provision is whether it is classified as a condition precedent or an intermediate term. If the notice provision is a classified as a condition precedent, the affected party will strictly comply with its term to benefit from the force majeure clause. On the other hand, if the notice clause is classified as an intermediate term, there will be greater tolerance for non-compliance with the terms of the clause. The party seeking to rely on a defective notice may still be able to obtain the benefit of the force majeure clause depending on the gravity of their non-compliance with the notice provisions and its impact on the other party. Where the breach is serious and could not be properly compensated by damages – for example, where there is a substantial and unexplained delay in issuing the notice and that delay prevents the other party from properly investigating the force majeure 102

Is a notice provision a condition precedent or an intermediate term? 7.3 event – the party issuing the notice may not be able to rely on the force majeure provision. However, if the breach of the notice provisions is minor or can be adequately compensated by damages, the party issuing the notice should still be able to rely on the force majeure provision, provided the notice provision is an intermediate term. It should also be noted that the other party can be taken to ‘waive’ their right to object to a defective notice. This proved a winning defence for many parties that issued defective force majeure notices in the litigation on soya bean meal contracts that followed the Mississippi River floods in the US in 1973.

Some common law background on conditions and intermediate terms 7.3 The modern approach to determining whether a clause is a condition, a warranty or an innominate term is pithily summarised by the Court of Appeal in Grand China Logistics Holding (Group) Co Ltd v Spar Shipping As (Spar Capella, Spar Vega, Spar Draco).1 First, Gross LJ endorsed the following concise summary from Professor Andrew Burrows at paragraph 19(9) of the Commentary in A Restatement of the English Law of Contract:2 ‘A  condition is a major term of the contract any breach of which entitles the innocent party to terminate the contract … a warranty is, in contrast, a minor term of the contract such that no breach will entitle the innocent party to terminate the contract. An innominate term (sometimes referred to as an “intermediate term”) is neither a condition nor a warranty; and it would appear that most terms are now regarded as innominate. Where a term is innominate, the question as to whether the contract can be terminated turns on the seriousness of the consequences of the breach (judged at the time of the termination taking into account what has happened and is likely to happen …) rather than on the importance of the term broken …’3 Gross LJ consolidated the following general principles for distinguishing between a condition, a warranty and an innominate term based on the judgment of Diplock LJ in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd4 and the House of Lords decision in Bunge Corp v Tradax SA:5:

1 [2016] EWCA Civ 982. 2 AS Burrows, A Restatement of the English Law of Contract (2016), pp 113–114. 3 Ibid, per Gross LJ in [20]. 4 [1962] 2 QB 26, Diplock LJ’s judgment in this case is generally acknowledged to be the first case that recognised innominate terms as a separate classification for contractual terms. 5 [1981] 1 WLR 711.

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7.3  Notice ‘(i) First, the question was one of ascertaining the intentions of the parties and thus of the true construction of the contract: As Lord Scarman put it (at p 717): “The first question is always, therefore, whether upon the true construction of a stipulation and the contract of which it is part, it is a condition, an innominate term, or only a warranty.” It follows that where on the true construction of the contract a term was to be classified as a condition, then it was unnecessary and inappropriate to explore the gravity of the breach; it was open to the parties to agree that any breach of a particular obligation (regardless of its gravity) would entitle the innocent party to treat the contract as at an end: Lord Wilberforce, at pp 715–716. (ii) Secondly (Lord Scarman, at p 717), if, on the true construction of the contract, the parties have not made a particular term a condition and if the breach of that term may result in trivial, minor or very grave consequences, then the term is innominate. (iii) Thirdly (Lord Wilberforce, at pp 715–716, Lord Scarman, at p 717, Lord Roskill at p 727), unless the contract made it clear that a particular stipulation was a condition or only a warranty, it was to be treated as an innominate term; the courts should not be too ready to interpret contractual clauses as conditions.’6 Essentially, in relation to (i) above, in each case, the determination of whether a term is a warranty or a condition, express or implied, is a matter of contractual interpretation pursuant to the principles of Wood v Capita.7 A term may be classified as a condition where the parties use clear words in the contract to classify the term as a condition. Although simply using the word ‘condition’ does not make it conclusive that the clause is a condition, it is generally a strong indicator that it is a condition.8 A similar reasoning would follow to the labelling of a term as a ‘warranty’.9 Also, a term can be classified as a condition even though the word ‘condition’ is not expressly used in the clause.10 Essentially, the term would be classified as a condition by necessary implication from the process of contractual interpretation/construction.

6 7 8 9 10

Grand China Logistics Holding (Group) Co Ltd v Spar Shipping As (Spar Capella, Spar Vega, Spar Draco) [2016] EWCA Civ 982 at [52]. [2017] UKSC 24. These principles are explained in some detail in Chapter 2. Personal Touch Financial Services Ltd v SimplySure Ltd [2016]  EWCA  Civ 461, per Sir Stanley Burton at [28]. Or even an ‘intermediate term’. Bunge Corp v Tradax SA [1981] 1 WLR 711, per Lord Wilberforce at 716, and Lord Roskill at 729.

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Is a notice provision a condition precedent or an intermediate term? 7.4 Usually, either clear words or a process of contractual interpretation resulting in a necessary implication will be necessary to classify a term as a ‘condition’ or a ‘warranty’, otherwise the term will be an intermediate condition.11

General principles in relation to notice provisions in force majeure clauses Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA 7.4 The case law concerning force majeure notice provisions typically discusses whether a term is a condition precedent that must be strictly honoured or an intermediate term whose breach is less serious. The leading authority in relation to the interpretation of force majeure notice provisions is Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA.12 The facts of Bremer v Vanden were set out in the judgment of Lord Wilberforce. The buyers, Vanden, contracted with the sellers, Bremer, on 5 April 1973 to purchase 2,500 tonnes of soya bean meal from origin, the US, to be delivered cif (cost, insurance and freight) to Rotterdam in the Netherlands. The soya bean meal was to be delivered in instalments of 500 tonnes per month. Bremer, had also contracted with the Vanden on identical terms, for the delivery of 220 tonnes of soya bean meal. As a result of this washout, Bremer had to deliver to Vanden 220 tonnes of soya bean meal per month. The buyers and the sellers used a standard GAFTA 100 contract to conclude their purchases and sales.13 Severe flooding occurred in the lower delta region of the Mississippi River, USA, from around March to May 1973. The floods resulted in great damage to property, livestock, crops and also caused great loss of life. In particular, soya bean crops were damaged. The US Government became concerned about whether there would be enough soya bean meal available for US domestic consumption. On 27 June 1973, the US Government imposed an embargo on the export of soya bean meal with the following exception: ‘… on lighter destined for an exporting vessel or for which loading aboard an exporting vessel had actually commenced as of 5 pm EDT June 27, 1973 …’.

11 [1981] 1 WLR 711, per Lord Scarman at 717. 12 [1978] 2 Lloyd’s Rep 109. 13 The current version of the GAFTA  100 form, which has not changed much since the case of Bremer v Vanden, can be found at https://www.gafta.com/Write/Mediauploads/ Contracts/2010/100.Pdf.

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7.4  Notice This exception, referred to as a ‘loophole’, was unavailable to the sellers in this case.14 On 2 July 1973, by Bulletin 88, the US Government introduced a licensing system that allowed the export of 40% of any outstanding soya bean meal contract. The buyers and the sellers accepted that the embargo was absolute for the purposes of this case between 27 June and 2 July 1973, and there was no way the sellers could have made use of the loophole. On 3 July 1973, the sellers dispatched a notice at 5:54 pm stating that shipment would be delayed and nominating the alternate ports as ‘the usual ports on the Lakes/East Coast Gulf’. Around 7 July 1973, the sellers obtained an export licence in respect of the outstanding monthly amounts instalments, including June 1973, and on 8 July 1973, were able to ship 800 tonnes of soya bean meal. INVOKING CLAUSE 21 OF THE GAFTA 100 FORM

7.5 On 9 July 1973, the sellers, Bremer, sent a telex to the buyers invoking cancellation under clause 21 in respect of part quantities for which export licences could not be obtained. This was the first point in issue in relation to notice in this case. Clause 21 stated as follows: ‘21. PROHIBITION. In case of prohibition of export, blockade or hostilities or in case of any executive or legislative act done by or on behalf of the Government of the country of origin or of the territory where the port or ports of shipment named herein is/are situate, preventing fulfilment, this Contract or any unfulfilled portion thereof so affected shall be cancelled. In the event of shipment proving impossible during the contract period by reason of any of the causes enumerated herein, Sellers shall advise Buyers without delay with the reasons therefor. If required, Sellers must produce proof to justify their claim for cancellation.’15 The buyers maintained that the clause 21 notice provision was a condition precedent that had to be strictly complied with for the sellers to obtain the benefit of the prohibition provision and that the sellers had failed to give notice ‘without delay’. The sellers maintained that they had given notice within clause 21 ‘without delay’, and in any case, even if the court was not with them on that point, that clause 21 was an intermediate term and their non-compliance with this clause was not so serious that they should be denied the benefit of exercising their force majeure rights. 14

Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109, per Lord Wilberforce at 112. 15 Clause 21 is in largely similar terms to the clause 19: Prohibition in the current GAFTA 100 form.

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Is a notice provision a condition precedent or an intermediate term? 7.5 Lord Wilberforce laid down the following principles, which are widely cited as being the guiding principles to be used to determine whether a force majeure notice clause is a condition precedent or an intermediate term16 of a contract: ‘… (it) must depend on (i) the form of the clause itself, (ii) the relation of the clause to the contract as a whole, (iii) general considerations of law’.17 In relation to condition (i), Lord Wilberforce noted that the clause at issue was not framed as a condition precedent. The word ‘condition’ or ‘condition precedent’ was not mentioned anywhere. More importantly, the ‘cancellation’ referred to in the first sentence, on a fair reading, could not be considered to be conditional upon the notice provisions in the second sentence of clause 21. Lord Wilberforce held that cancellation took place automatically upon the happening of an event.18 He also held that the notice provision in clause 21 would generally only be a condition precedent if it were expressed to have a definite time limit. The generality of the words ‘without delay’ suggested it was an intermediate term.19 Whether the sellers should be deprived of the benefit of clause 21 on the basis that their notice was either defective or late would depend on the seriousness of the breach and the consequences for the buyers. In this particular case, the buyers suffered no serious disadvantage from the delay in issuing the notice, and the sellers were found to have issued a valid notice. Any disadvantage to the buyers could be remedied by payment of damages from the sellers to the buyers.20 Regarding condition (ii), Lord Wilberforce observed by comparison with other clauses in the GAFTA  100 form, stricter language would have been used if it had been intended that clause 21 was a condition precedent to obtaining relief.21 Finally, concerning condition (iii), Lord Wilberforce held that the modern approach was not to automatically classify a term as a condition or a warranty but to classify the term as an innominate/intermediate term that would fall to

16 Lord Wilberforce’s judgment used the expression ‘or some other character’ rather than intermediate expression, but the term intermediate expression tends to be used in modern judgments. 17 Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109, per Lord Wilberforce at 113. 18 Ibid, per Lord Wilberforce at 113. 19 Ibid, per Lord Wilberforce at 113, however, it should be noted that it is a matter of contractual interpretation in each case. There is not a general principle that because the words ‘without delay’ are used this will always mean that the clause is a condition precedent. 20 Ibid, per Lord Wilberforce at 113. Lord Salmon at 128 went further and said that not only would he expect to see a definite time limit, but that he would expect that the clause would make clear that the party relying on the clause should be deprived of its benefit if they fail to strictly comply with the notice clause. See also Lord Russell at 130 to similar effect. 21 Ibid, per Lord Wilberforce at 113.

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7.5  Notice be a condition or a warranty in a particular case having regard to the gravity of the breach.22 In sum, Lord Wilberforce, with the other judges in the House of Lords agreeing, found that clause 21 was an intermediate term and was not a condition precedent. In any case, where a party proved that the other party was in breach of clause 21, the court would need to assess the gravity of the breach in each case. If the breach was serious and the other party suffered a serious disadvantage, the other party could treat the breach as a repudiatory breach that had brought the contract to an end and claim damages.23 Brandon J  in Bunge SA  v Kruse,24 following this decision of the House of Lords in Bremer v Vanden,25 held that a seller who sent a letter to a buyer on 6  July 1973, advising them of the licensing system that the US  Department of Commerce had introduced on 2 July 1973, had issued the notice ‘without delay’ for the purposes of the ‘prohibition’ clause, particularly since the buyers had suffered no real disadvantage from a four-day delay in being informed about the new licensing system and arrangements.26 The House of Lords reiterated their approach to generally treating an obligation to perform by a fixed time as a condition and treating a clause that uses the expression ‘without delay’ as involving ‘questions of degree’, specifically citing Bremer v Vanden, and therefore impliedly being an innominate term.27 This approach continues to resonate with recent Court of Appeal authority. In Grand China Logistics Holding (Group) Co Ltd v Spar Shipping As (Spar Capella, Spar Vega, Spar Draco)28 Hamblen LJ espoused: ‘The modern English law approach to the classification of contractual terms is that a term is innominate unless it is clear that it is intended to be a condition or a warranty. See, for example, Cehave NV v Bremer Handelgesellschaft (The Hansa Nord) [1976] QB 44 at p 70H–71B (Roskill LJ); Bremer v Vanden [1978] 2 Ll Rep 109 at p 113 (Lord Wilberforce); Bunge v Tradax at p 715H–716A (Lord Wilberforce), at p 717G–H (Lord Scarman) and at p 727E (Lord Roskill).’29 Gross LJ gave a judgment to a similar effect:

22 23

[1978] 2 Lloyd’s Rep 109, per Lord Wilberforce at 113. Grand China Logistics Holding (Group) Co Ltd v Spar Shipping As (Spar Capella, Spar Vega, Spar Draco) [2016] EWCA Civ 982, per Gross LJ at [21]. 24 [1979] 1 Lloyd’s Rep 279. 25 [1978] 2 Lloyd’s Rep 109, HL. 26 Bunge SA v Kruse [1979] 1 Lloyd’s Rep 279, per Brandon J at 291. 27 Compagnie Commerciale Sucres et Denrees v C Czarnikow Ltd [1990] 1 WLR 1337, per Lord Ackner at 1346. 28 [2016] EWCA Civ 982. 29 Ibid, per Hamblen LJ at [92].

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Is a notice provision a condition precedent or an intermediate term? 7.5 ‘(i) First, the question was one of ascertaining the intentions of the parties and thus of the true construction of the contract: As Lord Scarman put it (at p 717): “The first question is always, therefore, whether upon the true construction of a stipulation and the contract of which it is part, it is a condition, an innominate term, or only a warranty.” It follows that where on the true construction of the contract a term was to be classified as a condition, then it was unnecessary and inappropriate to explore the gravity of the breach; it was open to the parties to agree that any breach of a particular obligation (regardless of its gravity) would entitle the innocent party to treat the contract as at an end: Lord Wilberforce, at pp 715–716. (ii) Secondly (Lord Scarman, at p 717), if, on the true construction of the contract, the parties have not made a particular term a condition and if the breach of that term may result in trivial, minor or very grave consequences, then the term is innominate. (iii) Thirdly (Lord Wilberforce, at pp 715–716, Lord Scarman, at p 717, Lord Roskill at p 727), unless the contract made it clear that a particular stipulation was a condition or only a warranty, it was to be treated as an innominate term; the courts should not be too ready to interpret contractual clauses as conditions.’ Implicitly, he acknowledged that the appropriate balance between certainty in classifying a contractual termination clause as a condition and the undesirability of a trivial breach resulting in a breach of a term classified as a condition is often to classify that term as an intermediate term.30 In Ark Shipping Company LLC v Silverburn Shipping (IoM) Ltd,31 Gross LJ endorsed both his judgment and Hamblen LJ’s judgment in Grand China Logistics v Spar Shipping on this issue, citing the passages above.32 McCombe LJ and Leggatt LJ concurred.33 By contrast, however, in the case of Bunge Corp v Tradax Export SA,34 the House of Lords observed that in a suitable case, the court should hold that a term was a condition where, objectively viewed, the parties intended that the term be a condition. In particular, he observed that a ‘time clause’, a clause setting a time by which an obligation must be performed, would usually be a condition.35 This matter is further discussed below at para 7.11.

30 [2016] EWCA Civ 982, per Gross LJ at [58]–[60]. 31 [2019] EWCA Civ 1161. 32 Ibid, per Gross LJ at [48]. 33 McCombie LJ at [83] and Leggatt LJ at [84]. 34 [1981] 1 WLR 711. 35 Ibid, per Lord Wilberforce at 716.

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7.5  Notice This approach is ultimately the same as applying general principles of contractual interpretation derived from Wood v Capita to determine whether a force majeure notice provision is a condition precedent or an intermediate term and what the contractual requirements are for giving appropriate notice. Breach of a notice clause that is an intermediate term may still allow the party seeking to rely on the force majeure clause to cancel the contract if the breach of the notice provision is minor. However, if their breach of the notice provision is more serious, the party seeking to rely on the force majeure clause may still be able to cancel the contract but have to pay damages appropriately assessed. There may also be cases in which cancellation should be treated as not having taken effect. Treating the notice provision as an intermediate term allows the court to take a more flexible approach, the consequences of the breach of the notice clause varying with the gravity of the breach.36 It should also be noted that if a party is obliged to provide a notice ‘without delay’, they are under this obligation, even if they are relying on another party in a chain of shippers/suppliers to provide them with notice of a force majeure event in a timely manner.37 The recent decision of the Court of Sessions in Hoe International Ltd v Andersen38 in relation to a ‘notice’ was to a similar effect. In that case, the court considered whether a notice given by a purchaser in relation to a share purchase agreement was valid. Giving judgment for the court, Lord Drummond Young observed that there were two important requirements in considering whether a notice was valid: (1) Does the notice, objectively viewed from the point of view of the reasonable person with all the necessary background information, convey the necessary information to the recipient? (2) Was the notice issued in compliance with the contractual provisions that govern the sending of the notice?39 He held that the first requirement turned on the construction of the notice itself. It also involved considering the purpose of serving the notice.40 The second requirement was an application of the general principles of contractual 36

Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109, HL, per Lord Wilberforce at 113. 37 See Tradax Export SA v Andrew & Cie SA [1976] 1 Lloyd’s Rep 416, per Lord Denning MR at 424. 38 [2017] CSIH 9. 39 Ibid, per Lord Drummond Young at [16]. Lord Drummond Young drew on the general principles laid down by Lord Steyn in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997]  AC  749. Lord Steyn tended to emphasise the first criteria as the notice provisions in Mannai Investments, although the second principle is implicit in his judgment. Mannai Investments was recently followed by the Court of Appeal in Stobart Group Ltd, Stobart Rail Ltd (formerly WA Developments Ltd) v William Stobart, William Andrew Tinkler [2019] EWCA Civ 1376, per Simon LJ at [25]. 40 Ibid, per Lord Drummond Young at [29].

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Is a notice provision a condition precedent or an intermediate term? 7.6 interpretation.41 Lord Drummond Young’s judgment is essentially consistent with the thread of reasoning running through the authorities above. With this background, it is pertinent to consider these matters in a force majeure context. INVOKING CLAUSE 22 OF THE GAFTA 100 FORM

7.6 The next matter to be considered concerned whether the force majeure notice given by the sellers pursuant to the fourth sentence of clause 22 of the contract. Clause 22 of the standard GAFTA 100 contracts stated: ‘22. FORCE MAJEURE, STRIKES, ETC Sellers shall not be responsible for delay in shipment of the goods or any part thereof occasioned by any Act of God, strike, lockout, riot or civil commotion, combination of workmen, breakdown of machinery, fire or any cause comprehended in the term ‘force majeure’. If delay in shipment is likely to occur for any of the above reasons, Shippers shall give notice to their Buyers by telegram, telex or teleprinter or by similar advice within 7 consecutive days of the occurrence, or not less than 21 consecutive days before the commencement of the contract period, whichever is later. The notice shall state the reason(s) for the anticipated delay. If after giving such notice an extension to the shipping period is required, then Shippers shall give further notice not later than 2 business days after the last day of the contract period of shipment stating the port or ports of loading from which the goods were intended to be shipped, and shipments effected after the contract period shall be limited to the port or ports so nominated. If shipment is delayed for more than one calendar month, Buyers shall have the option of cancelling the delayed portion of the contract, such option to be exercised by Buyers giving notice to be received by Sellers not later than the first business day after the additional calendar month. If Buyers do not exercise this option, such delayed portion shall be automatically extended for the further period of one month. If shipment under this clause be prevented during the further one month’s extension, the contract shall be considered void.’ The buyers disputed that the notice was valid because it did not comply with the fourth sentence at clause 22 in two respects. The buyers insisted that the sellers should have strictly complied with these provisions on the basis that clause 22 was a condition precedent to the sellers obtaining relief under the force majeure clause as: (1) notice was not given within two business days after the last day of the contract period; 41

[2017] CSIH 9, per Lord Drummond Young at [16].

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7.6  Notice (2)

the nomination of the usual ports from which shipping of soya bean meal was prevented was too wide.42

In relation to the first issue, the end of the contract period was 30 June 1973. The soya bean shipments had been contracted for on a month-to-month basis. In relation to notifying alternative ports, the fourth sentence of clause 22 above stated that the sellers had to give further notice: ‘not later than 2 business days after the last day of the contract period …’. 1 July 1973 was a Sunday. Therefore, the sellers had to deliver their notice by 4 pm on Tuesday 3 July in order to strictly comply with the fourth sentence of clause 22. The sellers dispatched their notice at 5.54 pm on 3 July 1973. However, the buyers disputed that it was the time of receipt that mattered. Clause 23 deemed: ‘… Any notices received after 16 00 hrs on a business day be deemed to have been received on the … Business day following.’ Each judge accepted that the correct construction of clause 22 was that notice was properly given when it was dispatched rather than when the buyers received it.43 Therefore, the notice had been given within time. Lord Wilberforce endorsed the view given in the existing authorities of Toepfer v Cremer (us), Tradax v Andre (us) v Berg & Son Ltd v Vanden Avenne44 and Andre & Cie v Ets Michel Blanc45) that clause 22 was a regulatory code and that accurate compliance with its stipulation was essential to avoid commercial confusion in circumstances where there is ‘the possibility of there being long strings of buyers and sellers’.46 Implicitly, he regarded compliance with clause 22 as a condition precedent to a party obtaining the benefit for the force majeure clause. No other judge expressed a view on this point. Lord Wilberforce preferred to decide the matter on the basis that the buyers had waived any non-compliance with the notice. In relation to the second issue of whether the notice was invalid because of the description of the ports that were nominated, the House of Lords was very divided. Lord Wilberforce considered that the fourth sentence of clause 22 required the sellers to specify the ports from which they had intended to ship prior to the force majeure event. This enabled the buyers to know where the shipments were held up and from what place delayed performance would occur once the embargo was lifted.47 He observed that it was found that the soya bean meal of the contract description was at or in transit to Mobile, Chicago and Duluth/Superior, but nowhere was it suggested that they intended to ship from 42

Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109, HL at 118. 43 Ibid, per Lord Wilberforce at 116, Viscount Dilhorne at 118, Lord Salmon at 125 and Lord Russell at 130. 44 [1977] 1 Lloyd’s Rep 499. 45 [1977] 2 Lloyd’s Rep 166, per Justice Ackner at 177. 46 Ibid, per Lord Wilberforce at 116. 47 Ibid, per Lord Wilberforce at 116.

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Is a notice provision a condition precedent or an intermediate term? 7.7 East Coast ports. Viscount Dilhorne stated that, objectively viewed, it was the intention of the parties that they should specify the ports from which shipment would take place as a result of the force majeure event. He considered that the expression ‘usual ports on the Lakes/East Coast/Gulf’ was not satisfactory, and therefore the notice was invalid.48 Lord Salmon submitted that the purpose of nominating ports was to identify those from which shipment had been prevented as a result of the embargo, and that the nomination of ‘the usual ports on the Lakes/East Coast/Gulf’ was appropriate in this case as the embargo covered all potential ports from which the sellers might have desired to ship. If it had been a force majeure event that affected just one port, a different nomination would have been appropriate.49 Lord Russell considered that the requirement of nominating ports was obscure. However, he was not prepared to hold the notice invalid on either the basis that the sellers were confined to specific ports before or after shipment. Essentially, where there was an embargo in relation to all ports, he thought that it made no commercial sense to confine the sellers to specific ports either before or after shipment. Therefore, he declined to hold the notice invalid on this ground. He considered that the decision of the Court of Appeal in Tradax v Andre50 was wrongly decided.51 As seen by the divergence of opinion, it was an issue that caused tremendous difficulty for the House of Lords. The wording of the current GAFTA 100 form at clause 20, the force majeure clause, contains the precise same wording. For whatever reason, GAFTA did not consider it necessary to change the wording of their form despite this decision. The precise meaning of clause 22 on this second issue is difficult to determine. The actual contractual interpretation of a force majeure notice provision can present great difficulty in some cases.

Other cases considering the late service of a force majeure notice Mamidoil-Jetoil Greek Petroleum Company SA, Moil-Coal Trading Company Ltd v Okta Crude Oil Refinery AD 7.7 The issue of whether a force majeure notice cannot be relied on because it was served late was considered in Mamidoil-Jetoil Greek Petroleum Company SA, Moil-Coal Trading Company Ltd v Okta Crude Oil Refinery AD.52 Jetoil, a Greek company, had entered into a ten-year contract with Okta, an oil refiner based in Skopje in the former Yugoslavia, for the exclusive right to manipulation of oil at Okta’s terminal in Skopje. Okta accepted that since July 1999, it had failed to permit Jetoil to manipulate oil at its terminal. Okta sent a 48 49 50 51 52

[1978] 2 Lloyd’s Rep 109, per Viscount Dilhorne at 119. Ibid, per Lord Salmon at 124. [1976] 1 Lloyd’s Rep 416. Ibid, per Viscount Dilhorne at 130. [2002] EWHC 2210 (Comm).

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7.7  Notice letter to Jetoil dated 5 June 2001 purporting to give notice of a force majeure event that prevented it from performing the contract it had signed with Jetoil. Okta claimed that the Government had sent it letters on 16 and 26 November 1999 and 30 May 2001 directing it not to perform its contract with Jetoil. Okta largely defended the matter on the basis that this alleged direction constituted a force majeure event under an annex in the contract that neither party would be responsible for damage caused by a failure to perform the contract if the failure to perform is attributable to ‘acts or compliance with requests of any governmental authority’. The force majeure notice provision stated that the party ‘invoking force majeure shall give prompt notice to the other party’. Okta had accepted that it had not given prompt notice of the force majeure event.53 Its letter dated 5 June 2001 was more than six months after the alleged force majeure event had occurred. However, Okta maintained that the force majeure notice provision was an innominate term that did not have to be strictly complied with. Jetoil, on the other hand, maintained that the force majeure notice provision was a condition precedent that had to be strictly complied with. Aikens J held that he considered that the force majeure notice provision was in the form of a condition precedent. He considered that it put the other party on notice so that they could investigate the alleged force majeure event at the time and challenge whether performance was actually prevented. Also, he considered that if the force majeure notice provision was just an innominate term, there was no additional damage that the other party could have suffered as a result of not being informed promptly of the force majeure event.54 Aikens J decided that Okta could not rely on its force majeure defence. The matter went on appeal. Longmore LJ in the Court of Appeal stated that he could see great force in Aikens J’s observation that the form of the force majeure notice clause was in the form of a condition precedent. This was particularly because of the use of the word ‘shall’ in the phrase ‘… shall give prompt notice to the other party’. He also observed that there was no obligation to give a notice, but that the force majeure provision could not be relied on until a notice was given. Ultimately, Longmore LJ did not decide the point, but noted that this case was fact-specific and it would be unwise to express an obiter view on this point.55

Great Elephant Corp v Trafigura Beheer BV (‘The Crudesky’) 7.8 Teare J  reached a different conclusion in Great Elephant Corp v Trafigura Beheer BV (‘The Crudesky’)56 in relation to a clause concerning 53 54 55 56

[2002] EWHC 2210 (Comm), per Aikens J at [135]. Ibid, per Aikens J at [134]. Okta Crude Oil Refinery AD v Mamidoil-Jetoil Greek Petroleum Company SA, Moil-Coal Trading Company Ltd [2003] EWCA Civ 1031 at [34] and [35]. [2012] EWHC 1745 (Comm).

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Is a notice provision a condition precedent or an intermediate term? 7.8 ‘prompt notice’ that bore some similarities to the clause in Mamidoil-Jetoil v Okta. In Great Elephant Corp v Trafigura, Trafigura had purchased a quantity of crude oil from Vitol on free on board (‘FOB’) terms. Trafigura had chartered The Crudesky from the claimant owners (Great Elephant Corp) in order to transport the crude oil cargo. On 31 August 2009, The Crudesky berthed at a terminal operated by Total off Port Harcourt in Nigeria. Approval was required from the Nigerian Department of Petroleum Resources (‘DPR’) before The Crudesky could begin loading. The local DPR representative who had been on-site at Total’s terminal unexpectedly left the terminal on 29  August 2009. On 31  August 2009, Total’s supervisor, Mr Bankhole, telephoned the head of the DPR in Port Harcourt, Mr Pepple. Mr Pepple told Mr Bankhole that the DPR’s local representative would not arrive in Port Harcourt until the next day 1  September 2009. Mr Bankhole asked if they could come to another arrangement to begin loading The Crudesky. Verbal authority was given to begin loading The Crudesky, although written signed authority had not been given.57 Trafigura did not have The Crudesky leave port as expected on 1  September 2009 because they did not have documentation from the Nigerian authorities to evidence the quantity of crude oil that had been loaded. To depart in these circumstances would have been an offence under the Crude Oil (Transportation and Shipment) Regulations 1984 (Nigeria). On 7  September 2009, the head office of the DPR in Lagos informed Total that its actions were an economic crime and ordered the navy to ensure The Crudesky did not leave port. The Nigerian navy duly did so. Vitol gave Trafigura notice of a force majeure event on 2 October 2009 as a result of government action that it claimed was beyond its/Total’s control.58 On 9 October 2009, the Ministry of Petroleum Resources wrote to Total advising that the Minister had approved a ‘fine’ of $12 million. Total paid the fine and The Crudesky was released from detention on 13 October 2009. The owners of The Crudesky, Great Elephant Corporation, brought various claims against Trafigura as a result of the delay. Trafigura sought to pass on any liability to Vitol on the basis that Vitol was in breach of article 18 of the Nigerian National Petroleum Corporation (‘NNPC’) General Conditions which formed part of the FOB sale contract between Trafigura and Total. The NNPC conditions stated that each party would comply with ‘all laws, rules, regulations, valid directives and policies … necessary for the performance by each party of its obligations under the contract’. Vitol defended the action on the basis it was relieved of its obligations under article 21 of the NNPC conditions, being the force majeure provision. Article  21.2 of the NNPC conditions contained the force majeure notice provision which stated:

57 This was confirmed by an independent surveyor’s report, Great Elephant Corp v Trafigura Beheer BV (‘The Crudesky’) [2012] EWHC 1745 (Comm), per Teare J at [6]. 58 Ibid, per Teare J at [119].

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7.8  Notice ‘Immediately on the occurrence of Force Majeure, the party claiming to be affected by the Force shall promptly notify the other party in writing stating the details of the event or act constituting Force Majeure, and stating also the measure being adopted by it to minimize or to remedy the consequences of the Force Majeure on the performance of this Contract.’ Trafigura countered that article 21.2 was a condition and that Vitol had failed to give ‘prompt notice’, as Vitol only gave notice on 2 October 2009. This was over a month after The Crudesky had been unable to leave Port Harcourt on 1 September 2009. Teare J ultimately considered that article 21.2 of the NPCC conditions was an intermediate term for the following reasons: (1) article 21.1 was not in the form of a condition precedent; (2) there was no clear requirement for notice to be given in a clear number of days. What constituted ‘prompt notice’ would depend on the factual circumstances of each case; (3) the notice provision along with ‘details’ of the event, required details of the ‘measures’ being taken to mitigate the consequences of the event; (4) identifying when notice is not immediate or prompt is difficult. There is a lot of subjectivity in making such a judgment. In these circumstances, the parties cannot have intended that failure to provide immediate and prompt notice should prevent a party from relying upon a force majeure event to terminate their contractual obligations; (5) where a sanction arose for breach of contractual obligations, the NPCC conditions said so. For instance, article  6.7 provided that failure to provide notice of a demurrage claim within a defined period would result in that claim being waived.59 Teare J concluded that a breach of article 21.2, in this case, would sound in damages only, but he did not consider the matter further because no damages had been claimed.60 Implicitly, Teare J  considered that ‘prompt notice’ had not been given. Great Elephant Corp v Trafigura was appealed. The Court of Appeal reversed Teare J’s decision primarily on the basis that the events in Nigeria were not ‘beyond control’ of Total and, therefore, Vitol.61 However, the Court of Appeal remained silent on whether ‘prompt notice’ was given.62 It is 59 60 61 62

[2012] EWHC 1745 (Comm), per Teare J at [121]. Ibid, per Teare J at [122]. Great Elephant Corp v Trafigura Beheer BV (‘The Crudesky’) [2013] EWCA Civ 905, per Longmore LJ at [28] with Tomlinson LJ at [49] and Underhill LJ at [50] agreeing. Presumably the matter was argued before the Court of Appeal. While they may have decided to leave this matter until another day, their silence may be taken as implicit endorsement that the force majeure notice clause was an intermediate term.

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Is a notice provision a condition precedent or an intermediate term? 7.9 not clear whether this matter was argued on appeal or why the Court of Appeal remained silent on this issue. Teare J also cited the authority of SHV Gas Supply & Trading SAS v Naftomar Shipping & Trading Co Ltd Inc (‘The Azur Gaz’)63 and was influenced by this decision in coming to his own conclusion. In The Azur Gaz where Christopher Clarke J  reached a decision along similar reasoning in relation to a force majeure notice clause stated that a party ‘invoking force majeure shall give prompt notice to the other party’.64 Christopher Clarke J  specifically cited the decision of Aitken J  in Great Elephant Corp v Trafigura. He acknowledged that he could see force in Aitken J’s reasoning, particularly in relation to the long-term nature of the contract that Aitken J was dealing with (a contract with a duration of over ten years). In comparison, the contract for the sale and delivery of Butane gas in The Azur Gaz had an approximately three-day duration. He recognised that there was an imperative in Great Elephant Corp v Trafigura for the other party to receive prompt notification to be able to investigate and challenge the force majeure event and the difficulty of proving loss in the event of non-notification. Ultimately, he considered that these matters could apply to many other cases such that there would be little scope for the three considerations laid out in Bremer v Vanden. Consequently, he considered the clause to be appropriately categorised as an intermediate term.65 First, the above decisions demonstrate that whether a force majeure notice clause is a condition precedent or an intermediate term is a matter of contractual interpretation in each case. Second, the interpretation of notice clauses is a matter on which great legal minds can disagree, even where the clauses use similar expressions. Arguably clauses that use the expression ‘prompt notice’ do not set a fixed time limit and can involve questions of degree. As such, they can potentially be intermediate terms.66

Force majeure notice clause as a condition precedent 7.9 A  force majeure notice clause will be a condition precedent in two situations: (1) where the parties have expressly stipulated that a party may not obtain the benefit of the force majeure unless it strictly complies with the notice 63 64 65 66

[2006] 1 Lloyd’s Rep 163. Ibid, per Christopher Clarke J at [39]. Ibid, per Christopher Clarke J at [38]. Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109, HL, per Lord Salmon at 128 and Lord Keith at 130. Also see Compagnie Commerciale Sucres et Denrees v C. Czarikow Ltd [1990] 1 WLR 1337, per Lord Ackner at 1346.

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7.9  Notice provision, particularly in relation to form and time limits for the delivery of the notice; or (2)

by necessary implication through the process of contractual interpretation applying the principles in Wood v Capita, which concluded that the parties must have objectively intended that the notice clause was a condition precedent.

Clauses that are expressly made to be a condition precedent 7.10 An example of a notice clause outside of a force majeure context that was a condition precedent arose in the 2014 High Court case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar.67 Obrascon was a large Spanish engineering firm that brought suit against the Government of Gibraltar in relation to a contract for designing and constructing a road and tunnel under the eastern end of Gibraltar Airport. The project was only 25% finished after 2.5 years, and the suit concerned who was liable for the termination of the contract as a result of this state of affairs. It was accepted by both parties, and agreed by Akenhead J, that the following clause was a condition precedent: ‘20.1 If the Contractor considers himself to be entitled to any extension of the Time for Completion … under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer, describing the event or circumstance giving rise to the claim. The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance. If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim. Otherwise, the following provisions of this Sub-Clause shall apply …’

Clauses where the notice provision is a condition precedent by necessary implication from the process of contractual interpretation 7.11 In a force majeure context, there are two very obvious situations where a force majeure notice clause will be interpreted as a condition precedent as a result of applying general principles of contractual interpretation. 67

[2014] EWHC 1028 (TCC).

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Is a notice provision a condition precedent or an intermediate term? 7.11 The first is where strict compliance with notice requirements is necessary because the giving of notice triggers other interdependent obligations for which the parties have contracted. The classic example of this situation is clause 22 of the GAFTA 100 form as was considered in the case of Bremer v Vanden.68 Here, giving timely notice was important because this had a knock on effect for other notice obligations and the physical obligation of one of the parties to deliver soya bean/commodities to the other party. Also, at this time, there were long chains of buyers and sellers in many of these soft commodity markets. Following the correct procedure in clause 22 would have impacted on a long chain of buyers and sellers. By necessary implication, the House of Lords considered that clause 22 was a regulatory code that constituted a condition precedent that had to be strictly complied with.69 The second situation is where the notice provision specifies an expression such as ‘prompt notice’ – as was the case in Mamidoil-Jetoil v Okta – or otherwise specifies a precise time by which a notice must be given. This is because there is strong authority for the presumption that time is of the essence in a commercial contract and that, where a precise time is specified, there is likely to be a strong argument that the clause is a ‘time clause’ that should be strictly complied with. This is particularly true in the case of force majeure notices. Bunge Corp v Tradax SA70 established that, generally, ‘time is of the essence’ in relation to commercial contracts.71 By contract dated 30 January 1974, Bunge Corp agreed to purchase 15,000 tons of soya bean meal in the months of May, June and July 1975. Bunge Corp was obliged to give notice of readiness of a vessel to collect the soya bean meal pursuant to clause 7 of GAFTA form 119. Clause 7 read: ‘Period of delivery – during May 1975 at buyers’ call. Buyers shall give at least 15 consecutive days’ notice of probable readiness of vessel(s) and of the approximate quantity required to be loaded. Buyers shall keep sellers informed of any changes in the date of probable readiness of the vessel(s).’ In Bunge Corp, the buyers exercised their right under clause 8 of GAFTA form 119 to extend the period of delivery by one month. Therefore, the end of the delivery period in respect of the delivery originally contracted for in May 1975 was 30 June 1975. Therefore, pursuant to clause 7 above, Bunge Corp had to 68 In the case of Bremer v Vanden, the relevant clause was clause 22 of the GAFTA  100 form at that time. The language is substantially the same as the current clause 20 of the GAFTA 100 form. 69 See also the discussion of Grand China Logistics Holding (Group) Co Ltd v Spar Shipping As (Spar Capella, Spar Vega, Spar Draco) [2016] EWCA Civ 982, per Gross LJ at [52] and [53] and Hamblen LJ at [93]. 70 [1981] 1 WLR 711. 71 Ibid, per Lord Wilberforce at 716, Lord Scarman at 718, Lord Lowry at 719 and Lord Roskill at 725, 728 and 729.

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7.11  Notice give notice of readiness of vessels 15 consecutive days before the end of the delivery period being 30 June 1975. Bunge Corp gave notice on 17 June 1975, in breach of their obligation under clause 7. The sellers, Tradax, claimed that Bunge Corp had repudiated the contract because clause 7 was a ‘time clause’ and, therefore, a condition that should have been strictly complied with. In relation to clause 7, Lord Wilberforce stated: ‘… In suitable cases, the court should be not reluctant, if the intentions of the parties as shown by the contract so indicate, to hold that an obligation has the force of a condition, and that indeed they should usually do so in the case of time clauses in mercantile contracts.’72 [emphasis added] Implicitly, in referring to a ‘time clause’, Lord Wilberforce must have been referring to either the fact that there was a fixed time for performance, or the fact that there were interdependent obligations in the sense that the seller needed certainty in order that it could perform its obligations commercially and efficiently.73 Lord Roskill couched his judgment in terms of a clause specifying a time for performance being a condition in a commercial contract where the ability of the other party to perform a term of the contract was dependent on the performance of that first obligation: ‘… in a mercantile contract when a term had to be performed by one party as a condition precedent to the ability of the other party to perform another term especially an essential term such as the nomination of a single loading port, the term as to time for the performance of the former obligation would in general fall to be treated as a condition’.74 It should be noted that the treatment of time as a condition in a commercial contract is not based on a presumption of a rule of law or fact, but it is based on practical business expediency.75 Gross LJ in Ark Shipping Co LLC v Silverburn Shipping (IOM) Ltd76 described the clause in Bunge v Tradax as a ‘paradigm time clause’. However, it is important to note that the cases in which a clause is specified to be a ‘time condition’ are not closed.

72 73 74 75 76

[1981] 1 WLR 711, per Lord Wilberforce at 716. Arguably, it is implicit in Lord Wilberforce’s judgment at 715 that it was the latter. Bunge Corp v Tradax SA [1981] 1 WLR 711, per Lord Roskill at 729. Ibid, per Lord Lowry at 719. [2019] EWCA Civ 1161, per Gross LJ at [47].

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Waiver 7.14

Who can impugn an invalid notice? 7.12 If a party serves a notice and the other party accepts it, and the party who issued the notice continues to represent that the notice is a good notice, in the words of Lord Denning MR that party ‘cannot (later) blow hot and cold’ and seek to impugn the validity of the notice.77 Lord Denning MR maintained that they were estopped from doing so.78 Scarman LJ maintained that the doctrinal basis, whether waiver or estoppel, did not matter.79 For example, in Alfred C Toepfer v Peter Cremer80 the sellers served a force majeure notice on 16 May 1973 and stated that: ‘We intend to ship this parcel from Mississippi River Port(s)’. They never represented to the buyers that the force majeure event had ceased or that the notice was bad. At trial, the sellers sought to impugn the validity of their own notice on the basis that it should have specified certain ports and also on the basis that it only extended time for the period that the force majeure lasted, that is, until 30 May 1973. Lord Denning MR held that they were estopped from denying the validity of the notice because they always represented to the buyers that the notice was good. They never informed the buyers that the force majeure event had ended.81 However, if the other party challenges the validity of the notice, the party relying on the notice can also dispute its validity.82

WAIVER 7.13 The final issue of immense importance in relation to notices is whether a party who has issued a defective notice can rely on that notice because the other party, through a representation and/or conduct, has ‘waived’ the fact that the notice was defective.

General background to waiver and force majeure 7.14 The most authoritative guidance in relation to waiver as it relates to force majeure is stated by Potter LJ in Flacker Shipping Ltd v Glencore Grain Ltd (‘The Happy Day’), the facts of which are outlined at para 7.16:83

77

Alfred C Toepfer v Peter Cremer [1975] 2 Lloyd’s Rep 118, per Lord Denning MR at 123 and Scarman LJ at 128. 78 Ibid, per Lord Denning MR at 123. 79 Ibid, per Scarman LJ at 128. 80 [1975] 2 Lloyd’s Rep 118. 81 Ibid, per Lord Denning MR at 123 and 124. 82 Ibid, per Scarman LJ at 128. 83 [2002] EWCA Civ 1068.

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7.14  Notice ‘64. Broadly speaking, there are two types of waiver strictly so-called: unilateral waiver and waiver by election. Unilateral waiver arises where X alone has the benefit of a particular clause in a contract and decides unilaterally not to exercise the right or to forego the benefit conferred by that particular clause. It has been described as: “The abandonment of a right in such a way that the other party is entitled to plead the abandonment by way of confession and avoidance if the right is thereafter asserted.” see Banning v Wright [1972] 1 WLR 972 per Lord Hailsham LC at 97C–D. In such a case, X may expressly or by his conduct suggest that Y need not perform an obligation under the contract, no question of an election by X between two remedies or courses of action being involved. Waiver by election on the other hand is concerned with the reaction of X when faced with conduct by Y, or a particular factual situation which has arisen, which entitles X to exercise or refrain from exercising a particular right to the prejudice of Y. Both types of waiver may be distinguished from estoppel. The former looks principally to the position and conduct of the person who is said to have waived his rights. The latter looks chiefly at the position of the person relying on the estoppel. In waiver by election, unlike estoppel, it is not necessary to demonstrate that Y has acted in reliance upon X’s representation: see per Lord Goff of Chieveley in The Kanchenjunga [1990] 1 Ll Rep 391 at 399 RHC. 65. So far as waiver by election is concerned, the basic proposition is that where two possible remedies or courses of action are to his knowledge open to X  and he has communicated his intention to follow one course or remedy in such a manner as to lead Y to believe that his choice has been made, he will not later be permitted to resile from that position: see Scarf v Jardine (1882) 7 App Cas 345 per Lord Blackburn at 360–1 and Kammins Ballroom Co v Zenith Investments [1971] AC 850. Waiver by election is essentially an illustration of the general principle that a party to a contract may not both approbate and reprobate: see the classic exposition of Isaacs J in Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28  CLR  305 (High Court of Australia) at pp 327–8. In The Kanchenjunga [1990] 1 Ll Rep 391 at 397–399, Lord Goff of Chieveley dealt at some length with the principles underlying the doctrine of waiver by election in relation principally to the situation where: “Characteristically, the effect of the new situation is that a party becomes entitled to determine or to rescind the contract, or to reject an uncontractual tender of performance; but, in theory at least, a less drastic course of action might 122

Waiver 7.14 become available to him under the terms of the contract. In all cases, he has in the end to make his election, not as a matter of obligation, but in the sense that, if he does not do so, the time may come when the law takes the decision out of his hands, either by holding him to have elected not to exercise the right which has become available to him, or sometimes by holding him to have elected to exercise it …” In Bremer v Vanden [1978] 2 Ll Rep 109 the House of Lords was concerned with and applied the doctrine of waiver by election to a force majeure notice given by sellers to the buyers which was defective both in form and on the ground that it was given too late. Their Lordships treated the issue of waiver as an objective exercise based on the communications between the parties, Lord Salmon observing: “I  think that any reasonable sellers would rightly have inferred the buyers were accepting the notice as a valid and effective notice under cl 22 save that the reference to 500 tonnes should be altered to 280 tonnes. To put it another way, the buyers made an unequivocal representation that they were treating the notice as a valid and effective notice under cl 22. To make an unequivocal representation or waiver it is not necessary for the buyers to say ‘we hereby waive it’. It is quite enough if they behave in such a way that reasonable sellers would be led to believe that the buyers were waiving any defect there might be in the notice and were accepting it as effectively extending the date for delivery in accordance with the provisions of cl 22.” See also Bremer v Mackprang [1979] 1 Ll Rep 221 per Lord Denning MR at 226 lhc and per Shaw LJ at 230 rhc. 66. Thus, it is clear that whether or not the party entitled to notice has waived a defect upon which he subsequently seeks to rely, will depend upon the effect of the communications or conduct of the parties, the intention of the party alleged to have waived his rights being judged by objective standards.’84 Part of the problem in relation to cases on waiver, as was specifically acknowledged by Robert Walker LJ in the Court of Appeal in Oliver Ashworth 84 [2002] EWCA Civ 1068, per Potter LJ at [64]–[66]. The Privy Council implicitly endorsed Potter LJ’s summary of the law of waiver in Lancashire Insurance Company Ltd v MS Frontier Reinsurance Ltd [2012] UKPC 42, per Sir John Chadwick at [23] giving judgment for the court.

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7.14  Notice (Holdings) Ltd v Ballard (Kent) Ltd,85 is that: ‘Waiver is not at all a precise term of art.’86 Robert Walker LJ’s judgment contained an extensive analysis of cases considering a waiver and observed that: ‘But there is a volume of binding authority showing that for many purposes, including determining the time at which an election must be made, it is necessary to distinguish election between remedies from election between rights: see especially Lord Atkin in United Australia Ltd v Barclays Bank Ltd [1941]  AC  1, 29–30; Lord Wilberforce in Johnson v Agnew [1980]  AC  367, 396 and Lord Nicholls of Birkenhead in Personal Representatives of Tang Man Sit v Capacious Investments Ltd [1996] AC 514 , 521–522.’87 Further along, Robert Walker LJ concluded in relation to waiver and landlord/ tenant disputes involving a notice to quit (among other things) that: ‘This is not an area of the law where any rigid or precise taxonomy of principles is possible.’88 He ultimately rejected one part of the tenant’s defence because the landlord had made an elective waiver and decided that the case was not really one about waiver at all.89 The same could be said to be true of force majeure notices. Each case will turn on its own unique circumstances. In relation to the issue of waiver Bremer v Vanden,90 it is difficult to distinguish whether the waiver was made on the basis of unilateral waiver/abandonment of a right or an elective waiver. If waiver is defined in the wider sense of being an ‘election between remedies or courses of action’, as was the case in Flacker v Glencore,91 one party’s decision to accept a defective notice can definitely be an elective waiver. However, if unilateral waiver/abandonment of rights is construed in the wider sense that a party has made a deliberate decision, communicated clearly to the other party that they would not insist on their strict legal rights,92 it can also be argued to be a waiver in that sense. 85 86 87 88 89 90 91

92

[2000] Ch 12. Ibid, per Robert Walker LJ at 28. Ibid, per Robert Walker LJ at 28. Ibid, per Robert Walker LJ at 30. Ibid, per Robert Walker LJ at 30 and 31. [1978] 2 Lloyd’s Rep 109. [2002] EWCA Civ 1068, per Potter LJ at [64]. As above, this authority was impliedly endorsed by the Privy Council in Lancashire Insurance Company Ltd v MS Frontier Reinsurance Ltd [2012] UKPC 42, per Sir John Chadwick at [23] giving judgment for the court, although the Privy Council merely cited the judgment and did not comment on this issue. Oliver Ashworth (Holdings) Ltd v Ballard (Kent) Ltd [2000] Ch 12 per Robert Walker LJ at 28. It should be noted that the decision in Bremer v Vanden would not fulfil the narrower definition of waiver of an election between remedies or an election between rights per Robert Walker LJ at 28.

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Waiver 7.15

General principles of unilateral waiver/abandonment of a right 7.15 Potter LJ gave the most authoritative recent guidance in relation to waiver in Flacker Shipping Ltd v Glencore Grain Ltd (‘The Happy Day’).93 Based on this case, and drawing on other authorities in relation to waiver, the following principles can be distilled: (1) it must generally be shown that the party alleged to be making a waiver had knowledge about their right or the relevant facts when making a choice in relation to electing between rights/remedies; (2) there must be a clear, unambiguous representation given in writing and/or orally and/or by conduct94 from the party entitled to notice and communicated to the other party, objectively viewed, that they will not insist on their strict legal rights; (3) the party making a representation/giving notice must intend, objectively viewed, that the other party rely on that representation;95 (4) the other party must actually rely on that representation such that it is inequitable for the party making the representation to insist on their strict legal rights;96 (5) the courts will examine with care any agency relationship involved where an agent has allegedly made an unequivocal representation that the principal will not insist on their strict legal rights. If the person alleged to be an agent lacked actual or ostensible authority, there will be no waiver.97 As with everything force majeure related, each case turns on its own facts. Many cases considering waiver, particularly in relation to force majeure, do not break down the separate elements of waiver set out above. Often, the cases discuss waiver in a general way and only discuss the above principles relevant to that case.

93 [2002] EWCA Civ 1068. 94 Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109, per Lord Salmon at 126. 95 [2002] EWCA Civ 1068, per Potter LJ at [65]–[68]. As above, this authority was impliedly endorsed by the Privy Council in Lancashire Insurance Company Ltd v MS  Frontier Reinsurance Ltd [2012] UKPC 42, per Sir John Chadwick at [23] giving judgment for the court. 96 Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109, this requirement is at least implicit in the judgment of Lord Salmon at 126. 97 Flacker Shipping Ltd v Glencore Grain Ltd (‘The Happy Day’) [2002] EWCA Civ 1068, per Potter LJ at [68].

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7.16  Notice

It must generally be shown that the party making the representation had knowledge of their rights 7.16 In Flacker Potter LJ specifically cited the decision of Lord Atkinson in the Privy Council in Fuller’s Theatre and Vaudeville Co v Rofe98 where Lord Atkinson in the Privy Council considered that it was settled law that the party making the representation must have had knowledge of their rights.99 Lord Atkinson was making that statement in the context of a landlord and tenant dispute. Essentially, Lord Atkinson stated that waiver could only arise where the landlord had some sort of knowledge of the underlying facts on which his right of re-entry arose but instead undertook actions that continued to recognise the existence of the lease. Applying these principles, Lord Atkinson held that a landlord who continued to receive rent could not be considered to have waived his right of re-entry when the landlord was yet to discover that the tenant had committed a breach of their lease subleasing the property.100 Lord Atkinson also implicitly endorsed the approach in relation to the onus of proof that a tenant has the onus of showing an act by which the landlord recognises the tenancy but does not have to show ‘want of knowledge’ on the part of the landlord.101 Flacker v Glencore102 concerned a vessel transporting a load of wheat that had arrived off the port of Cochin in India at 4:30 pm on Friday 25 September 1998. The vessel was unable to enter the port immediately because the tide was too low. However, the master gave a notice of readiness at this time. As the notice of readiness was premature, it was invalid.103 The vessel was able to enter the port the next morning and berthed just after 1 pm. No further notice of readiness was ever given. The vessel began to discharge its cargo of wheat on the afternoon of Saturday 26  September 1998. Full discharge was not completed until 25 December 1998, well beyond the number of laydays provided for in the charterparty. This was largely because of the failure of the charterers to produce the original bills of lading. In relation to the owners claim for failing to discharge the vessel within the time agreed in the charterparty,104 the arbitrators concluded that laytime commenced at 8 am on 29 September on the basis that a valid notice of readiness had been given at around 1 pm on Saturday 26 September 1998. The charterers appealed on whether laytime could ever commence when no valid notice of readiness had ever been given by the master of the ship, and therefore no demurrage was payable. The owners maintained that the charterers had waived reliance of any invalidity in the notice of readiness. The Court of Appeal agreed. On this particular point, 98 [1923] AC 435. 99 Ibid, per Lord Atkinson at 443. 100 Ibid, per Lord Atkinson at 443. 101 Ibid, per Lord Atkinson at 443. 102 [2002] EWCA Civ 1068. 103 Applying the authority of The Kyzikos [1989] AC 1264. 104 Also known as a claim for demurrage.

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Waiver 7.17 Potter LJ held that the charterers were well aware of the notice of readiness and the information that it was intended to convey, and they were also well aware, through their agents, that the notice of readiness had been received prematurely and they were aware of the invalidity in the notice. Nevertheless, the charterers and their agents did nothing to indicate any rejection of the invalid notice. Coupled with their assent to the commencement of discharge operations, objectively viewed, they had intimated a waiver to any reliance on the notice of readiness.105 It should be noted that Lord Goff of Chieveley in Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (‘The Kanchenjunga’)106 stated that, in relation to waiver by election, the party making the election must be making an informed choice with knowledge of facts giving rise to the right. However, in relation to waiver by the abandonment of right, ‘no question arises of any particular knowledge on the part of the representor’.107 Reading this decision in accordance with his decision in Avimex SA  v Dewulf & Cie,108 it may be that a party is not making any representation when they have no knowledge of underlying defects in a notice.

Latent defect in the notice 7.17 In Avimex SA  v Dewulf & Cie109 it was common ground between the parties that the telex/notice by which the seller notified the buyer of a force majeure event had not been passed on ‘without delay’, as was required by the force majeure clause.110 The seller contended that the buyer had waived their right to rely on this defect because they had not raised this issue at the time the notices were served. Robert Goff J found for the buyer on this point. He considered that there was no way that they could have discovered this defect from the face of the telexes/notices. There was nothing in the arbitrator’s award to show that the buyer was aware, or could reasonably have been aware, of this deficiency in the notices. As such, the buyer could not be considered to be making any representation, implied or otherwise.111 It is also important to note that the party obliged to serve a notice bears the onus of proving all relevant issues in relation to any notice dispute. Kerr LJ in Cook Industries v Tradax Export SA112 considered a dispute arising out of the Mississippi River floods in 1973. In that case, the sellers, among other things, 105 Flacker Shipping Ltd v Glencore Grain Ltd (‘The Happy Day’) [2002] EWCA Civ 1068, per Potter LJ at 72. 106 [1990] 1 Lloyd’s Rep 391. 107 Ibid, per Lord Goff of Chieveley at 399. 108 [1979] 2 Lloyd’s Rep 57. 109 Ibid. 110 Ibid, per Robert Goff J at 67. This was a finding of the arbitrators that presumably was not challenged on appeal. 111 Ibid, per Robert Goff J at 67 and 68. 112 [1985] 2 Lloyd’s Rep 454.

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7.17  Notice contended that notice had been given by the shippers pursuant to clause  9 of the GAFTA  100 form extending the time for shipment of 620 tonnes of soya bean meal and that these notices had taken effect before clause 21, the prohibition clause, had taken effect at the end of July. However, the buyers disputed that the notices were valid. Kerr LJ observed that the sellers bore the onus of proof in relation to showing that the notices were valid, even if they were put to proof in trial six years after the actual events.113 The sellers were unable to do this and, accordingly, they lost on this issue. This case highlights the need to ensure that a notice is properly drafted and served and that proper records are maintained if the party serving the notice is put to proof in relation to its validity.

The representation must be clear, unambiguous and unequivocal 7.18 The court will examine the representation/representations, whether given in writing, orally and/or by conduct, to decide whether the representation/ representations are clear, unambiguous and unequivocal. This is essentially a question of fact in each case.114 Potter LJ, giving judgment for the Court of Appeal in Flacker v Glencore,115 considered that the charterers had waived reliance on any invalidity in the notice of readiness through a course of conduct. Upon the vessel’s arrival in the port of Cochin, they received a letter of indemnity to enable discharge to the receivers to take place. Through their agents, they were aware that a notice of readiness had been served prior to the vessel’s berthing. Instructions were communicated to the receiver’s agents to discharge the vessel without any reservation of the charterer’s position or any mention of any invalidity in the notice of readiness. Potter LJ held that, objectively viewed, the actions of the charterers, being their failure to object to any defect in the notice of readiness, coupled with their assent to allow the vessel to discharge its cargo, would lead a reasonable shipowner to conclude that they had waived any invalidity in the notice of readiness or any requirement for further notice.116 The paradigm example in relation to force majeure cases is the case of Bremer v Vanden.117 The facts and issues are stated at para 7.4 above. Essentially, the sellers dispatched a notice by telex at 5:54 pm on 3 July 1973 informing the buyers that the June shipment of 280 tonnes of soya bean would be delayed 113 [1985] 2 Lloyd’s Rep 454, per Kerr LJ at 461 and 462. 114 Flacker Shipping Ltd v Glencore Grain Ltd (‘The Happy Day’) [2002] EWCA Civ 1068. See also Faidi and Faidi v Elliot Corp [2012] EWCA Civ 287 is a good example of a recent case where compliance with a contractual stipulation was taken to be waived by a tenant through both writing and impliedly from conduct. 115 [2002] EWCA Civ 1068. 116 Ibid, per Potter LJ at [69]. 117 [1978] 2 Lloyd’s Rep 109.

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Waiver 7.19 and nominating alternate ports for delivery to be ‘the usual ports on the Lakes/ East Coast Gulf’. The buyers later argued that this notice was invalid because it should have been given before 4 pm on 3 July 1973 to comply with clause 22 of the GAFTA 100 form and also for failing to properly specify to which ports delivery would be made. The validity of the notice is considered at para 7.6 above. Proceeding on the basis that there were two defects in the notice, each of the Law Lords considered that the buyers had waived the right to object to the notice. A number of telexes passed back and forth between the sellers and the buyers after the sellers’ telex of 5:54 pm on 3 July 1973. The buyers continued to press and negotiate for delivery of the 280 tonnes of soya bean that had been due for the June contract period. They never questioned the validity of the telex notice issued by the buyers on 3 July 1973. The buyers never stated that ‘we hereby waive’ defects in the notice.118 However, each of the Law Lords considered that the course of dealing that the sellers had conducted, and that was relied on by the sellers, was sufficient to amount to a waiver of any defects in the notice.119 There are a number of other cases in relation to the GAFTA 100 form that bear discussion on this point.

Insisting on one’s strict legal rights 7.19 Where a party adopts a course of conduct or otherwise explicitly insists on performance according to their strict legal rights, this should be sufficient to sterilise any waiver defence. In the case of V  Berg & Sons Ltd v Vanden Avenne-Izegem PVBA,120 the seller was in a chain of buyers and sellers. V Berg, based in London, had contracted with another seller based in China for the purchase of 1,000 tons of sweet potato slices in January/February 1973. V Berg had intended to sell on these sweet potato slices to the defendant buyers. Bad weather in the Shanghai area prevented the sellers in China from shipping the sweet potato slices by 28  February 1973. They asked for an extension until 31  March 1973. In particular, their telex notice did not specify a port from which shipment would take place. It did not specify a port because the contract was not a standard GAFTA 100 form contract, and simply specified that the sweet potato would be shipped from Shanghai. V  Berg relayed this to their buyer, who refused an extension and effectively insisted on strict performance. The contract between V  Berg and their buyer was a standard GAFTA 100 contract. The shipment was not made in time, and V Berg sought to defend itself by invoking the force majeure clause of the GAFTA 100 form. Specifically, they raised the issue that the buyer had not objected that the telex notice did not specify the port from which shipment would take place. 118 [1978] 2 Lloyd’s Rep 109, see particularly Lord Salmon at 126. 119 Ibid, per Lord Wilberforce at 117, Viscount Dilhorne at 120, Lord Salmon at 126 and 127, and Lord Russell at 130. 120 [1977] 1 Lloyd’s Rep 499.

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7.19  Notice Therefore, they were stopped from relying on the force majeure clause. The Court of Appeal held that this case did not even come close to raising a waiver/ estoppel issue in relation to the telex notice. Although the buyer had remained silent in relation to the fact that the telex notice did not mention a port from which shipment would take place, this did not prevent them from insisting on strict compliance with the force majeure clause.121 Lord Denning MR was happy to decide the case on the basis that the Belgian buyers had continued to insist on strict performance, and the telex notice generally failed to satisfy the terms of the force majeure notice provision.122

Accepting part performance up to the maximum amount permitted under the licensing system 7.20 The facts of the cases arising out of the US embargo imposed in relation to the export of soya bean meal are stated at para 7.4 above. To recap, on 2 July 1973, by Bulletin 88, the US Government introduced a licensing system that allowed the export of 40% of any outstanding soya bean meal contract. As a result of the issue of Bulletin 88, the sellers in Bremer Handelsgesellschaft mbH  v Bunge Corp123 sent a telex to the buyers requesting the following declaration: ‘… We herewith declare that we agree that the contracts mentioned may be fulfilled by 40% resp those portions which will be maximum allocation for export by competent US authorities …’. The buyers responded to the sellers by telex on 5  July with the following message: ‘accept delivery under the above contract of the quantities licensed by the US government’. Robert Goff LJ was content to accept that the buyers intended to communicate that they simply wanted 40% of the soya bean meal that they had contracted for in respect of the June instalment, as this was the maximum quantity that the sellers could obtain a licence to ship. He held that the buyers were not unequivocally representing either that they would accept further quantities above this if it became possible to ship these right up until the end of the force majeure period or that they would accept the balance of 60% of the June instalment of the contract at some later date.124

121 122 123 124

[1977] 1 Lloyd’s Rep 499, per Roskill LJ at 504. Ibid, per Lord Denning MR at 503. [1983] 1 Lloyd’s Rep 476. Bremer Handelsgesellschaft mbH v Bunge Corp [1983] 1 Lloyd’s Rep 476, per Robert Goff LJ at 484.

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Waiver 7.22

Continuing to negotiate to try and reach a settlement does not amount to a waiver 7.21 Correspondence, whereby a party tries to negotiate a settlement or compromise, does not amount to an unequivocal or unambiguous representation. A promise by a party to reconsider claims already paid in this context similarly does not amount to an unequivocal representation that a party will not insist on their strict legal rights.125

The other party must rely on that representation such that it is inequitable for the party making the representation/giving notice to insist on its strict legal rights 7.22 There was some discussion in the judgment of Lord Salmon in Bremer v Vanden126 whether it was necessary that the party relying on the notice had suffered a detriment, or whether they had simply conducted their affairs on the basis of the waiver. Lord Salmon did not decide the point. He considered that the sellers acted to their detriment in spending time and money making further shipment of soya bean on 18 July 1973 and 7 August 1973 to cover their original obligations.127 When discussing this point, Lord Salmon specifically cited W J Alan & Co v El Nasr Export and Import Co.128 In that case, Lord Denning MR stated that a relevant waiver criterion was that the party making the representation should not be allowed to insist on their legal rights where it would be inequitable for them to do so. However, he further stated the representee did not need to show they suffered detriment due to their reliance on the representation. Lord Goff of Chieveley in Motor Oil Hellas (Corinth) Refineries SA  v Shipping Corp of India (‘The Kanchenjunga’),129 giving judgment for the House of Lords, agreed that in relation to waiver by the abandonment of rights, the representor would not be allowed to rely on their representation where it would be inequitable for them to do so. He stayed silent on detriment. There appears to be no requirement that the representee suffer detriment in order for waiver to operate. This may also be reflected in the comments of Potter LJ in Flacker v Glencore130 that waiver looks principally at the behaviour of the representor who is said to have waived their rights, while

125 Seechurn v ACE Insurance SA – NV [2002] EWCA Civ 67, at [51]–[53]. Of course, it is a question of objectively constructing the words and conduct in each case. 126 [1978] 2 Lloyd’s Rep 109. 127 Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109, per Lord Salmon at 127. 128 [1972] 1 Lloyd’s Rep 313. 129 [1990] 1 Lloyd’s Rep 391. 130 [2002] EWCA Civ 1068.

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7.22  Notice an estoppel looks at the position of the person relying on the representation.131 The matter appears to be settled. Robert Goff LJ in Bremer Handelsgesellschaft mbH v Bunge Corp132 considered that there was nothing inequitable about the buyers making a representation that they were still entitled to enforce their strict legal rights in respect of the balance of 60% of the June instalment of soya bean meal that could not yet be shipped while accepting the 40% of the contract that could be shipped. The sellers would have applied for an export licence in any case, and the buyer’s representation had no impact on this action.133 Finally, it should be noted that in relation to waiver by election, it is not necessary for the party to whom the representation is made to rely on that representation. Once the representee makes the relevant election, and communicates it to the other party, it is final. This is what distinguishes waiver by election from waiver by the abandonment of a right.134

131 Flacker Shipping Ltd v Glencore Grain Ltd (‘The Happy Day’) [2002] EWCA Civ 1068, per Potter LJ at [64]. See also Faidi and Faidi v Elliot Corp [2012] EWCA Civ 287. 132 [1983] 1 Lloyd’s Rep 476. 133 Ibid, per Robert Goff LJ at 484. 134 Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (‘The Kanchenjunga’) [1990] 1 Lloyd’s Rep 391, per Lord Goff of Chieveley at 399.

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Chapter 8

Material Adverse Change (‘MAC’) Clauses

INTRODUCTION 8.1 Economic downturns triggered by events like the global financial crisis and the Covid-19 pandemic invariably lead to a discussion about whether a party can invoke a material adverse change (‘MAC’) clause. MAC clauses bear some relation to force majeure clauses. The events that trigger them are often, although not exclusively, large catastrophic events. As with force majeure, there is a continuing debate over whether the event that allegedly triggers a MAC should be unforeseeable. MAC clauses very broadly appear in two types of agreements: (1) lending agreements: a MAC clause in a loan agreement typically allows the lender to either stop lending further funds or to call in a loan, where there has been a material adverse change in the financial condition of a borrower; (2) share purchase/asset purchase agreements: a MAC clause in an acquisition agreement excuses the purchaser of a business from going through with the purchase if an event occurs that has a material adverse impact on the business of the target company. These are also often referred to as material adverse event (‘MAE’) clauses. MAC clauses are very common in both lending and acquisition agreements. Surprisingly, there is little in the way of decided case law in relation to these clauses. This chapter explores these clauses and discusses the relevant case law.

INTERPRETATION OF A MAC IN A LOAN AGREEMENT The leading UK authority on MAC clauses 8.2 The leading UK decision on MAC clauses is the 2013 decision of Grupo Hotelero Urvasco SA v Carey Value Added SL (formerly Losan Hotels World 133

8.2  Material Adverse Change (‘MAC’) Clauses Value Added I SL).1 The claimant was Grupo Hotelero Urvasco SA (‘GHU’), a Spanish hotel company. The defendant was Carey Value Added SL (‘Carey’), a Spanish investment company. GHU had originally set up an English subsidiary, Urvasco Ltd. In 2004, Urvasco Ltd had purchased the old Marconi Building, a prime site on the corner of Aldwych and The Strand in Central London. GHU’s main source of financing at this time had been a Spanish bank, Banco Bilbao Vizcaya Argentaria SA. On 22  December 2004, it entered into a credit agreement that gave it access to several different facilities to finance its business (‘the BBVA Credit Agreement’). GHU had difficulty obtaining bank finance in 2007 to assist Urvasco Ltd to continue the project on the old Marconi Building site. Borrowing had become increasingly expensive due to the onset of the global financial crisis. Carey came on the scene to provide GHU with finance. Various agreements, including a loan agreement, were entered into on 21 December 2007. Under the loan agreement, Carey was to provide a total of £105 million. This consisted of an initial advance of £30 million, a further £40 million by way of certification of works as the project commenced, and a final payment of around £35 million on completion. By way of clause 8(h) of the Loan Agreement signed on 21 December 2007 between the borrower, GHU, and the lender, Carey, GHU represented on its behalf and on behalf of a subsidiary entity Urvasco Ltd that: ‘There has been no material adverse change in its financial condition (consolidated if applicable) since the date of this Loan Agreement’ (the date of the loan agreement being 21 December 2007). By the final sentence of clause 8, this representation was deemed repeated on each subsequent ‘advance date’ by reference to circumstances existing at that date. At the next ‘advance date’, 6 June 2008, Carey refused to make a further advance based on what it said was a ‘substantial deterioration in the financial condition and prospects’ of the Urvasco companies. GHU claimed for damages arising from a breach of contract by Carey for failure to make a further advance. Carey defended itself on the basis that there had been a ‘material adverse change’ in the business of the Urvasco group of companies, particularly because of the collapse of the property market in Spain in 2008. A MAC was deemed to be a default pursuant to clauses 10(b)(iii) and 10(b)(iv) of the loan agreement. If GHU was in default, Carey was not obliged to make further advances. There were a number of issues in contention between GHU and Carey in relation to how the MAC clause should be interpreted. These are discussed below. 1 [2013] EWHC 1039 (Comm).

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Interpretation of a MAC in a loan agreement 8.3 It should be noted that Blair J considered that Carey, the lender relying on the MAC clause, very clearly bore the onus of proof.2

Is there a ‘material adverse change’? 8.3 The Oxford Dictionary defines ‘adverse’ to mean: ‘preventing success or development, harmful, unfavourable’. Therefore, ‘adverse change’ means a change that is unfavourable or in some way harmful. Blair J decided the meaning of the term ‘material’ by reference to academic writing on MAC clauses, as authority on this issue was sparse. He espoused: ‘There is some academic writing on this point which supports this view. The Encyclopaedia of Banking Law says at F[1862] that, “It is considered that normally an adverse change in financial condition would be material if the change would have caused the bank not to lend at all or to lend on significantly more onerous terms, eg, as to margin, maturity or security”. Zakrzewski (ibid at p  350) puts it slightly differently, considering a change to be material that substantially affects the borrower’s ability to repay, or, more generally, significantly increases the risks assumed by the lender. In other words, to be material, the adverse change must be material in a substantial way to the borrower’s ability to perform the transaction in question.’3 He ultimately held that the adverse change must be ‘significant’, and he stressed the word ‘significant’ if the change was to be held to be ‘material’. Blair J pointed out that the rationale for this interpretation was that allowing a lender to exercise this clause would likely propel the borrower into insolvency. In the case of Levison v Farin,4 a vendor gave a warranty in relation to the sale of their business that was worded as follows: ‘ … the vendors hereby jointly and severally warrant to and undertake with the purchasers that between the balance sheet date and the completion date: (i) … (ii) there will have been no material adverse change in the overall value of the net assets of the company on the basis of a valuation adopted in the balance sheet allowing for normal trade fluctuations’. Finding in favour of the acquirer, Gibson J  held that a 20% change in the net asset value of the defendant company between the balance sheet date of 2 [2013] EWHC 1039 (Comm), per Blair J at [331]. 3 Ibid, per Blair J at [356]. 4 [1978] 2 All ER 1149.

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8.3  Material Adverse Change (‘MAC’) Clauses 31  December 1972, and the completion date of 12  May 1973, constituted a ‘material adverse change’ in the net asset value of the defendant company. In Thomas Witter Ltd v TBP  Industries Ltd,5 the relatively small carpeting business vendor provided the purchaser with audited accounts showing that the vendor’s profit was around £750,000 for the 1988 financial year. Among other things, the sale and purchase agreement provided the following warranty: ‘… there has been no materially adverse change [since 1988] in the financial or trading position of the Business, and the Business has been carried on in the ordinary course and in the same manner (including nature and scale) as immediately before the 31st December 1988.’ The vendor carried on the business in the same manner but yielded a profit for the business of around £530,000 for the 1989 financial year, roughly a 30% drop in profitability. The defendant sued for breach of the above warranty, among other things. Jacob J  held that the term ‘financial condition’ referred to both the balance sheet position and trading profitability of the vendor. He also considered that it was best interpreted as relating to short term profitability. He considered that the defendant’s view that financial condition/profitability in relation to the above clause referred to long-term profitability involved too much speculation. He had no problem concluding that the approximate 30% drop in current year profitability constituted a ‘material adverse change’ in the financial condition of the business acquired.6 In the context of a small business, this decision seems sound. However, similar reasoning may not apply to a similar dispute between large corporates. The expression ‘material’ is a deliberately ambiguous term. The sparse case law above offers some insight into how it might be interpreted. Nevertheless, each case will turn on its own facts.

In the ‘financial condition’ of a party? 8.4 In relation to the term ‘financial condition’, this is very much a matter of contractual interpretation in respect of each clause. In Grupo Hotelero Urvasco SA v Carey Value Added SL,7 Blair J considered that the ‘financial condition’ was best assessed by reference to financial information for the relevant period. In this case, that period was 21 December 2007, the date that the loan agreement was signed, through until 6 June 2008, 5 [1996] 2 All ER 573. 6 Ibid, per Jacob J at 605. 7 Grupo Hotelero Urvasco SA  v Carey Value Added SL (formerly Losan Hotels World Value Added I SL) [2013] EWHC 1039 (Comm).

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Interpretation of a MAC in a loan agreement 8.5 when Carey was meant to make a further advance under the loan agreement. Blair J considered that 6 June 2008 was the latest possible date for assessing a material adverse change. Further, where ‘financial condition’ fell to be assessed during an accounting year, Blair J  considered that this would generally be ascertained from interim financial information and management accounts. He observed that clause 8(h) of the loan agreement above referred to ‘consolidated if applicable’. In this case, he considered that GHU’s financial condition would be assessed from the ‘consolidated accounts’ of GHU.8 Blair J agreed with Carey that the inquiry into GHU’s financial condition is not necessarily limited to its consolidated financial information. He considered that it may also be appropriate to take account of other information outside of the financial accounts of a company or group, as this may offer compelling evidence that there had been a ‘material adverse change’ in the finances of a company or group, even though the financial accounts showed that the company or group was on a sound financial footing. In this case, he considered the fact that Grupo Urvasco SA (‘GU’), the main holding company for the group that had guaranteed GHU’s loan, had ceased to pay bank debts from mid to late June 2008 as information capable of demonstrating that there had been a change in the ‘financial condition’ of GU. Yet, Blair J pointed out that GHU and Carey had not incorporated a representation in their Loan Agreement that GU would make a representation at each drawdown date that there was no ‘material adverse change’ in its ‘financial condition’, even though it would have made commercial sense to incorporate such a term. Therefore, Blair J considered that Carey could not invoke a change in the ‘financial condition’ of GU in seeking to show that there was a ‘material adverse change’ in the ‘financial condition’ of GHU.9 It should be noted that Blair J specifically rejected Carey’s contentions that an inquiry into the ‘financial condition’ of a company or group should take account of economic changes, market changes or changes in the company or group’s financial prospects. He considered that such inquiries were too wide ranging and imprecise.10 However, there is nothing to stop parties, and particularly a lender, from specifically incorporating these matters in a MAC clause. It will usually be to the lender’s advantage to do so.

The length of the change in ‘financial condition’ of a company or group 8.5 Blair J considered that a change in the financial condition of a company or group for the purpose of a MAC clause must be something that is more than

8 [2013] EWHC 1039 (Comm), per Blair J at [350] and [351]. 9 Ibid, per Blair J at [390]. 10 Ibid, per Blair J at [348] and [351].

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8.5  Material Adverse Change (‘MAC’) Clauses temporary,11 to which he referenced the US case of IBP v Tyson Foods Inc.12 Vice Chancellor Strine in IBP v Tyson Foods Inc13 espoused: ‘ … the important thing is whether the company has suffered a Material Adverse Effect in its business or results of operations that is consequential to the company’s earnings power over a commercially reasonable period, which one would think would be measured in years rather than months.’14 He continued: ‘It is odd to think that a strategic buyer would view a short-term blip in earnings as material, so long as the target’s earnings-generating potential is not materially affected by that blip or the blip’s cause.’15 Further, he stated that a MAC/MAE clause: ‘… is best read as a backstop protecting the acquirer from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally significant manner. A short-term hiccup in earnings should not suffice, rather, the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquirer.’16 This reasoning of Vice Chancellor Strine, and particularly the expression that a MAC must affect the earning potential of a target in a ‘durationally significant manner’, is widely cited in US case law in relation to MAC clauses when discussing the issue that a MAC must be more than a temporary event.17 Blair J did not go into detail about when a change may be temporary or when it might be more enduring, as this was unnecessary. The approach of the US courts seems reasonable and is the most authoritative guidance available in considering whether an event can amount to a MAE because it is enduring. However, as with many matters related to the interpretation of MAC clauses, the dividing line between when a change in ‘financial condition’ is temporary or more durable may, in some cases, be ambiguous.

11 [2013] EWHC 1039 (Comm), per Blair J at [363]. 12 789 A2d 14 (Del Ch 2001). It should be noted that this case dealt with a MAE clause, rather than a MAC clause – however, the two clauses are similar. 13 Ibid, at 65. 14 Ibid, per Vice Chancellor Strine at 67. 15 Ibid, per Vice Chancellor Strine at 67. 16 Ibid, per Vice Chancellor Strine at 68. 17 For example, see the decision of Akorn Inc v Fresenius Kabi AG  No  2018-0300-JTL (unreported, 2018) WL 4719347, per Vice Chancellor Laster at 53 citing the decision of IBP v Tyson Foods Inc 789 A2d 14 (Del Ch 2001), per Vice Chancellor Strine at 68.

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Interpretation of a MAC in a loan agreement 8.6

Pre-existing circumstances/foreseeable events at the date of signing 8.6 In Grupo,18 Blair J held that a lender, Carey, could not benefit from a MAC clause where the material adverse change related to circumstances of which it was aware when it entered into the loan agreement. He based this on both academic commentary and the judgment of IBP v Tyson Foods Inc19 cited above, where Vice Chancellor Strine held that MAE clauses apply to ‘unknown events’.20 From a business common sense point of view, this is very logical. One would expect that a lender would price in all events it was aware of at the time of entering into a loan agreement. Such events could not be considered ‘unknown events’ which a MAC clause is generally intended to cover. The question arises as to whether a lender might be able to obtain the benefit of a MAC clause where certain events or circumstances that existed at the date of signing a loan agreement were foreseeable, and possibly even known to the party trying to invoke the MAE clause. Similarly to the discussion of foreseeability and force majeure at para  5.10, it is a matter that is likely to turn on the construction of each clause. Again, it should be noted that the jurisprudence in relation to force majeure is generally unsympathetic to a party where the event for which they wish to obtain the benefit of a force majeure clause was foreseeable. It is interesting to note that the authority on this point in the US is not entirely settled. As above, Vice Chancellor Strine in IBP v Tyson Foods Inc21 held that MAE clauses apply to ‘unknown events’.22 However, Vice Chancellor Laster in Akorn Inc v Fresenius Kabi AG23 took a different approach. He considered that the MAE in Akorn contained a lengthy list of exceptions and exclusions. It did not use the word ‘foreseeable’. He also considered that Vice Chancellor Strine in IBP v Tyson Foods Inc was not prescribing a standard that applied to all MAE clauses. In the context of the MAE clause in Akorn Inc v Fresenius Kabi AG, he considered that the party seeking to invoke the MAE could still invoke it even if it had foreseen the risk.24 However, it should be noted that Vice Chancellor Laster also espoused that Delaware courts embrace: ‘the

18 Grupo Hotelero Urvasco SA  v Carey Value Added SL (formerly Losan Hotels World Value Added I SL) [2013] EWHC 1039 (Comm). 19 789 A2d 14 (Del Ch 2001). 20 Grupo Hotelero Urvasco SA  v Carey Value Added SL (formerly Losan Hotels World Value Added I SL) [2013] EWHC 1039 (Comm), per Blair J at [360]–[362] citing the decision of IBP v Tyson Foods Inc 789 A2d 14 (Del Ch 2001), per Vice Chancellor Strine at 68. 21 789 A2d 14 (Del Ch 2001). 22 Ibid, per Vice Chancellor Strine at 68. 23 No 2018-0300-JTL (unreported, 2018) WL 4719347. 24 Ibid, per Vice Chancellor Laster at 61.

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8.6  Material Adverse Change (‘MAC’) Clauses strong American tradition of freedom of contract … is especially strong in our State’,25 and that: ‘The proper way to allocate risks in a contract is through bargaining between parties. It is not the court’s role to rewrite the contract between sophisticated market participants, allocating the risk of an agreement after the fact, to suit the court’s sense of equity or fairness.’26 It may be that the approach to contractual interpretation in Delaware influenced Vice Chancellor Laster’s judgment. Ultimately, UK courts are likely to be guided by UK authority in relation to contractual interpretation on the issue of foreseeability.

MAC clauses where the lender forms an opinion as to whether there is a ‘material adverse change’ in the financial condition of the borrower 8.7 Some MAC clauses effectively give the lender discretion to decide whether a material adverse change has occurred in the borrower’s financial condition. Essentially, it is the lender’s opinion that determines whether a material adverse change has occurred in the borrower’s financial condition rather than the objective view of the reasonable person. The best example of such a clause is the 2013 Privy Council case of Cukurova International Ltd v Alfa Telecom Turkey Ltd (Nos 3 to 5).27 The Cukurova group of companies had substantial business interests in Turkey. They held a 52.91% interest in a Turkish Telecoms holding company. A Finnish group, Sonera, held the remaining shares in the Turkish Telecoms holding company. In turn, the Turkish Telecoms holding company owned 51% of the shares in Turkcell, a dual listed Turkish/US telecoms operating company. The Cukurova group of companies was experiencing cash flow difficulties. They sought investment from a Russian group to assist with financing the Turkish Telecoms group. The Cukurova group transferred their shareholding to a new holding company in the British Virgin Islands (BVI) which they wholly controlled. However, the Russian group was issued with convertible bonds of around $1.6 billion, giving them a 49% stake in the holding company if converted. The Russian group also lent $1.352 billion by entering into a facility agreement with the Cukurova group, which was secured by charges over the Cukurova group’s shareholding in the BVI company. Clause 17 of the facility agreement was entitled ‘Events of default’, which, by way of clause 17.16 of the facility agreement, included: 25 No 2018–0300–JTL (unreported, 2018) WL 4719347, per Vice Chancellor Laster at 60. 26 Ibid, per Vice Chancellor Laster at 60. 27 [2013] UKPC 2.

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Interpretation of a MAC in a loan agreement 8.7 ‘Any event or circumstance which in the opinion of Alfa Telecom Turkey Ltd28 has had or is reasonably likely to have a material adverse effect on the financial condition, assets or business of [any member of the Cukurova group.]’ Clause 17.18 of the facility agreement provided that ‘on and at any time after the occurrence of an event of default which is continuing …’ the Russian group could ‘declare all or part of the loan, with accrued interest … be immediately due and payable’. Meanwhile, Sonora, the Finnish company with a minority shareholding in the main Turkish Telecoms holding company, commenced arbitration proceedings in Geneva, claiming they had pre-emptive rights that allowed them to acquire the Cukurova group’s shareholding in the Turkish Telecoms company. On 26 January 2007, Sonora announced they had been successful in the Geneva arbitration and that they had obtained an order for specific performance that the Cukurova group transfer their shareholding in the Turkish Telecoms group in lieu of damages. On 16  April 2007, the solicitor for Alfa Telecon Turkey Ltd (‘ATT’) sent a letter signed by Mr Nazarian, the sole de jure director of ATT, alleging a number of defaults under the facility agreement. These included that Geneva arbitration proceedings were likely to result in substantial payment of damages by Cukuorva in substitution for specific performance. He concluded that this was an event that was likely to have a material adverse effect on the financial condition of the Cukurova group of companies. The letter requested, amongst other things, immediate repayment of the $1.352 billion facility agreement. On appeal to the Privy Council, the Cukuorva group of companies challenged that ATT had validly exercised their discretion to declare that there had been a material adverse change in the financial condition of the Cukurova group of companies. The Privy Council ultimately vindicated ATT on this point. It held that Mr Nazarian’s exercise of a contractual discretion to declare a material adverse change in the financial condition of the Cukurova group of companies was valid. The Privy Council acknowledged that clause 17.16 of the facility agreement allowed ATT to be a judge in their own cause, with potentially drastic consequences for the Cukurova group of companies.29 First, the Privy Council held that for there to be a valid exercise of a contractual discretion pursuant to clause 17.6 of the facility agreement, the exercise of the discretion/judgment had to be: (1) honest; 28 The immediate investment company of the Russian group. 29 Cukurova International Ltd v Alfa Telecom Turkey Ltd (Nos 3 to 5) [2013] UKPC 2, per Lord Neuberger at [55] giving judgment for the Privy Council (British Virgin Islands).

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8.7  Material Adverse Change (‘MAC’) Clauses (2) rational; and (3) there had to be some admissible evidence to demonstrate the basis on which ATT had formed the requisite opinion.30 The Privy Council was satisfied that minutes from an ATT board meeting on 2 April 2007 clearly demonstrated that the ATT directors, and therefore ATT, had formed this opinion based on their knowledge of the Geneva arbitration by which the Cukurova group was likely to have to pay substantial damages.31

MATERIAL ADVERSE EFFECT (‘MAE’) CLAUSES IN ACQUISITION AGREEMENTS 8.8 MAE clauses are sometimes used in agreements for the sale and purchase of a business. Essentially, their purpose is to protect the acquirer if an event occurs that has a material adverse effect on the business being acquired. Their form and drafting will depend on the circumstances of the transaction, the industry, and the bargaining power between the parties. A  vendor will clearly prefer a narrower clause for as short a duration as possible. If the vendor has sufficient bargaining power, it may avoid the inclusion of a MAE clause altogether. On the other hand, the purchaser will generally prefer a wider clause that protects it for as long as possible. MAE clauses typically take two forms: (1) a condition precedent to the closing of a transaction. Essentially, if a defined event occurs between the signing of the sale and purchase agreement and closing of the transaction, the purchaser will have the right to walk away from the purchase of the business; (2) a warranty where a vendor warrants that there has been no material adverse change in the trading/profitability of the business over a period of time. If this warranty turns out to be false, the purchaser can sue on the contract and recover damages for breach of warranty. Such warranties may be common in smaller businesses.

The leading UK authority on MAE clauses 8.9 Case law in relation to MAE clauses is sparse in the UK and in most other jurisdictions. The leading case on MAE clauses is the recent decision of Travelport Ltd v Wex Inc.32 In this case, Wex Inc, a financial technology and corporate payments service provider, had contracted to purchase Travelport Ltd, a payments provider operating in the travel industry, for around $1 billion. 30 [2013] UKPC 2. 31 Ibid, per Lord Neuberger at [61] and [62]. 32 [2020] EWHC 2670 (Comm).

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Material adverse effect (‘MAE’) clauses in acquisition agreements 8.9 The sale and purchase agreement was dated 24 January 2020, and it effectively had a closing date of 25 October 2020. In between signing the sale and purchase agreement and the transaction’s closing, the Covid-19 pandemic broke out. From around March 2020 onwards, governmental action in the form of lockdowns, travel bans and quarantine measures, and a general reluctance of people to travel due to the Covid-19 pandemic, had a widespread effect on the travel industry. There was also a broader concern that the move to remote working may have a long-term effect on business travel. Against this background, the purchaser, Wex Inc, sought to invoke the MAE clause to avoid completing the purchase. A MAE was stated to be a condition precedent to closing: ‘Since that date of this Agreement there shall not have been any Material Adverse Effect and no event, change, development, state of facts or effect shall have occurred that would reasonably be expected to have a Material Adverse Effect’. It was a typical MAE clause in that it had three main constituent parts: (1) A  definition of a MAE, for which the seller generally bears the risk. MAE was defined to be: ‘any event, change, development, state of facts or effect that, individually or in the aggregate, (x) has had and continues to have a material adverse effect on the business, condition (financial or otherwise) or results of operations of [the eNett Group], taken as a whole, or of [the Optal Group], taken as a whole … or (y) would prevent or materially delay the consummation of the transactions contemplated by this Agreement’. (2)

Carve-outs from the definition of a MAE that allocates specific categories of risk to the acquirer. The carve-outs were in the form of a proviso to sub-clause (x) that: ‘… provided that, solely for purposes of clause (x), no such event, change, development, state of facts or effect resulting, arising from or in connection with any of the following matters shall be deemed, either alone or in combination, to constitute or contribute to, or be taken into account in determining whether there has been or will be, a Material Adverse Effect: a) the general conditions and trends in the industries or businesses in which [eNett], [Optal] or any of their respective Subsidiaries operates, including competition in any of the geographic or product areas in which [eNett], [Optal] or any of their respective Subsidiaries operates … 143

8.9  Material Adverse Change (‘MAC’) Clauses b) general economic conditions, financial conditions, or capital market conditions (including interest rates, exchange rates and credit markets); c) conditions resulting from the commencement, occurrence, continuation, or intensification of any act of civil unrest, war (whether or not declared), terrorism or sabotage (including cyberattack), armed hostilities, military attacks or declaration of national emergency; d) changes (or proposed changes) in Tax, regulatory or political conditions (including as a result of the negotiations or outcome with respect to Brexit) or Law, IFRS EU or IFRS IASB (or, in each case, any authoritative interpretations thereof or the enforcement thereof); e) conditions resulting from any natural or manmade disasters, hurricanes, floods, tornados, pandemics, tsunamis, earthquakes, acts of God or other weather-related or natural conditions …’ (3) Finally, there was then an exception to this carve-out that allocates risks specific to the seller’s business to the seller: ‘provided, further that any event, change, development or effect referred to in clause (a), (b), (c) or (e) may be taken into account in determining whether there has been a Material Adverse Effect to the extent, and solely to the extent, such event, change, development, state of facts or effect has a disproportionate effect on [the eNett Group], taken as a whole, or on [the Optal Group], taken as a whole, as compared to participants in the industries in which [eNett], [Optal] or their respective Subsidiaries operate.’ The parties were granted a preliminary issues trial on an expedited basis. The purpose of the trial was to obtain a preliminary ruling on several issues in relation to the construction of the MAE clause. As will become apparent from the discussion below, the interpretation of a MAE is a matter of interpretation of the clause in each case. The MAE in Travelport was very detailed and complex. It had been drafted by solicitors with great expertise in their field. Unsurprisingly, the interpretation exercise in relation to such a clause tends to be very complex. The MAE clause in issue is typical of MAE clauses in merger and acquisition agreements in the UK.

Burden of proof 8.10 Cockerill J considered that a party should bear the burden of proving the factual issues that they assert. As such, the sellers, Travelport, should bear the

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Material adverse effect (‘MAE’) clauses in acquisition agreements 8.13 burden of proving that the event falls within one of the carve-outs, including the carve-out exception, set out at sections 2 and 3 of the MAE clause above.33 Implicitly, the purchaser, Wex Inc, had to first show that a MAE had occurred as defined in section 1. In coming to the conclusion she did, Cockerill J acknowledged that argument was possible either way in relation to which party bore the burden of proof on a particular matter.34 Implicitly, this acknowledges that determining the burden of proof is a matter of construction of a clause in each case on which reasonable minds may differ. Cockerill J observed that her finding on the burden of proof was consistent with the finding reached in the recent US case of Akorn Inc v Fresenius Kabi AG.35

Section 1 – a ‘material adverse event’ 8.11 The main issue in relation to section 1 is the issue of ‘materiality’. This issue has been discussed extensively above, particularly at para 8.3, and it is not further discussed here.

Section 2 – the carve-out clause 8.12 The main issue concerned what was meant by the term ‘industries’ in relation to the carve-out exceptions clause. A subsidiary issue in relation to section 2 was whether an ‘event’ could fall within two different exclusions across paragraphs (a) to (e). This was an important issue in this case as the carve-out exception in section 3 only applied to events (a), (b), (c) and (e). It did not apply to event (d). The sellers would naturally prefer that any material adverse event would fall within clause (d) because the buyer would not have the ability to try and satisfy the carve-out exception in section 3 above and obtain the benefit of the MAE. THE MEANING OF THE TERM ‘INDUSTRIES’, PARTICULARLY IN RELATION TO THE CARVE-OUT EXCEPTIONS CLAUSE

8.13 Travelport contended that the word ‘industries’ in section 2 and particularly in section 3 of the MAE clause meant the ‘travel payments industry’. Wex, on the other hand, contended that there was no such thing as the ‘travel payments industry’ and that the word ‘industries’ meant either the ‘B2B payments industry’ or the ‘payments industry’. This was important 33 Travelport Ltd v Wex Inc [2020] EWHC 2670 (Comm), per Cockerill J at [279]. 34 Ibid, per Cockerill J at [279]. 35 No 2018-0300-JTL (unreported, 2018) WL 4719347, see particularly Vice Chancellor Laster at [4], [52] and [53].

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8.13  Material Adverse Change (‘MAC’) Clauses in relation to determining whether the seller, Travelport,36 could potentially exercise the section 3 carve-out exception clause. The businesses being sold were the Optal group and the eNett group. The Optal business was founded in April 2002. eNett was initially a wholly owned subsidiary of Optal, but in 2007 it became a 23.5% subsidiary and was operated as a joint venture with Travelport Limited. The primary business of the Optal group was issuing virtual credit card account numbers (‘VANs’). These were essentially 16 digit virtual credit cards by which one business could pay another. One key commercial advantage of these cards was the ability of the provider to rebate some of the Mastercard ‘interchange’ fees as a result of the lower cost model involved – 98% of the revenues of the Optal group came from issuing VANs to the eNett group. The eNett group would then distribute these VANs via its own technology platform to customers in the travel payments industry. VANs can be distributed outside the travel payments industry. The Optal group had done this, but with little success, with this business accounting for around 0.2% of its revenue. Cockerill J  first considered the expert evidence and made the following findings: (1) eNett’s offering (of VANs) was particularly well-suited to the travel payments industry, but it was not uniquely suited to the travel payments industry; and (2)

a comparison with other companies in either the B2B payments industry or even the payments industry as a whole would render the comparison required by the section 3 exclusions carve-out clause nugatory on the basis it would result in a comparison with the global economy.

The principles in relation to contractual construction were common ground between the parties ie  the iterative approach most recently espoused by the Supreme Court in Wood v Capita,37 in particular: (1)

it was necessary to have regard to the contract as a whole, and depending on the nature, formality, and quality of the drafting, give more or less weight to the wider context in reaching a view as to the objective meaning of the wording;38

(2) there was no conceptual limit as to what could be regarded as relevant background bearing on the objective understanding of the terms that the parties had agreed;39

36 Travelport Ltd was one of many sellers. Its name is used as shorthand for all the sellers. 37 [2017]  UKSC  24 at [11] and [13] cited in Travelport Ltd v Wex Inc [2020]  EWHC  2670 (Comm), per Cockerill J at [131]. 38 Travelport Ltd v Wex Inc [2020] EWHC 2670 (Comm), per Cockerill J at [148]. 39 Ibid, per Cockerill J at [137].

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Material adverse effect (‘MAE’) clauses in acquisition agreements 8.14 (3) evidence to show the genesis and aim of the transaction is admissible as part of the background factual matrix.40 Applying these principles in Travelport, Cockerill J considered that: (1)

the parties had deliberately chosen the word ‘industries’ as the comparator in the carve-out exception clause, rather than ‘market’, ‘sectors’ or ‘competitors’. They had also deliberately chosen the ‘plural’ for the word ‘industries’. Objectively viewed, it connoted scale and a high level of generality. The use of the word ‘industries’ was intended to capture a comparator group in a broad sphere of economic activity. They did not want to limit the disproportionality analysis to firm specific issues;41

(2) the use of the words ‘as a whole’ in the carve-out exception clause suggested that the clause was aimed at different sectors of the B2B payments industry;42 (3) more generally, as a matter of language, the mere fact that the carveout exception drew a comparison did not of itself suggest a comparison to similar companies or that comparators should generally be affected consistently by an event or circumstance. However, it may do if there was authority to establish otherwise. The greatest body of authority in relation to MAE clauses has come from US cases – this is discussed at para 8.14 below; and (4) the field of operation of the carve-out exception clause was likely to be very small.43 Cockerill J’s final comment that the field of operation of a carve-out clause is likely to be very small is very telling. While all MAE clauses are different, the MAE clause in Travelport is typical of MAE clauses found in many agreements. In a great deal of cases, it is likely to be difficult for a purchaser to rely on a MAE clause to excuse the contract’s performance. THE COMMERCIAL PURPOSE OF THE MAE CLAUSE AND HOW THIS INFORMED THE MEANING OF THE TERM ‘INDUSTRIES’

8.14 Cockerill J  then went on to consider the commercial purpose of the transaction, as this informed the meaning of the word ‘industries’. Cockerill J observed that the arguments about commercial purpose were multi-layered.44 First, she observed that there was a paucity of UK case law on MAE clauses. The largest body of case law and academic writing on MAE clauses came from the US. Drawing on the judgment of Blair J in Grupo Hotelero Urvasco 40 [2020] EWHC 2670 (Comm), per Cockerill J at [138]. 41 Ibid, per Cockerill J at [150]–[153]. 42 Ibid, per Cockerill J at [160]. 43 Ibid, per Cockerill J at [165]. 44 Ibid, per Cockerill J at [171].

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8.14  Material Adverse Change (‘MAC’) Clauses v Carey Value Added.45 Cockerill J observed that the Delaware Chancery Court was the leading forum for corporate merger litigation,46 but even in this court, there were not a huge number of cases on MAEs. However, given that it was the largest body of jurisprudence on this topic and there was little other authority available, it made sense to examine the learnings from these cases and articles. The most recent decision on MAEs in the US was that of Vice Chancellor Laster in Akorn Inc v Fresenius Kabi AG.47 It was the only decision in which a purchaser had succeeded in relying on a MAE to excuse its performance of a sale and purchase agreement. Very broadly, Vice Chancellor Laster considered that the purpose of a MAE was to provide the purchasing party against a significant deterioration in the selling company’s business between the signing of the sale and purchase agreement and settlement of the transaction.48 Cockerill  J observed that Vice Chancellor Laster’s decision in Akorn Inc v Fresenius Kabi AG49 succinctly summarised much academic writing in the US on the commercial purposes of a MAE: ‘Zhou, supra, at 173; accord Choi & Triantis, supra, at 867 (“The principal purpose of carve-outs from the definition of material adverse events or changes seems to be to remove systemic or industry risk from the MAC condition, as well as risks that are known by both parties at the time of the agreement.”). “A  possible rationale” for this allocation “is that the seller should not have to bear general and possibly undiversifiable risk that it cannot control and the buyer would likely be subject to no matter its investment.” Davidoff & Baiardi, supra, at 15; see also Gilson & Schwartz, supra, at 339 (arguing that “an efficient acquisition agreement will impose endogenous risk on the seller and exogenous risk on the buyer”). As with any general statement, exceptions exist, and “different agreements will select different exogenous risks to shift to the counterparty, and in stock-forstock and cash-and-stock deals, parties may shift different exogenous risks to each other.” Miller, supra, at 2070.’50 The academic writing in relation to MAE clauses attempts to come up with logical theories for the purpose of MAE clauses. According to Gilson & Schwartz’s Investment Theory, the risks that are allocated by a MAE clause can be divided into exogenous risks and endogenous risks: 45 [2013] EWHC 1039 (Comm). 46 Travelport Ltd v Wex Inc [2020] EWHC 2670 (Comm), per Cockerill J at [174] referencing Blair J in Grupo Hotelero Urvasco v Carey Value Added at [355]. 47 No 2018-0300-JTL (unreported, 2018) WL 4719347. 48 Travelport Ltd v Wex Inc [2020] EWHC 2670 (Comm), per Cockerill J at [174] referencing Akorn Inc v Fresenius Kabi AG  No  2018-0300-JTL (unreported, 2018)  WL  4719347, see particularly Vice Chancellor Laster at [47]. 49 2018-0300-JTL (unreported, 2018) WL 4719347, at fn 531. 50 Akorn Inc v Fresenius Kabi AG  No  2018-0300-JTL (unreported, 2018)  WL  4719347, see particularly Vice Chancellor Laster at [49], fn 531.

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Material adverse effect (‘MAE’) clauses in acquisition agreements 8.14 (1) exogenous risks arise from general causes that are largely beyond the control of the target company. All exogenous risks should be allocated to the purchaser, as they are risks that the purchaser would have born anyway if they had owned the business; and (2) endogenous risks are those ‘firm specific’ risks relating to the business of the seller target. As these risks are within the control of the seller, it is most efficient for the seller to bear these risks between the signing of the sale agreement and settlement.51 Vice Chancellor Laster in Akorn went on to define four types of risk that seemed to be derived from an academic paper by Professor Robert Miller, now of the Iowa College of Law:52 (1) systematic risks: risks related to general changes in the economy, credit markets, capital markets, the political landscape, the regulatory environment, acts of war, terrorism, natural disasters etc. These are essentially exogenous risks largely beyond the control of a company/ either party;53 (2) indicators risks: risks related to failing to meet financial projections prepared by the party itself, failure to meet financial estimates prepared by industry analysts and risks related to changes in the prices or trading volume of securities. Miller considers that these risks are generally within the control of the seller, although the matter is not entirely clear;54 (3) agreement risks: risks peculiar to each party arising from the announcement of the merger agreement and the taking of actions contemplated by the parties in accordance with those agreements. They are not risks arising in the ordinary course of business for each party, nor do they arise from general factors beyond the control of each party. Agreement risks include some endogenous risks like employee flight. It is not totally clear whether these risks are all endogenous;55 (4) business risks: risks that arise out of the ordinary operation of the seller’s businesses over which the selling party has significant control. These are endogenous risks.56

51 Ronald J  Gilson and Alan Schwartz, Understanding MAC’s: Moral Hazard in Acquisitions 21 JL Econ & Org 330 at [339]. 52 Robert T  Miller, The Economics of Deal Risk: Allocating Risk Through MAC  Clauses in Business Combination Agreements (2007) 50 Wm & Mary L Rev 2008. 53 Ibid, at 2073; also see Akorn Inc v Fresenius Kabi AG  No  2018-0300-JTL (unreported, 2018) WL 4719347, see particularly Vice Chancellor Laster at [49]. 54 Ibid, at 2084. 55 Ibid, at 2072 and 2073. Also see Akorn Inc v Fresenius Kabi AG  No  2018-0300-JTL (unreported, 2018) WL 4719347, see particularly Vice Chancellor Laster at [49]. 56 Robert T  Miller, The Economics of Deal Risk: Allocating Risk Through MAC  Clauses in Business Combination Agreements (2007) 50 Wm & Mary L Rev 2008, at 2073.

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8.14  Material Adverse Change (‘MAC’) Clauses Returning to Travelport, Cockerill J ultimately considered that there was no clear way of identifying: ‘… the potential gap between industry wide risks and firm specific risks.’57 Essentially, there was no clear way to identify whether agreement risks and indicators risks were exogenous or endogenous risks. In the absence of such guidance, considering the meaning of the word ‘industries’ was very much a matter of considering the purpose of the transaction and the context in which it was used in the MAE clause.58 Cockerill J held that it was not clear from the authorities established that the purpose of a MAE clause was to shift exogenous risks to the buyer and leave the seller with only ‘firm specific’ risks.59 CONCLUSION IN RELATION TO THE MEANING OF THE TERM ‘INDUSTRIES’

8.15 After considering much witness evidence, Cockerill J  held that the transaction had more than one purpose for the acquirer, Wex Inc. Based on Wex’s Chief Corporate Development Officer’s evidence, the purpose of the transaction was three-fold: (1) to increase scale; (2) to increase geographic mix; and (3) to product extend. In relation to product extension, the Wex business model used innovation and technology and applied learnings from customers in one market to other payments markets.60 Implicitly, these findings supported the conclusion that the term ‘industries’ meant something broader than the ‘travel payments industry’. Cockerill J considered further information that formed part of the background factual matrix, including press releases in relation to the transaction, LinkedIn pages, and articles published by executives at each of the respective companies. After careful consideration, she held that the factual evidence was more consistent with travel payments being a sector or vertical, or incipient industry, 57 Travelport Ltd v Wex Inc [2020] EWHC 2670 (Comm), per Cockerill J at [189]. 58 Although it is purely an exercise in statutory construction, it is interesting to observe that Cockerill J’s approach also accords with the decision of Vice Chancellor Laster in Akorn Inc v Fresenius Kabi AG No 2018-0300-JTL (unreported, 2018) WL 4719347 at [49] where he stated that MAE clauses use ‘… exceptions to reallocate specific risks to the buyer’. It also accords with Robert T Miller’s paper The Economics of Deal Risk: Allocating Risk Through MAC clauses in Business Combination Agreements (2007) 50 Wm & Mary L Rev 2008, at 2069–2073, where he stated that very few agreements allocate all exogenous risks to the acquirer, and risks are really allocated on an agreement by agreement basis to the acquirer. It is also in keeping with a more recent paper by Robert T Miller, Material Adverse Effect Clauses and the COVID-19 Pandemic University of Iowa Legal Studies Research Paper Number 2020– 21 (September 2020), at p 27. 59 Travelport Ltd v Wex Inc [2020] EWHC 2670 (Comm), per Cockerill J at [243]. 60 Ibid; see particularly Cockerill J at [203]–[209].

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Material adverse effect (‘MAE’) clauses in acquisition agreements 8.16 operating perhaps within one or more industries, but not an industry in its own right.61 Similarly, in considering the carve-out clause, in undertaking the disproportionality comparison, Cockerill J held that there was no clear authority or rationale for favouring the company/market comparison as opposed to the market/industry comparison. Nevertheless, regardless of which approach was adopted, it was still possible that there was such close equivalence between the control group and the target company that any disproportionality would only be triggered by firm specific events. Cockerill J ultimately concluded that it was impossible to define any control group by reference to a ‘travel payments industry’, and any such comparison was unlikely to produce a tightly focused group of companies that Travelport had argued for.62 As such, this told against any construction that the word ‘industries’ referred to the ‘travel payments industry’. Cockerill J  ultimately concluded that ‘industries’ referred to the ‘B2B payments industry’, as the parties agreed and as a third-party observer would have concluded.63

Section 3 – exceptions to the carve-out clause (section 2) 8.16 Although the issue was not necessary to decide, Cockerill J opined on whether it was possible the events of the Covid-19 pandemic could fall within more than one of the ‘exclusions’ in section 2 of the clause. In relation to this case, there were two events that could fall within the exclusions. The pandemic itself clearly satisfied the exclusion in section 2, paragraph (e). However, many governments around the world imposed restrictions such as quarantine, forced the closure of businesses and limited leisure activities as a result of the pandemic. The restrictions made travel less attractive. There was a question as to whether these events fell within section 2, paragraph (e) of the carve-out clause, or whether they fell within section 2, paragraph (d) being ‘changes … in regulation … or law’. This was an important issue because the section 3 exception to the carve-out clause did not apply to events that fell within section 2, paragraph (d). Cockerill J ultimately considered that, to the extent that these restrictions made travel less attractive and resulted in a material adverse change, as a matter of contractual interpretation, they fell within section 2, paragraph (d), and the acquirer could not benefit from the section 3 carve-out exception in relation to these risks.

61 [2020] EWHC 2670 (Comm), per Cockerill J at [223]. 62 Ibid, per Cockerill J at [249]. 63 Ibid, per Cockerill J at [257].

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Chapter 9

Force Majeure in International Case Law

INTRODUCTION 9.1 The jurisdiction of England and Wales has by far and away the greatest amount of case law in relation to force majeure clauses. This situation has probably arisen because contracts in many industries are routinely specified to be interpreted according to the laws of England and Wales.1 However, even in the jurisdiction of England and Wales, case law is relatively sparse in relation to matters concerning force majeure. A survey of force majeure cases internationally finds that the case law in all other English common law jurisdictions is even sparser. This is not a great surprise. Force majeure is an esoteric topic that is generally only raised when a catastrophe occurs. The case law also demonstrates that it is difficult for a party to invoke force majeure provisions to excuse performance. This may also explain why there is little in the way of case law on this subject internationally. Canada is the UK common law jurisdiction with the greatest amount of case law on force majeure. Singapore and Australia also each have a small number of cases on force majeure. Not surprisingly, many of the decisions in Canada, Singapore, and Australia cite and often follow English authorities, largely because the jurisdiction of England and Wales has by far and away the greatest body of jurisprudence on force majeure. The approach to contractual interpretation is broadly similar across most UK common law jurisdictions in that most jurisdictions take account of the background factual matrix in relation to the contract and interpret the language in an objective way. However, as with all issues related to force majeure, each case turns on its own facts and the interpretation of the force majeure clause in that particular case. This chapter gives an overview of the major decisions in Canada, Singapore, Australia and Hong Kong in relation to force majeure.

1 Contracts in relation to shipping and the Grain and Food Trade Association (‘GAFTA’) are two such examples.

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Canada 9.2

CANADA Atlantic Paper v St Anne Pulp 9.2 Since the 1970’s, the leading decision in relation to force majeure in Canada has been the Canadian Supreme Court decision of Atlantic Paper v St Anne Pulp.2 In that case, St Anne Pulp contracted on 10 April 1970 to purchase a minimum of 10,000 tons and a maximum of 18,000 tons of wastepaper for ten years. St Anne intended to use this as secondary fibre in the manufacture of corrugating medium. However, just over a year later, on 9 June 1971, St Anne sent a telegram to Atlantic Paper stating they would not accept any more wastepaper. St Anne had begun to make significant losses in relation to the sale of corrugating medium. Atlantic Paper sued St Anne for damages for failing to perform the contract. St Anne defended itself on the basis that its performance should be excused due to ‘non-availability of markets’ in accordance with the force majeure clause. The force majeure clause stated: ‘St Anne warrants and represents that its requirements under this contract shall be approximately 15,000 tons a year, and further warrants that in any one year its requirements for Secondary Fibre shall not be less than 10,000 tons, unless as a result of an act of God, the Queen’s or public enemies, war, the authority of the law, labour unrest or strikes, the destruction of or damage to production facilities, or the non-availability of markets for pulp or corrugating medium.’3 Dickson J, giving judgment for the Supreme Court of Canada, held that the words ‘non-availability of markets’ should be construed ejusdem generis, such that the expression should be restricted to events over which St Anne had ‘no control’.4 Reviewing the evidence, Dickson J considered that the market for the sale of corrugating medium had become uneconomic from St Anne’s point of view largely through its own actions and arguably negligence. He held that St Anne’s problems arose because they: (1) had a lack of an effective marketing plan at the time they signed the contract; and (2) faced soaring production costs.5 2 56 DLR (3d) 409. 3 Ibid, per Dickson J at [1]. 4 Ibid, per Dickson J at [4]. 5 Ibid, per Dickson J at [9]; and also [5] and [6].

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9.2  Force Majeure in International Case Law Most critically, Dickson J  held that St Anne faced exactly the same market conditions at the time of signing the contract as it did around 15 months later when it sought to excuse its performance under the contract.6 He considered that a market still existed for the sale of corrugating medium, as it had at the time of signing the contract. However, largely through St Anne’s own actions, this market had become uneconomic for them. Dickson J pointed out it was essential to construe the term ‘non-availability of markets’ objectively and not subjectively from the economic point of view of St Anne.7 Dickson J’s decision was principally an exercise in contractual interpretation, interpreting the words in context. His use of the term ejusdem generis is not important. His conclusion on the meaning of the words ‘non-availability of markets’ came from construing them in context.

Atcor Ltd v Continental Energy Marketing Ltd 9.3 In Atcor Ltd v Continental Energy Marketing Ltd,8 Atcor entered into a contract for the supply of natural gas to Continental. It was supplying the gas through a pipeline run by the Nova corporation. Nova encountered breakdown and repair problems with its pipeline system that curtailed capacity and, therefore, the quantity of natural gas that it could supply. Supply to Atcor had to be curtailed. Atcor continued to receive sufficient gas such that it could have met all its commitments to Continental, however, for its own commercial reasons, it chose to prefer other customers it considered more valuable. Atcor did not attempt to pro-rate supplies and defaulted on its contract to supply gas to Continental, believing that it could invoke the force majeure clause to excuse its performance under the contract. The force majeure clause provided: ‘9. Subject to the other provisions of this paragraph, if either party to this Agreement fails to observe or perform any of the covenants or obligations herein imposed upon it and such failure shall have been occasioned by, or in consequence of force majeure, as herein defined, such failure shall be deemed not to be a breach of such covenants or obligations. (a) For the purposes of this Agreement, the term “force majeure” shall mean any acts of God, including herein, lightning, earthquakes and storms and in addition shall mean any strikes, lockouts or other industrial disturbances … pipeline tie-ins, pipeline 6 56 DLR (3d) 409, per Dickson J at [7]. 7 Ibid, per Dickson J at [6]. 8 (1996) 178 AR 372 (CA).

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Canada 9.3 connections, pipeline repairs and reconditioning … or any other causes, whether of the kind herein IMA rated or otherwise, and which, by the exercise of due diligence, such party is able to overcome.’ It was common ground between the parties that the problems on the Nova pipeline constituted a force majeure event within clause 9(a) above. The trial judge found that Atcor gave adequate notice of the event.9 Kearns JA giving judgment for the Alberta Court of Appeal, considered that the matter in issue was ‘causation’. That is, Atcor had to show that there was a ‘causal tie’ in a substantial way between the event and Atcor’s non-performance. Taking a broad high level view of the purpose of the force majeure clause, Kearns JA considered that: ‘A supplier need not show that the event made it impossible to carry out the contract, but it must show that the event created, in commercial terms a real and substantial problem, one that makes performance commercially unfeasible.’10 Kearns JA seemed to reach this decision because the force majeure clause did not specifically use the word ‘prevent’, rather it used the word ‘fail’.11 He went on to state that applying the above principles, it was an open question as to whether it was ‘commercially feasible’ for Atcor to: (1) purchase natural gas from another source to fulfil its contract to Continental; and/or (2) pro-rate supplies to customers according to the natural gas that it had available.12 Kearns JA sent the matter back to trial as he could not determine these matters on the evidence available. The decision of Kearns JA in Atcor Ltd v Continental Marketing Ltd is somewhat controversial. While it was open to Kearns JA to make the decision he made, his decision is a departure from a long line of cases that have taken a very strict approach to force majeure clauses and generally considered that they could not be invoked to excuse the performance of a party on the basis of economic hardship. Notably, Atcor Ltd v Continental Marketing Ltd has not been followed in any other case.

9 (1996) 178 AR 372 (CA), per Kerans JA at [4]. 10 Ibid, per Kearns JA at [11]. 11 Ibid, per Kearns JA at [17]. 12 Ibid, per Kearns JA at [22], [30] and [35].

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9.4  Force Majeure in International Case Law

Domtar Inc v Univar Canada Ltd 9.4 The case of Domtar Inc v Univar Canada Ltd13 is a decision of Fisher J of the British Columbia Supreme Court that is of particular interest because it considers the issue of economic hardship in the context of a force majeure clause. The plaintiff, Domtar Inc (‘Domtar’), had become a party to a contract with Univar Canada Ltd (‘Univar’) under which Univar was to supply Domtar with all its caustic soda requirements capped at a maximum price of C$545 a tonne. The contract was effective from 1  January 2006 to 31  December 2008. In late June 2008, the price of caustic soda dramatically increased, and Univar declared a force majeure event and refused to supply caustic soda to Domtar at the maximum capped contractual price of C$545. Univar instead charged Domtar prices of C$730 to C$860 per tonne for the last six months of the contract. Domtar purchased caustic soda from Univar at these prices under protest. Domtar later brought suit to recover the difference between the price that it paid and the contractually agreed price, that difference being C$1,871,408.94 plus goods and services tax (GST). The key issue in the case was whether Univar could legitimately invoke the force majeure clause in the contract to excuse it from performing the contract at the contractually agreed price of C$545. The force majeure clause of the contract was stated as follows: ‘15 FORCE MAJEURE A Performance will be excused, and the parties shall not be liable for any failure to perform under this Agreement, when (1) such performance is prevented or delayed by any cause or condition of force majeure, or (2) Supplier … is unable, despite diligent efforts to do so, to obtain raw materials or energy on terms Supplier deems commercially acceptable. The term “force majeure” means any contingency beyond the reasonable control of Supplier or Customer (for example, war or hostilities, Acts of God, accident, fire, explosion, public protest, breakage of equipment, governmental actions or legislation, or labour difficulties) which interferes with Supplier’s or Customer’s production, supply, transportation or consumption practice.’14 Univar’s defended itself on the basis that the dramatic rise in the price of caustic soda: (1)

was a ‘force majeure’ event in the sense that it constituted ‘a contingency beyond the reasonable control of Supplier’ that interfered with ‘supply’; and/or

13 [2011] BCTC Uned 1776. 14 Ibid, per Fisher J at [9].

156

Singapore 9.5 (2)

meant it could not obtain ‘raw materials’, where ‘raw materials’ included caustic soda, on terms that it deemed commercially acceptable.

Fisher J  was able to easily dispose of the first argument. He observed that none of the examples in the definition of force majeure were connected with economic or market conditions.15 He also observed a long line of authority to the effect that a party cannot rely on a change of economic conditions to invoke a force majeure clause as a defence. In particular, he cited Hamblen J in Tandrin Aviation Holdings Ltd v Aero Toy Store Llc:16 ‘it is well established under English law that a change in economic/ market circumstances, affecting the profitability of a contract or the ease with which the parties obligations can be performed, is not regarded as a force majeure event.’17 Fisher J  also cited many other UK authorities and the Canadian decision of Atlantic Paper v St Anne Pulp18 to the same effect. This point was quite easy to dispose of. In relation to the second argument, taking a contextual interpretation, Fisher J observed that: (1) all the pricing provisions with respect to caustic soda were contained in clause 6 of the agreement;19 (2) it would make no sense that ‘raw materials’ should include caustic soda as this would allow Univar to unilaterally determine the price at which it would sell the product that was the subject of the contract.20 Consequently, he rejected that Univar could invoke the force majeure clause as a defence, and Domtar succeeded in its claim.

SINGAPORE Holchim (Singapore) Pte Ltd v Precise Development Pte Ltd 9.5 The most recent decision of the Singapore Court of Appeal in relation to force majeure clauses is that of Holchim (Singapore) Pte Ltd v Precise Development Pte Ltd.21 It is a decision of great importance. 15 [2011] BCTC Uned 1776, per Fisher J at [86]. 16 [2010] EWHC 40 (Comm). 17 Ibid, per Hamblen J at [40], cited in Domtar Inc v Univar Canada Ltd [2011] BCTC Uned 1776, per by Fisher J at [78]. 18 56 DLR (3d) 409. 19 Ibid, per Fisher J at [67]. 20 Ibid, per Fisher J at [66]. 21 [2011] SGCA 1.

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9.5  Force Majeure in International Case Law The appellant, Holchim, had contracted for the supply of 90,000 cubic metres (+/- 15%) of ready-mixed concrete to Precise Development. Holchim quoted a price of S$65 per cubic metre. A  crucial raw material for the production of Holchim’s ready-mixed concrete was concreting sand. Holchim had been sourcing concreting sand from suppliers in Indonesia. However, the Indonesian Government prohibited the export of sand (‘Sand Ban’) on or around 6 February 2007. Holchim faced far higher costs in order to obtain concreting sand that made it uneconomic for Holchim to supply ready-mixed concrete to Precise Development at the contracted price of S$65 per cubic metre. A series of negotiations followed: (1)

Having notice of the Sand Ban, Holchim wrote to Precise Developments in a letter dated 1 February 2007 implying that the pending Sand Ban constituted a force majeure event and provided a revised quotation to Precise Developments that increased the price for sales of ready-mixed concrete over a number of months by between 30% to 50%. Holchim requested that Precise Developments should sign this quotation – they refused;

(2) Precise Developments, in a letter dated 5  February 2007, refuted that there was a force majeure event because the Building and Construction Authority (‘BCA’), a statutory board under the supervision of the Ministry of National Development of the Singapore Government, was making concreting sand available from its stockpiles as of 1 February 2007. In fact, the BCA sand stockpiles were only available to main contractors, of which Precise Development was one, but Holchim was not; (3) Holchim responded by letter dated 9 February 2007 indicating they did not have access to the BCA stockpiles and stated they would try and obtain concreting sand in the open market, but their 1  February 2007 quotation stood. They implied their actions were the result of a force majeure event; (4) On 15  February 2007, the BCA announced that it would release concreting sand to main contractors for S$60 per tonne on a ‘first come, first served’ basis. On 26 February 2007, the cost of concreting sand was increased to S$70 per tonne. Following this announcement, Holchim informed Precise Developments in a letter dated 1 March 2007 that if Precise Development procured concreting sand from the BCA for Holchim, Holchim was willing to credit back to Precise Development the cost of this sand. The letter dated 1  March 2007 also contained a revised fee quotation for ready-mixed concrete that varied from S$195 to S$199 per cubic metre, depending on the quality of the concrete. This was a nearly 200% increase in the price from the original contract. Precise Developments did not respond to this offer; (5) On 19 March 2007, representatives from both companies met to try and resolve the matter. The meeting ended with no resolution; 158

Singapore 9.6 (6)

Holchim, in a letter dated 2 April 2007, provided a revised quote of S$55 per cubic metre for ready-mixed concrete, on the basis that Precise Developments would procure the concreting sand free of charge. Precise Developments did not respond to this offer;

(7) Precise Developments, in a letter dated 2 April 2007, reiterated an offer made at the meeting on 19  March 2007 by one of their directors and offered to supply sand and aggregates to Holchim at ‘the same old rate as that agreed’ for Holchim to supply ready-mixed concrete at contracted prices on the same basis. The letter also stated that Holchim would be liable for damages if it did not supply ready-mixed concrete. Holchim countered that the director who made the offer on 19 March 2007 offered to supply manufactured sand, not concreting sand. Clause 3 of the original contract contained that force majeure clause. Clause 3 stated: ‘The Purchaser must provide sufficient advance notice in confirming each order. The Supplier shall be under no obligation to supply the concrete if the said supply has been disrupted by virtue of inclement weather, strikes, labour disputes, machinery breakdowns, riots, and shortage of material, [acts] of God or any other factors arising through circumstances beyond the control of the Supplier.’ [emphasis added]

Was Holchim ‘disrupted’ from supplying ready-mixed concrete? 9.6 The court examined the Oxford English Dictionary22 definitions of the word ‘disrupt’ and the word ‘hinder’ and concluded that they were broadly similar.23 In particular, the court concluded that both the word ‘disrupt’ and the word ‘hinder’ were triggered at some lower threshold than a force majeure clause that used the word ‘prevent’. The court observed that it was unnecessary to show that performance was ‘impossible’ in relation to a clause that used the word ‘disrupt’. However, the court observed that an increase in costs itself would be insufficient to amount to ‘disruption’ or ‘hindrance’.24 The court went on to state that whether something was a ‘disruption’ or ‘hindrance’ was: ‘best informed by considerations of commercial practicability’.25 In relation to the present case, the Singapore Court of Appeal found ample evidence that it was commercially impractical for Holchim to obtain concreting sand: 22 2nd edn, Oxford, 1989. 23 [2011] SGCA 1, per Andrew Phang Boon Leong JA giving judgment for the court at [56]. 24 Ibid, per Andrew Phang Boon Leong JA giving judgment for the court at [53]. 25 Ibid, per Andrew Phang Boon Leong JA giving judgment for the court at [56].

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9.6  Force Majeure in International Case Law (1) the Indonesian Government’s Sand Ban clearly created a difficulty; (2) the Singaporean BCA implemented a system that gave contracts like Precise Development, but not Holchim, access to their sand stockpiles. This clearly created a practical impediment to Holchim’s efforts to obtain concreting sand; (3) even if Precise Development could have obtained concreting sand on Holchim’s behalf, there was no guarantee it could secure the requisite quantities that Holchim required; (4) it was also at the mercy of Precise Developments and other contractors as to the pricing of the sand; and (5) it was commercially impractical for Holchim to obtain concreting sand from other sources/countries because clause 15 of the contract it signed required the sand to be delivered within two days of being ordered.26 Collectively, the Singapore Court of Appeal considered that these considerations constituted ‘disruption’ for the purposes of clause 3 of the contract, the force majeure clause.27

Does Holchim have an obligation to ‘take reasonable steps’ to avoid the effect of the force majeure event in order to invoke the force majeure clause? 9.7 First, the Singapore Court of Appeal considered that clause 3 was to be construed holistically such that any of the events in the clause must have been ‘beyond the control’ of Holchim for Holchim to invoke the clause.28 After conducting an extensive examination of authority, the Singapore Court of Appeal held that whether a party had a duty to ‘take reasonable steps’ to mitigate the effect of a force majeure event depended on the wording of the clause. However, they considered that this would generally be the case where the force majeure clause defined a force majeure event to be one beyond the reasonable control of a party.29 In the case at hand, the Singapore Court of Appeal were satisfied that Holchim had taken all reasonable steps to avoid the operation of a force majeure event because: (1) Holchim had offered to have Precise Development procure concreting sand from the BCA and credit back the cost of this concreting sand to Precise Development. Precise Development ignored this offer;30 26 [2011] SGCA 1, per Andrew Phang Boon Leong JA giving judgment for the court at [61]–[63]. 27 Ibid, per Andrew Phang Boon Leong JA giving judgment for the court at [62]. 28 Ibid, per Andrew Phang Boon Leong JA giving judgment for the court at [48]. 29 Ibid, per Andrew Phang Boon Leong JA giving judgment for the court at [69]. 30 Ibid, per Andrew Phang Boon Leong JA giving judgment for the court at [80].

160

Singapore 9.8 (2)

Precise Developments offer to procure manufacturing sand as a substitute for concreting sand was an empty gesture. The evidence showed that Holchim was required by law to use at least 50% concreting sand in relation to the raw materials used to produce ready-mixed concrete. Also, Precise Developments knew that they had not obtained approval from a qualified person at the time that the offer was made, to use manufacturing sand as a substitute for concreting sand. Therefore, Precise Developments offer did not give Holchim a viable alternative for manufacturing readymixed concrete. Consequently, it should have no impact on whether Holchim could rely on clause 3, the force majeure clause;31

(3) Holchim had met with other concrete suppliers and the BCA to discuss alternative suppliers. Implicitly, Holchim could not obtain an alternative source for concreting sand. Precise Development had not offered any evidence that Holchim could obtain an alternative source of concreting sand.32 In sum, the Singaporean Court of Appeal considered that Holchim could rely on the force majeure clause to excuse it from performing its obligation to deliver concreting sand to Precise Developments. A  rare case in which a court has ruled that a party could rely on a force majeure clause to excuse performance.

RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd 9.8 In RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd,33 Sato Kogyo Pte Ltd (‘Sato Kogyo’) had been appointed by the Singaporean Land Transport Authority (‘LTA’) as the main contractor to construct the Lorong Chuan Station (‘the Project’), one of 29 stations on the Mass Rapid Transit (‘the Singaporean Metro’). The plaintiff, RDC  Concrete Pte Ltd (‘RDC’), invited several contractors to tender to supply ready-mixed concrete for the Project. RDC eventually chose Sato Kogyo to supply ready-mixed concrete for the project. Sato Kogyo was to supply 70,000 cubic metres of ready-mixed concrete for the Project between 1 September 2003 and 30 June 2006. After the commencement of the Project in May and June of 2004, it was discovered that the concrete had an unacceptable amount of cube failure. On 4 July 2004, RDC instructed Sato Kogyo to suspend the supply of readymixed concrete. From this time, RDC obtained ready-mixed concrete from an alternative supplier at an increased price and re-charged Sato Kogyo the price difference.

31 [2011] SGCA 1, per Andrew Phang Boon Leong JA giving judgment for the court at [90]–[98]. 32 Ibid, per Andrew Phang Boon Leong JA giving judgment for the court at [99]–[100]. 33 [2007] SGCA 39.

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9.8  Force Majeure in International Case Law On 18 November 2004, RDC allowed Sato Kogyo to resume supply of readymixed concrete. From this time, it was undisputed that Sato Kogyo failed to supply RDC will ready-mixed concrete on 42 occasions. Sato Kogyo gave two main reasons: (1) a shortage of raw materials being aggregates and cement; (2) plant breakdowns. However, Sato Kogyo did not provide an explanation on every occasion. Sato Kogyo sought to invoke a force majeure clause in the following terms: ‘In the event of any circumstance constituting Force Majeure, which is defined as an act of God, or due to any cause beyond the supplier’s control, such as market raw material shortages, unforeseen plant breakdowns or labour disputes, the duty of the affected party to perform its obligations shall be suspended or limited until such circumstance ceases.’ Ultimately, the Singaporean Court of Appeal considered that Sato Kogyo could not invoke the force majeure clause as a defence because: (1) it had not pleaded force majeure as a defence;34 (2) Sato Kogyo could have obtained raw materials on market at a higher price. Force majeure clauses typically cannot be invoked in circumstances where it is economically more costly to perform the contract;35 and (3) there was a complete failure by Sato Kogyo to prove that the breakdown of the plant was both unforeseeable and beyond their control. As such, Sato Kogyo could not satisfy the terms of the force majeure clause.36

China Resources (S) Pte Ltd v Magenta Resources (S) Pte Ltd 9.9 In China Resources (S) Pte Ltd v Magenta Resources (S) Pte Ltd,37 by a contract dated 12  October 1991, the sellers, Magenta Resources Pte Ltd (‘Magenta’) agreed to sell the buyers, China Resources Pte Ltd (‘China Resources’) 50,000 metric tonnes of ‘prilled urea of USSR origin’. The urea was to be packed in polypropylene bags, each containing 50 metric tonnes of urea, for discharge at either the Chinese ports of Huangfu or Shekou at the designation of the buyers, China Resources. The port of loading was not 34 [2007] SGCA 39, per Andrew Phang Boon Leong JA giving judgment for the court particularly at [50]–[52]. 35 Ibid, per Andrew Phang Boon Leong JA giving judgment for the court particularly at [70], [74] and [75]. 36 Ibid, per Andrew Phang Boon Leong JA giving judgment for the court particularly at [76]– [80]. 37 [1997] SGCA 2.

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Singapore 9.9 agreed in the original contract but was later agreed to be USSR or Eastern European Ports due to possible congestion at USSR ports. Another salient fact was that China Resources wanted Magenta to put special shipping markings on each bag of urea and provide these markings to China Resources 45 days before the scheduled shipping date, failing which Magenta should effect shipment without markings or with the manufacturers’ markings. The first shipment of 25,000 metric tonnes was to be effected within 30 days of receipt of a workable letter of credit. The latest date of shipment was stated to be 30 November 1991. The force majeure clause read as follows: ‘A Force Majeure means the situation/condition being not under human control, meaning act of God, such as storms, fire, war, military action, government emergency order, stop-order of strike, transportation accident, etc. B The seller will not be responsible (for) the non-performance of this contract in case of force majeure, but, when force majeure happens, the seller must immediately send to the buyer within 30 days thereafter by registered airmail, certificate of the force majeure issued by a competent government authority at the place where the force majeure occurred as evidence thereof. C The buyer likewise, shall not be responsible for non-performance due to force majeure. In such case, the buyer shall notify the seller immediately of the force majeure and shall send the seller within 30 days thereafter, by registered airmail, a certificate of force majeure issued by a competent government authority or by the China Council for the Promotion of International Trade. D Should the effect of the force majeure continue for more than 120 consecutive days, the buyer and the seller shall discuss through friendly negotiation as soon as possible, their obligation to continue to perform under the terms and conditions of the contract.’ Magenta requested an extension until 14  December 1991 to make the first shipment of 25,000 metric tonnes of urea, and the buyers agreed. Great political changes were taking place in the former USSR, which was impacting the sellers’ ability to ship the urea. The sellers requested a further extension until 22 December 1991 to make the first shipment. This time the buyers refused. The sellers sent a fax to the buyers on 11 December 1991 informing them that they now expected to make the first shipment of urea on 17 December 1991. The sellers indicated that political upheaval in the former USSR was making shipping difficult. The sellers sent a further fax indicating that the political upheaval in the former USSR was delaying shipment, and they thought that 163

9.9  Force Majeure in International Case Law 3 January 1992 would be the earliest date on which the first shipment could be made. The fax also noted that the ‘international fertiliser community’ had accepted that the political upheaval in the former USSR was a force majeure event. By a curt telex, the buyers agreed to the shipment on 3 January 1992 but reserved their right to damages. They also agreed to withdraw their call on the performance bond and extend its validity to 8 March 1992. The sellers continued having difficulty shipping the urea. On 13 January 1992, the sellers effectively declared a force majeure event. The sellers forwarded the buyers a letter of the same date that they had obtained from the USSR embassy in Singapore that explained the political upheaval in the former USSR and that serious problems had arisen with the issue or re-issue of licences and permits for the movements of goods in the former USSR. The sellers did this in order to comply with the certification requirement in clause B above. On 14 January 1992, the buyers called on the performance bond, and the relationship between the seller and the buyer broke down. The sellers sued the buyers for a repudiatory breach of the contract. The trial judge had found that the last agreed shipping date was 3 January 1992. Therefore, the sellers were prima facie in repudiatory breach of the contract unless they could establish a force majeure event. However, on the expert evidence, the judge considered that the sellers had established a force majeure event, political upheaval, and consequent licensing restrictions to transport goods constituting a force majeure event beyond the seller’s control. Therefore, the trial judge found that the sellers were excused from the performance of the contract and that the buyers were in repudiatory breach of the contract, having called on the performance bond. On appeal, Karthigesu JA giving judgment for the Singaporean Court of Appeal held that the sellers had established a force majeure event that excused their performance. He made the following findings: (1) the last date for agreed delivery was 14  December 1991. The sellers failed to meet this deadline. The sellers had stated by fax that they expected to deliver the urea by 3 January 1992. This was not an offer, it was merely a statement of expectation. However, by agreeing to extend the validity of the performance bond until 8 March 1992, the buyers had waived the seller’s breach of contract in failing to deliver by 14 January 1992. In the absence of a further agreed date, the sellers simply had an obligation to deliver the urea within a reasonable time. However, it would be unreasonable to find that the sellers had committed themselves to shipping urea by 3 January 1992, or impliedly, that this was a reasonable time within which to make shipment. Therefore, the buyers were in repudiatory breach of the contract in calling on the performance bond when they did not have cause to do so;38

38 [1997] SGCA 2, per Karthigesu JA at [31] and [32].

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Singapore 9.9 (2) in any case, the sellers had fulfilled the requirements to invoke the force majeure clause. The Singaporean Court of Appeal agreed with the trial judge that, based on expert evidence, the political upheaval in the former USSR was a ‘war like’ situation that would generally fall within a force majeure clause. The situation disrupted transport and communications across the entire former USSR. The USSR formally dissolved on 9  December 1991, and the Commonwealth of Independent States, of which Ukraine formed part, was formed. The factory processing the urea was located in Ukraine. The urea was to be transported to Novorossisk, a Black Sea port. However, to get to Novorossisk the Crimea had to be crossed. The Soviet Black Sea Fleet was located in the Crimea. Ukraine wanted control of this fleet. However, Russia was resisting. There were increasing tensions between Russia and Ukraine, and there was the threat of war between the two. There was feuding over shipping licences; for instance, shipping licences issued by Russia were not recognised by the Ukraine, and there was generally chaos;39 (3) it was acceptable to rely on expert evidence to establish the political chaos and upheaval in the former USSR. In this particular situation, it was impractical to call witnesses from the former USSR/Ukraine;40 (4) in this particular case, there was no obligation on the sellers to explore Eastern European markets for ‘urea of USSR origin’ and arrange shipment of any such urea from an Eastern European port because: (a) they would have had all the same transportation problems in relation to the original urea they intended to ship; (b) the seller’s contract with the buyer was a cost and freight (c&f) contract. The buyers were required to insure the goods. If the sellers had managed to source ‘urea of USSR origin’ from another source, they would have had to take out insurance because it was such a large quantity of urea. However, it would be too much to expect that they should take out insurance themselves (presumably because it was too expensive). The buyers cited only authorities dealing with cost, insurance and freight (cif) contracts that were distinguishable on this particular point;41 (5) the correct reading of clause B above was that notice was to be given immediately by telex or cable of the force majeure event. This was to be followed within 30 days by a certificate issued by a competent governmental authority to support the force majeure event. The certificate was to be sent by registered airmail. Clause B above was not a conclusive and exclusive evidence provision. The sellers still had to prove the force 39 [1997] SGCA 2, per Karthigesu JA at [36]–[37]. 40 Ibid, per Karthigesu JA at [38]. It should be kept in mind that this case took place in 1997 when giving evidence by video link was less common. 41 Ibid, per Karthigesu JA at [39].

165

9.9  Force Majeure in International Case Law majeure event, which they had done. The political upheaval in the former USSR had prevented the sellers from obtaining such a certificate. In all the circumstances, a letter from the USSR embassy in Singapore was practical and sufficient to satisfy the notice provision in this case.42 Accordingly, the sellers successfully established their force majeure defence.

AUSTRALIA Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd 9.10 In Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd,43 on 9 July 2015, Ivanman Pty Ltd (the respondent) purchased a ‘Meet Fresh’ franchise from a third party operating from retail premises in Burwood, Sydney. The ‘Meet Fresh’ business was a dessert restaurant business involving the sale of traditional Taiwanese desserts, beverages, snacks, and other food products. Meetfresh Franchising Pty Ltd (the appellant) was effectively the master franchisee of the ‘Meet Fresh’ business for Australia. In turn, the appellant had obtained its head franchise from Meetfresh Australia Pty Ltd (‘Meetfresh Australia’) who had obtained their rights from Easy Way Station Co Ltd (‘Easy Way’), a Taiwanese company. The respondent had licensed all the intellectual property for the business from the appellant. Soon after it purchased the franchise business, the respondent obtained a franchise agreement from the appellant that was to expire on 31 October 2017 and also a licence from the appellant to conduct the business at the premises. In January 2016, well prior to the expiry of the respondent’s franchise agreement, the appellant required the respondent to undertake a fit out of the Burwood premises at the respondent’s expense. The appellant represented that it would not renew the appellant’s franchise agreement and licence if this was not done. Accordingly, the respondent undertook the fitout at an expense of $119,579.88. Soon after the fitout was complete, the parties entered into a second franchise agreement for five years commencing 1  November 2017. The appellant represented in the disclosure agreement that the second franchise would not be affected by any termination of the head franchise agreement between Meetfresh Australia and the appellant. Both the first and second franchise agreements contained a force majeure clause in the following terms:

42 [1997] SGCA 2, per Karthigesu JA at [40]–[41]. 43 [2020] NSWCA 234.

166

Australia 9.10 ‘39. EVENTS BEYOND MEETFRESH’S CONTROL Meetfresh [the appellant] shall not be liable to the Franchisee [Ivanman] for any loss sustained by the Franchisee caused by Meetfresh’s failure to honour the terms of this Franchise Agreement where such failure has occurred because of an event which is beyond Meetfresh’s reasonable control including but not limited to strikes, war, fire, flooding, earthquakes and other natural disasters.’ On 10 January 2017, the respondent received a notice in writing from Easy Way, with whom it had no direct relationship, advising the respondent that it was no longer entitled to use the intellectual property of Meet Fresh. The appellant nevertheless authorised the respondent to carry on business. However, when the respondent’s licence for the Burwood premises expired, the appellant refused to renew or extend the respondent’s licence and served notice of termination of any ‘holding over’ licence then in existence in relation to the franchise agreement. The respondent surrendered possession of the premises and then bought suit to recover damages for breach of contract and unconscionable conduct. In particular, it sought damages for the amount that it had spent fitting out the premises based on the expectation it would obtain the benefit of this fitout for the full term of the second franchise agreement. Robison DCJ found for the respondent. He held that the appellant was liable for breach of contract, being a breach of an implied warranty that the second franchise agreement would continue for its full term. Robison DCJ also held that the appellant could not rely on the force majeure defence largely because of a complete absence of evidence about how the force majeure event came about. Macfarlan JA, giving judgment for the New South Wales Court of Appeal, had no problem upholding the trial judge’s judgment. He made the following important points in relation to the force majeure issue: (1)

it is for the party relying on a force majeure clause to prove this defence;44

(2) the appellant had offered no evidence in relation to why Easy Way had decided to terminate its master franchise agreement for the Australian market, even though any such evidence was a peculiarity within the appellant’s knowledge. As such, it had completely failed to prove its force majeure defence;45 and (3) the force majeure clause was an exception clause rather than one that qualified the appellant’s promise/obligation to perform.46

44 [2020] NSWCA 234, per Macfarlan JA at [20]. 45 Ibid, per Macfarlan JA at [19]. 46 Ibid, per Macfarlan JA at [21]–[24].

167

9.11  Force Majeure in International Case Law

South32 Aluminium (RAA) Pty Ltd v Alinta Sales Pty Ltd 9.11 In South32 Aluminium (RAA) Pty Ltd v Alinta Sales Pty Ltd,47 the plaintiffs were participants in an unincorporated joint venture known as the Worsley Joint Venture that operated the Worsley Alumina Refinery and associated cogeneration facilities known as the Worsley Plant. The defendant was, and still is, a major supplier of natural gas to residential, commercial, and industrial customers throughout Australia. By written agreement dated 14  January 2008, the defendants agreed to sell and deliver natural gas to the plaintiffs. At that time in Western Australia, there were two main suppliers of natural gas: (1) the North West Shelf Joint Venturers (‘NWSJV’); and (2) three joint ventures collectively known as Varanus Island Sellers. The defendant obtained natural gas from both these suppliers in order to fulfil their contract to sell and deliver natural gas to the plaintiffs. On 3  June 2008, one of the pipelines that connected the Varnus Island gas facilities with the offshore gas platforms sprang a leak and exploded. The explosion also caused the breach of other pipelines that triggered a fire that rendered the plant inoperable. The plant was shut down, and supply ceased at this time. Supply was only restored in December 2008. Between June 2008 and December 2008, the defendant managed to supply gas to the plaintiffs, but less than the quantities that had been contractually agreed. The plaintiffs supplemented their natural gas requirements by buying gas and heavy fuel oil from other parties at prices higher than they had contractually agreed with the defendant. Clause 1.1 of the agreement between the plaintiffs and the defendant defined a force majeure event as follows: ‘Force Majeure means any event or circumstance not within the control of the affected party and which that party by the exercise of the standards of a reasonable and prudent person is not able to prevent or overcome including but not limited to: (a) acts of God including fire, explosion, earthquake, landslide, flood, washout, lightening and cyclones; … (g) shortages of necessary equipment, materials or labour; …; and

47 [2015] WASC 450.

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Australia 9.12 (j) failure of the participants, from time to time, or any of them in the North West Shelf Joint Venture, or any of the Seller’s other suppliers, to supply some or any Gas by reason of an event that constitutes an event of force majeure within the meaning of the gas supply contract between the Seller and those participants or any such supplier.’48 The plaintiffs made an application to strike out certain parts of the defendant’s force majeure defence because the plea that the defendants had been prevented from delivering gas to the plaintiffs was wholly conclusory. Le Miere J agreed. Implicitly, he agreed that the plea did not identify the times that performance had been prevented, it merely stated that performance had been prevented in the ‘weeks and months’ following the explosion. Moreover, it was apparent from the pleading that the defendant had gas available to it from sources other than the Varanus Island Sellers, but did not explain why the defendant could not supply this gas to the plaintiffs. Therefore, it did not make sense why the defendant had been ‘prevented’ from supplying gas to the plaintiffs. Le Miere J ordered the relevant part of the pleading to be struck out, and the defendant was given leave to replead.49

Yara Nipro Pty Ltd v Interfert Australia Pty Ltd 9.12 In the case of Yara Nipro Pty Ltd v Interfert Australia Pty Ltd,50 Yara Nipro Pty Ltd (‘Nipro’) manufactured liquid fertilisers. Nipro contracted with Interfert Australia Pty Ltd (‘Interfert’) to purchase 4,000 tonnes of prilled urea originating from Russia or the Ukraine. Interfert was to make the prilled urea available for collection by Nipro at Interfert’s warehouse in Geelong, Australia, anytime during a 180 day period starting 11  February 2008. Interfert failed to make the prilled urea available for Nipro’s collection within the 180 day period, despite Nipro pressing for performance. Nipro gave notice by way of a letter dated 30 September 2008 that it was terminating the contract because of Interfert’s failure to perform. Interfert defended itself on the basis it was excused from performing the contract as a result of a force majeure event. The force majeure clause stated: ‘Notwithstanding anything else contained in this contract, neither party shall be liable for any delay in or failure to perform any of its obligations under this contract if such delay or failure is caused by circumstances beyond that party’s reasonable control, including without limitation, fire, flood, act of God, strikes, lock outs, stoppage of work, trade disputes, loss of banking facilities, non-supply to 48 [2015] WASC 450, per Le Miere J at [6]. 49 Ibid, per Le Miere J at [34]. 50 [2010] QCA 128.

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9.12  Force Majeure in International Case Law Interfert of Product or shipping services or any act of war or terrorism. On occurrence of any such event or condition, Interfert may: (a) elect to suspend performance for such time as may be reasonable under the circumstances; (b) reduce the quantities of Product to be sold and purchased hereunder by the amount affected by such event or condition; (c) elect to terminate this contract if, in Interfert’s opinion, such event or condition may materially impair the benefits of this contract to either Interfert or Customer; (d) allocate Product called for by this contract among Customer and Interfert’s other contracted customers for such Product from the same shipment on any basis which Interfert may determine in good faith.’51 Specifically, Interfert claimed that a third party’s ‘non-supply to Interfert of Product’ was an event beyond its control. The trial judge accepted that the failure by a third party to supply prilled urea to Interfert could amount to a force majeure event within the clause above. However, she was not persuaded that the failure, in this case, was causative of Interfert’s failure to perform because Interfert had failed to demonstrate that it could not have obtained prilled urea from another source.52 The Court of Appeal agreed with the trial judge’s analysis. Fraser JA, giving judgment for the Queensland Court of Appeal, considered that, having regard to the wide wording of the force majeure clause above, Interfert should have shown that it could not obtain the goods from another source in order to rely on the force majeure clause.53 In giving judgment, and particularly on this point, he referred with approval to the authority of PJ  van der Zijden Wildhandel NV v Tucker54 that he pointed out was cited with approval in the Privy Council case of Hoecheong Products Ltd v Cargill Ltd.55

HONG KONG Regent National Enterprises Ltd v Goldlion Properties Ltd (Raiffeisen Zentralbank Osterreich AG intervening) 9.13 The decision of the Hong Kong Court of Final Appeal in Regent National Enterprises Ltd v Goldlion Properties Ltd (Raiffeisen Zentralbank Osterreich 51 [2010] QCA 128, per Fraser JA at [26]. 52 Ibid, per Fraser JA at [28]. 53 Above at note 48, per Fraser JA at [34]–[44]. 54 [1975] 2 Lloyd’s Rep 240. 55 [1995] 1 WLR 404.

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Hong Kong 9.13 AG intervening)56 is the leading common law decision on the interpretation of force majeure clauses in Hong Kong. In that case, Regent National Enterprises Ltd, the appellant, was under the control of a liquidator pursuant to certain winding-up proceedings in the British Virgin Islands (BVI). On its behalf, the liquidator entered into a contract for the sale of a building in Tsimshatsui to the respondents. The building was mortgaged to a bank that had provided finance to the appellant. Clause 13.2 of the sale agreement provided that: ‘Notwithstanding the provisions in Clause 13.1 above, the parties hereto agreed that should the Vendor become unable or fail to complete the sale and purchase of the Property on the completion date due to any matter (including and without limitation to third party action) beyond the reasonable control of the Vendor and which in the reasonable opinion of the Vendor materially hinders, prevents or obstructs the completion of the sale and purchase of the Property, the Vendor shall, within 3 business days of the date fixed for completion, return all deposits and other monies paid by the Purchaser in connection with the purchase of the Property, together with all interests accrued thereon and the actual costs incurred by the Purchaser in connection with the purchase, as full and final settlement of the Purchaser’s claim herein and (conditional upon the receipt of such deposits, interests and costs) the Purchaser shall not take any further action to claim for damages or to enforce specific performance.’57 The appellant was part of a group of companies that Mr Lau controlled. Mr Lau objected to the sale of the building and issued statutory demands to the appellant alleging that the appellant owed debts to two companies in his group, one of which was a company called Waygood Investment Limited (‘Waygood’) as well as to himself personally. Two days before completion of the sale agreement for the building, Mr Lau caused a winding-up petition to be presented on the basis of the Waygood statutory demand. On the day before completion, Mr Lau filed a further application with the courts in the BVI, making an application for leave to appeal out of time against an order made in the winding-up proceedings. On the same day, the day before the sale of the building was to complete, one of the liquidators of the appellant, Mr Lo, had flown into Hong Kong. He had gone directly from the airport to the offices of Clifford Chance, where he obtained legal advice. He obtained legal advice from Mr Korff, an insolvency partner with Clifford Chance. Mr Korff had been brought in precisely because the matter may have become contentious. Mr Korff considered that there was insufficient time to obtain advice on the merits of Mr Lau’s winding-up 56 [2009] 5 HKC 67. 57 Ibid, per Ribeiro PJ at [37].

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9.13  Force Majeure in International Case Law petition. Mr Korff advised Mr Lo that if Mr Lau were successful in overturning the winding-up petition, it was likely that the liquidator’s capacity to appoint current management of the defendant and to enter into the sale agreement in respect of the building, would be challenged. Mr Korff further advised that if the respondent proceeded to complete in circumstances where they could have exercised their right to terminate the agreement pursuant to clause 13.2 above, Mr Lo would be leaving himself open to an action in the BVI that may leave him liable to damages. Mr Lo advised Clifford Chance to write to the respondent’s solicitors the day before the building was due to complete, stating that the appellant had decided to invoke clause 13.2. The respondent refused to accept the return of the deposits it had made for the sale of the building and commenced proceedings for specific performance. At first instance, the judge considered that the appellant had brought itself within clause 13.2, the force majeure clause, and declined to order specific performance. The respondents appealed, and the Hong Kong Court of Appeal allowed their appeal. The Hong Kong Court of Appeal considered that the appellants had to show that they had ‘taken all reasonable steps’ in order to maintain that they were materially hindered in completing the sale of the building, specifically: (1) the appellant should have informed the first respondent of the BVI application and given it reasonable time to consider whether to object to the title, or alternatively (2) the liquidator was not reasonable to have acted on the legal advice received, as it was wrong as a matter of law to say that the setting aside of the winding-up order would invalidate the sale. The appellant appealed to the Hong Kong Court of Final Appeal who allowed the appeal. They made a number of findings of interest. Unsurprisingly, as with all matters related to force majeure, their findings turned on the construction of the force majeure clause in this particular case. Considering the above force majeure clause, and whether the appellant’s performance was ‘materially hindered’, the majority held that: it was not implicit that there was an obligation to ‘take all reasonable steps’ when the performance of an obligation was ‘materially hindered’; and that the event was ‘beyond its control’.58 In particular, the force majeure clause in this case, was constructed for the benefit of the appellants and could be exercised by them in the face of third party threats based on their reasonable opinion.59 However, the court did accept that a requirement to ‘take all reasonable steps’ would 58 [2009] 5 HKC 67, per Ribeiro PJJ and Nazareth and Sir Gerard Brennan NPJJ at [102] and [106]. 59 Ibid, per Ribeiro PJ at [105] and [106] with Nazareth NPJ at [155] and Sir Gerard Brennan NPJ at [156] concurring.

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Hong Kong 9.13 generally apply where a party relying on the clause had to show that their performance was ‘prevented’.60 In order to exercise their rights under clause 13.2, the appellant had to have held a ‘reasonable opinion’. The majority considered that ‘reasonable’ simply met ‘not unreasonable’, and there was no particularly stringent test of unreasonableness that had to be adopted in relation to this particular clause.61 This was on the basis that Mr Lo had been advised by his solicitor that if Mr Lau was successful in having the BVI winding-up petition against the appellant set aside, the current management’s capacity to enter into the sale agreement in relation to the building could be challenged. Mr Lo’s solicitors had been appropriately instructed based on the information available to Mr Lo.62 Therefore, the court considered that it was reasonably open to the judge at first instance to find that the appellant had formed a ‘reasonable opinion’ that the sale of the building had been ‘materially hindered’.63

60 [2009] 5 HKC 67, per Ribeiro PJ at [102] with Nazareth NPJ at [155] and Sir Gerard Brennan NPJ at [156] concurring. 61 Ibid, per Ribeiro PJ at [112] and [113] with Nazareth NPJ at [155] and Sir Gerard Brennan NPJ at [156] concurring. 62 Ibid, per Ribeiro PJ at [148] with Nazareth NPJ at [155] and Sir Gerard Brennan NPJ at [156] concurring. 63 Ibid, per Ribeiro PJ at [151] and [152] with Nazareth NPJ at [155] and Sir Gerard Brennan NPJ at [156] concurring.

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Chapter 10

Frustration

INTRODUCTION 10.1 Frustration is a common law doctrine, developed mainly through jurisprudence, originally and most extensively in English law, but has been adapted or finessed by subject matter, or situation in other common law jurisdictions; or a little by the legislator in some jurisdictions (including the UK). Finally, the doctrine is supplemented in no small measure through custom or business practice and codification of standard contracts, and through arbitral practice.

Origins 10.2 As a doctrine it represents a departure from, indeed a relegation of, the concept of the absolute obligation, encapsulated by the maxim pacta sunt servanda – ‘agreements must be kept’ – so robust in its terms that ‘when a man will for a valuable consideration undertake to do an impossible thing, though it cannot be performed, yet he shall answer in damages.’1 It is said it has its nascent origins in Paradine v Jane,2 when it was said that: ‘Where the law creates a duty or charge and the party is disabled to perform it without any default in him, and hath no remedy over, there the law will excuse him.’ Although that judgment did not establish the principle that a party may not be excused from a contractual obligation – as that is a duty created by the party, and not created by law3 – it recognised an underlying principle of discharge from a legal obligation owing to a supervening event. However, Blackburn J  is credited with establishing the cornerstone of the modern doctrine in Taylor v Caldwell:4 1 Thornborow v Whitacre (1706) 2 Ld Raym 1164 at 1165. 2 [1647] EWHC KB J5. 3 And therefore the tenant farmer was bound to pay rent on a house despite being dispossessed of the house by ‘an enemy of the king’. 4 [1863] EWHC QB J1.

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Introduction 10.3 ‘if the performance of the promise of the … bailee to return the things lent or bailed becomes impossible because it has perished, this impossibility (if not arising from the fault of the … bailee from some risk which he has taken upon himself) excuses the … bailee from the performance of his promise to redeliver the chattel.’

Development 10.3 Lord Radcliffe’s restatement of the concept of frustration in Davis Contractors Ltd v Fareham UDC5 is the culmination of accrued reasoning for the acknowledgement that the doctrine is quintessentially an application of fairness. The modern day doctrine owes its existence to the intention of the parties, the canons of construction and equality of bargaining power in an event over which neither party has any control. The progression of the doctrine is worth some insight, not least to understand that its development is as much a response to events, or an adaptation to certain activities, as it is an exercise in logical reasoning arising from stare decisis. So much so that, despite arguments for and against expansion, or restriction, through reasoning, the doctrine owes its development to the cases litigated in the aftermath of events such as King Edward’s cancelled coronation, World War II, the Suez crisis, etc. However, various theories were elaborated over the years as to how, retrospectively, the courts have arrived at the point of fairness. Initially the courts assumed the power to a term in the contract providing for the discharge of the parties, See for example, Taylor v Caldwell.6 Later that was reduced down to simply a power ‘… invented by the court in order to supplement the defects of the actual contract’.7 This was followed by the more reliable theory, which resembles the modern day justification of ‘loss of purpose’, that the foundation of the contract had disappeared.8 Along the way there has been attempted alignment with total failure of consideration or mistake, neither of which are satisfactory. The legislator has intervened in some scenarios, the statute of most general application being the Law Reform (Frustrated Contracts) Act 1943, which continues to apply today. Further, under the Sale of Goods Act 1979, s 7, an agreement to sell specific goods is ‘avoided’ if subsequently the goods ‘perish before the risk passes to the buyer’. But in the main, the modern doctrine is a product of its engagement in a variety of situations (property, carriage, goods, services, intangibles, commercial, 5 [1956] AC 696. 6 (1863) 3 B & S 8264. 7 Constantine (Joseph) Steamship Line Ltd v Imperial Smelting Corpn Ltd (‘The Kingswood’) [1942] AC 154 at 184, 186, [1941] 2 All ER 165, 70 Ll L Rep 1, 110 LJKB 433, 46 Com Cas 258, 165 LT 27, 57 TLR 485, HL. 8 Krell v Henry [1903] 2 KB 740.

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10.3  Frustration consumer) with all the variations that each situation may feature. In some of these, the jurisprudence has developed in a sophisticated and specialised way, which deserves individual attention. This may be attributable to custom or business practice. Equally regard should be had to the differences between jurisdictions. In ‘Breathing space – a Concept Note on the effect of the pandemic on commercial contracts’, published by the British Institute of International and Comparative Law (BIICL),9 there was much commentary about the need for the world to prepare for the volume of commercial cases arising as a result of the pandemic – bearing in mind the strict approach to frustration and force majeure in common law jurisdictions, and the need for new thinking involving rational and equitable solutions. It is not without some irony that the Concept Note should refer to a ‘world’ response in applying what is a common law doctrine. This chapter is confined to the common law, and regrettably the authors are not equipped to address the civil law, sharia and other systems of law. Even amongst the common law world, one must be a little arbitrary in approach. The common law is of course the main legal tradition, or has a role in the legal systems in many countries around the world, and the position in each deserves attention. The authors beg the reader’s deference to dealing with the law of England and Wales.

The modern doctrine 10.4 A  modern day definition of frustration was consolidated by Lord Radcliffe in Davis Contractors Ltd v Fareham UDC:10 ‘[F]rustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.’ The modern doctrine of frustration of contract involves testing whether a promisor should or should not be held liable in contract for non-performance of a contractual obligation that cannot be performed to put the promissee in the position intended, by reason of a supervening event outside the parties’ control that in all fairness should mean that the contract shall be deemed discharged, and, in which case, determining where losses or gains should be fall, or if they should be given up, shared or compensated for. 9 See https://www.biicl.org/projects/breathing-space-concept-notes-on-the-effect-of-thepandemic-on-commercial-contracts. 10 [1956] AC 696.

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Introduction 10.4 As a doctrine the whole is greater than the sum of its parts, although each part bears the weight of the entire doctrine; that is to say, if any part fails then the doctrine is disapplied. In simple terms the key element is a non-culpable reason for non-performance. It is juxtaposed against numerous other contractual doctrines, of which validity, performance, mistake, and equity appear most often. In this regard, the parties may have expressly addressed the prospect and impact of a frustrating event, either generally or specifically. This involves, but is not limited to, all the connotations of a force majeure clause, which is a study in itself, but entire, choice of law, and dispute resolution clauses, conditions precedent and subsequent, and implied clauses all touch on the issue. The commonplace use of force majeure clauses has led to codification, in standard terms, that have mostly been debated through arbitration. In both individualised and codified it is first a question of construction, and then application of the agreed term, failing which the doctrine may then be applied. The reason that purportedly frustrates the contract is identified by a study of cause and effect. The key requirement in connection with cause and effect is that the frustrating event is outside the control and contemplation of either party, or sufficient so to qualify. This may be difficult to identify where the factual matrix is a mix of frustrating event, breaches of contract, and what was or was not represented or in the contemplation of the parties prior to contract. In every context, it is necessary to understand what was bargained for, what was agreed, and the end result intended by performance. The main causes of frustration may be categorised as: illegality; impossibility; impracticability; or loss of purpose. It would be incomplete and incorrect to suggest that all frustrating events result in an impossibility of performance. Certainly, this will be true in the case of unavailability or destruction of the subject matter, which, if central to performance, will literally render it impossible as intended. Whereas, when performance is (merely) affected by illegality, loss of purpose, or impracticability, it may still be possible. This demonstrates that what one is assessing is whether the event qualifies as a frustrating event. If the contract is truly frustrated, then the sole effect is automatic and total discharge. Such remedies as arise thereafter will either stem from subsequent events, representations, actions or omissions, or concern unpicking the contract and dealing with the consequences of discharge on the parties. The consequences must be understood and followed through whether absolutely or partially, depending on whether anything was agreed or is implied, or is or has become necessary, or is equitable in the circumstances, to determine loss allocation. This chapter will remind what performance of a contract entails, which will bring about discharge as the parties intended. It will then consider the supervening event, which is the act which is purportedly unforeseen or (even if 177

10.4  Frustration foreseen as a theoretical possibility) unexpected, and becomes – or is perceived by one or both parties as – an impediment to performance. Consideration will be made of the three types of supervening event that may give rise to application of the doctrine. These events are examined in the order of: (a) frustration of purpose; (b) illegality; and (c) impossibility, as being a logical sequence that is steadily (if merely marginally by degree) less concerned with the intentions of the parties. Impracticability will not be separately examined on the ground that it will be absorbed as an adjunct to frustration of purpose or impossibility. The doctrine of frustration applies in general to all types of contracts and, inter alia, to the following: personal contracts; building contracts; charterparties, including time charters frustrated by government requisition or act of state; contracts for the carriage of goods by sea; contracts for the sale of goods, whether avoided by statute or otherwise; the hire-purchase of goods; and perhaps even leases and sales of land.

PERFORMANCE OF CONTRACTS 10.5 Whilst both frustration and performance are methods by which a contract is discharged, both require, or as abstracts, assume the existence of, a valid and enforceable contract. The contract must be one that has been properly concluded, by way of offer and acceptance, between parties having capacity to do so, and an intention to create legal relations, with valuable consideration (when required). These are elements that may require individual consideration in relation to frustration as much as performance, as they will colour what the parties have bargained for, and therefore what the purpose of the contract is. Frustration is the antithesis of performance. It is because a contract is frustrated that it cannot be performed. It follows therefore that a performed contract cannot be frustrated. A contract is performed when all its obligations are discharged, according to its terms if need be, in the time, place or manner specified, or to the satisfaction of one or both parties, or on the occurrence of a specified event, which stipulations are measurements of performance and therefore may or may not determine whether an event frustrates the contract. Those terms may be characterised as conditions or warranties, which are either precedent or subsequent to other terms. In this regard the consequences of frustration may be compared similarly to treatment of conditions and warranties that are not performed. First there are fundamental obligations that go to the heart of what the parties bargained for, the non-performance of which may cause the losing party to contend either a total failure of consideration or a fundamental breach of contract and entitle them to treat the contract as repudiated. In these instances that party may wait for performance, or treat the contract as at an end and sue 178

Performance of contracts 10.5 for damages to put them in the position as if the contract had been performed. Second are minor obligations, the non-performance of which will only entitle the other party to damages, in what is often characterised as a partial failure of consideration. Between the two the value of performance may be assessed on a quantum meruit or quantum velebant basis. In this regard, in relation to frustration of a condition or warranty, the consequences are similar. That is to say, an intervening event may affect performance of a fundamental obligation (and by implication all conditions subsequent) or of, say, a subsequent warranty, where the condition precedent has been performed. In either case if the intervening event is sufficient to prevent performance then it will qualify as sufficient to discharge the contract by frustration. Performance of a contract leads to discharge, and the contract is at an end. There is no recourse in respect of a discharged contract. That is not to say that discharge may not preclude voiding the contract on grounds of mistake, misrepresentation, or fraud. In these instances, the discharged contract is put back ab initio, and the parties into the position as if the contract had not been concluded. But to claim a breach of performed contract is to contend that the contract is not discharged. The common law will not save a party from the perils of a bad bargain. Thus a constant conundrum for the court is whether it should accede to any means of preserving the integrity of the contract so that it may be performed and not discharged, and eschewing or mitigating the deleterious effect of a supervening event, which but for the intervention of the court could be rendered frustrated. This often occurs in the case of partial or temporary impossibility. A case in point is when a method of performance is prescribed in the contract or anticipated by the parties but cannot be performed by that method for one of the recognised reasons, arguably rendering it frustrated. However, the question for analysis in these instances is whether an alternative method of performance ought to be imposed to redefine the obligation, so as to avoid frustration. Strictly speaking, an obligation that was agreed, not performed, but waived, does not (if the remainder of the contract is performed) result in discharge by performance, but discharge by way of accord and satisfaction. Whereas an amendment to the contract terms, say in the case of an unperformed obligation, does not discharge the contract, even by way of accord and satisfaction, but alters the terms of performance against which one determines if the contract has been performed and therefore discharged. An express term that has a peculiar status in this context is a force majeure clause. Technically it is condition subsequent to a specified event which defines the rights and obligations of the parties thereafter, usually to waive performance, but also to settle liability. For example, if X happens then P is discharged from Y, thus overwriting the consequences of frustration. But, whilst it purports to deal with frustration, counterintuitively, when the force 179

10.5  Frustration majeure clause is engaged according to its terms then arguably the contract is discharged through performance. If the force majeure clause becomes redundant (for whatever reason) then the doctrine of frustration will be applied, subject to all the arguments for and against its application. Finally, there is a tension between frustration and performance in the case of impossibility relating to a circumstance prior to conclusion of the contract. Frustration is concerned with intervening events following the conclusion of the contract and prior to performance of the obligation in question. This is narrower in scope than the wider scenarios where contracts are proved impossible to perform from the outset because a required element is missing. These instances could be treated as an issue of common (or sometimes unilateral) mistake and not frustration, and the consequences can be different, because of the more complicated tests for mistake. The tension between the two reduces somewhat in that some kinds of impossibility will not discharge the contract at all, whether before or after conclusion of the contract; ie frustration will not be available. The situation is similar in relation to an illegal contract. In these instances, the contract is invalid, and cannot be enforced by either party, or in consequence cannot be deemed to be frustrated. The tension is whether the contract is illegal.

SUPERVENING EVENTS 10.6 A supervening event is, in relation to a contract, one that takes place after the contract has been concluded and falls to be performed. It is, if the doctrine is to apply in any meaningful way, an event that is not provided for or contemplated by the contract or in the anticipation of the parties. A known or expected event, for the sake of distinction, forms part of the factual matrix of the contract. All other events are either antecedent, and may form part of the factual matrix, or subsequent to discharge and in the main will not be relevant at all. The three main types of supervening event recognised by the common law as may lead to frustration are illegality, impossibility and impracticability (or loss of purpose). They are different from each other and do not overlap, although possibly an event could be categorised twice for different reasons, and in this way they are not mutually exclusive. Illegality depends on the objective application of the legal system and legislation, resulting from a change in the law or the interpretation of it. Impossibility usually depends upon a new factual circumstance. Impracticability or loss of purpose turns on a change of circumstances which renders performance neither illegal nor impossible but fatally undermines the bargain struck (ie  for the sake of argument, the assumptions upon which it is made). Some events, often attributed as types of supervening event, such as unavailability, destruction, change in status, death or incapacity, cancellation, 180

Supervening events 10.6 etc may justifiably be treated as discrete in certain situations, but in the main are a form of illegality, impossibility, or loss of purpose. Common amongst nearly all types of supervening event is that there is a change of law, fact or assumptions extant at the time the contract was concluded. And it is trite but an oversimplification to say that a change is something that alters the factual matrix extant at the time the contract was concluded, since a supervening event could relate to a known fact, or it could be something that was never contemplated. In the case of contracts that are not exhaustively, or even not extensively, in writing, the factual matrix will in part come from what was in the joint contemplation of the parties, and the surrounding circumstances, which may be difficult to elicit except by way of trial. Equally the court will be concerned if the supervening event was foreseen or foreseeable, crucially, not just by one party but by either party. This distinction, especially in the latter case, is likely to prove controversial, but it is because an event is foreseen or reasonably foreseeable by one party that may suggest that it is not an event that ought to frustrate the contracts. Except in the case where there is or was some duty of disclosure, or misrepresentation, then ignoring the foreseeable because it was not in the joint contemplation of the parties could too easily allow a party to escape a bad bargain. However, if a supervening event was in the joint contemplation of the parties as being foreseeable, then it may be that the court ought to imply a force majeure type clause, in place of the doctrine. For example, if X happens then the parties agree to abort the contract. Yet, ultimately, and fundamentally, a supervening event, even one that may have been foreseeable, satisfies the test for frustration if the illegality, impossibility, or impracticability renders performance nugatory or that the key obligation falls into desuetude. This is measured by what was agreed, and thereafter what must or can be done to put the parties in the position they intended, or particularly what remains to be done. In terms of what was agreed, contract terms may specify innumerable preconditions by which performance will be assessed as being discharged, for example: dates; timelines; persons; methods; routes; sources; destinations; formats; addresses; content; etc. The doctrine requires that these conditions are at least fundamental, and not honoured in the breach (in which case the manner of discharge will be by breach and not frustration). Thereafter the importance of a condition in the contract will be relative to performance. Thus, if the presence or absence (as the case may be) of a pre-condition renders performance as impossible, illegal or impracticable by any contemplated means bargained for, then the contract ought to be frustrated. There is no particular measure of impossibility, illegality or impracticability. Objective measurement to some standard or expectation of such objectivity has not usefully helped the courts. The contract may be capable of being performed, or it may not be capable of being performed. The courts may relent in the case of a temporary supervening event, particularly in the case of illegality. 181

10.6  Frustration Where there has been partial performance, by one or both parties, then assessing whether the supervening event defeats contractual performance becomes problematic if there has been a passing of risk, wholly or partially. However, where the courts have had to deal with risk then it is not in simple terms following a line from supervening event to complete frustration ab initio; instead the courts will be found engaged in managing the consequences of the supervening event when putting the parties back into their original positions is itself an impossibility. In this way, the bulk of cases concerning frustration involve managing the consequences of frustration and not the immediate effect on the contract. The treatment of some types of supervening event with regard to particular types of contract has evolved over the years, for example, with leases of land, shipping contracts, building contracts, sale of goods, or, uniquely, in England and Wales, by statute to decide the consequences of certain contracts, prompted by the outbreak of hostilities with Germany and the Axis powers in 1939.

FRUSTRATION OF PURPOSE 10.7 Frustration of purpose, as a supervening event, emerged in the enduringly charming series of cases arising out of the postponement, owing to illness, of King Edward VII’s coronation in 1937. It has been applied to other scenarios, and the principle that emerges from them is that when purpose is frustrated, the supervening event does not render performance impossible or illegal. In fact the contract could yet still be performed, but a fundamental element of the premise upon which the parties entered into the contract is no longer extant, such that if the parties have their time over again the contract would not have been concluded. Thus it may be imagined that, of the three types of supervening events traditionally recognised as grounds for frustration, frustration of purpose, or impracticability, is the most contextual if not subjective. In application it requires an appreciation of what was bargained for. The bargaining theory of contract does not have universal application, but in the case of impracticability or frustration of purpose, it plays an instructive and illuminating and practicable role. By understanding what was bargained, one can entertain the reason for the contract, in a vein similar to cause or causa doctrine in civil law codes, that is to say the legal reason for the contract, without which a contract may not be enforced. In the common law, cause is displaced by consideration, working in harmony with intention to create legal relations. It is said that this is why a peppercorn can be adequate consideration in common law, and necessary, whereas in civil law, being solemnly bound to a joint cause is the minimum requirement. Purpose infers objective as opposed to objectivity, and there must always be an obvious objective for the contract, which is crystallised within the bargain. The 182

Illegality 10.8 bargain is identified in the course of contracting, it is not purely synonymous with the consideration passing, but equally manifests from the intention of the parties, if not from the written terms, as to what is in their joint contemplation. Thus purpose is an inherently subjective or contextual element just as intention to create legal relations in the formation of the contract. In this way what was bargained for enables the court to identify if a supervening event that does not result in impossibility or illegality is sufficiently impracticable such that the parties will not get what they bargained for, and hence the purpose of the contract has been frustrated. Consideration may have passed (and risk) but the contract has not yet been wholly performed as agreed, and the parties will not be put in the position as jointly contemplated and intended. Hence the most difficult cases to decide in applying the doctrine of mistake will be frustration of purpose because it depends upon determining the joint intention of the parties. It is appropriate to mention mistake in this context. Mistake invalidates a contract whether it is committed by one party (unilateral mistake) and more than one (common mistake) but in each case if certain conditions are met. Mistake contrasts with frustration in that the error of fact (or event) was extant or occurred prior to conclusion of the contract, whereas with frustration the material ingredient that causes performance to fail occurs after conclusion of the contract. With mistake the contract could never be performed on the basis as intended and agreed. It may particularly be contrasted with frustration of purpose because the discovery of the mistake, necessarily after the contract was purportedly concluded, makes performance impracticable.

ILLEGALITY 10.8 Supervening illegality is unusually irregular in its scope and definition. In its purest form it describes the circumstances when performance of an obligation that was lawful when the contract was concluded becomes illegal when it falls to be performed. However, when this central theme is mixed with the variations that arise in practice, cross-over with all the other concepts being dealt with can be found: impossibility; impracticability; breach; and force majeure. Frustration by reason of illegality starts with the premise that performance is or was legal at some point. Certainly, the contract must be concluded with the object of performing an act that is lawful. It does not apply to the contract which is entered into with the object of committing an illegal act. Such contracts – or at least those where the obligation is unlawful – are contrary to public policy and enforceable per se. Where a type of contract is prohibited by statute then it is wholly outside the remit of frustration, in that it could never lawfully be performed. However, where a particular obligation is unlawful, within a contract that is not otherwise prohibited by statute, then there may be some 183

10.8  Frustration introspective analysis as to what the joint or unilateral intent of the parties was at the time to determine if any part of the contract is able to survive. But there are various grades of illegality. The paradigm scenario is an act that constitutes a criminal offence punishable by a fine or imprisonment. A statutory prohibition can also amount to a supervening illegality notwithstanding that semantically a breach would more commonly be described as being unlawful (with or without a penal or fiscal sanction) as opposed to illegal. The cross-over between illegality and unlawfulness extends to acting without authorisation in relation to activities that are regulated (or become regulated). There is a distinction to be made where the contract entered into is neither unlawful, nor is there an intent to act unlawfully, but where an obligation is performed unlawfully. In these circumstances frustration may yet have a role. Theoretically supervening illegality should not be limited to positive acts. It ought also to include an omission, that is to say an agreement not to perform a certain act that a party is entitled or permitted to do, if for instance the act in question becomes a public duty to discharge an obligation. Finally, there are common law duties the breach of which entitles the victim to compensation. Technically unlawful, in that the rule of law does not permit the tortfeasor to avoid the consequences of their actions, they are not illegal. Generally they would not be supervening events if the breach occurs within the same contract said to have been frustrated, as the remedy is damages and not frustration. If they occurred in a related or collateral contract, then the event may cause performance to be impossible or impracticable. In some instances, they may qualify as illegal if they are reinforced by court order. In this context, one should also contemplate certain clauses that – when compared to impossibility and impracticability – are treated differently, indeed uniquely, in relation to illegality, because they are often wholly or partly within the contemplation of the parties, yet they can amount to frustrating events. First, severability clauses, that is to say a clause that directs that if any provision of a contract is (the situation of relevance here) illegal, invalid or unenforceable then it shall not affect the validity of the remainder of the contract, thereby severing the offending clause. In species they can be considered a form of force majeure since they operate to deal with a scenario that would otherwise fall into the doctrine of frustration, and thereby enable the contract to be performed. The issue then becomes whether the application of that clause negates the supervening illegality. Similarly, one needs to consider contracts involving obligations that are unlawful at the time they are agreed but concluded in the expectation that permission or authorisation will be received, for example, obtaining planning permission or a licence. These are archetypal cases of antecedent illegality, but invariably do not discourage contracts from being concluded. Where the necessity to obtain permission is an express or implied obligation, the failure to obtain it will 184

Impossibility 10.9 constitute a breach. However, where the contract is premised on an expectation that authorisation shall be obtained – this being a condition precedent to other obligations – but is refused, then by definition, an event not provided for in the contract has caused the contract to be frustrated but was always unlawful. The dichotomy here is whether this creates an impracticability, as opposed to an illegality, and whether representations that were made gave rise to a reliance. Prudence indicates that the parties will contemplate what happens if the expected authorisation is not forthcoming, which will have a bearing on the scope for frustration in a similar fashion to frustration of purpose, such that the contract is not frustrated by way of supervening illegality. Yet if a stricter regime refusing authorisations has been introduced as a matter of policy rather than legislation, and as such no thought has been given to it, then the contract must be discharged by one manner or another, and frustration by illegality would fit. Finally there is the question of whether the change in law results in an inability to perform the contract by reason of illegality. Contracts that may be performed in a different way, or may be performed at a later time (in the case of temporary illegality), or those that result in partial illegality, may not qualify for frustration. This issue depends upon what was bargained for, and whether the prescriptions as to time, method, circumstances, ancillary events and conditions are sufficiently stipulated in the contract to render performance as conceived by the parties illegal.

IMPOSSIBILITY 10.9 Supervening impossibility is the classical and most nuanced frustrating event, but counterintuitively it is not a common law rule, as it is with illegality. Whether impossibility will result in discharge depends upon the terms and conditions of the contract in relation to risk, and risk can often depend upon purpose, and in this way the line between impossibility and purpose may be blurred. It is typified by the death of the party who has contracted to perform a personal service, or the destruction of a property that was under contract of sale. Both these examples self-evidently demonstrate that performance has become not just impracticable or more costly but impossible, such as to put the parties in the position that was intended. It does not cover situations in which a person had already died or the property is non-existent. These are situations which are governed by the common law doctrine of mistake. To qualify for supervening impossibility there must principally be a ‘thing’ – a chose – or a person that characterises performance of the contract, such that it was jointly intended that the chose or person may be the very subject matter of the transaction. The chose or person must at least be essential to performance. It or they may also give shape or substance to the purpose of the contract, 185

10.9  Frustration but strictly speaking supervening impossibility would only lead to frustration where the purpose remains valid and wanted but cannot be achieved.

SPECIFIC CONTRACTS 10.10 The following paragraphs are concerned with how the courts have applied (or differentiated from) the normal principles of frustration to particular classes of contract.

‘In-person’ contracts or obligations 10.11 In this category there are two sub-categories: corporeal; and incorporeal persons, recognising that ‘in-person’ may theoretically stretch to both natural and legal persons. In the case of corporeal or natural persons, it is common place for contracts to require performance by a named and living individual. Classically these contracts will be entered into ‘in-person’, but for present purposes the scope includes any contract in which there is an obligation to discharge by a natural person, corporeally and in person, such that on death, for instance, the obligation is impossible to perform as envisaged. Contracts of employment, personal service (such as an apprentice or personal assistance), of agency, of service, to deliver goods that are individually created by a person (for example, works of art), or to undertake an activity (for example, a theatrical performance) fall into this category. There is an extensive overlap between the category of in-person contracts envisaged in the context of frustration and the common law doctrine making contracts unenforceable if the service is personal in nature. The two are not the same. In-person contracts are unenforceable as a matter of policy, whereas they become discharged by frustration as a matter of common law. Practically the distinction barely resonates beyond observations since they both serve the same principle that personal promises are individual between promissor and promissee and non-assignable. This does not mean that the death of a person will result in frustration, or that corporeal parties may not provide for certain eventualities on the occasion of a frustrating event. However, the present category is potentially much wider since a contract concluded between several natural persons and or legal persons or a mixture of both, which depends upon the personal and corporeal performance of one person who is a third party, that becomes impossible or illegal may nevertheless have the result of frustrating the contract. In the context of frustration, the concern is usually frustration by impossibility occasioned by unavailability of the person due to death. Yet, an in-person obligation may become impossible owing to injury, loss of mental capacity, 186

Specific contracts 10.12 loss of capacity (to attend to one’s own affairs), imprisonment, or removal from the jurisdiction. Performance may alternatively become illegal in the case of authorisation, disqualification, or injunction, being distinct from cases when the obligation itself is illegal. In all these scenarios, although perhaps least of all in cases of death, injury and capacity, the contract may not be rendered frustrated if the individual concerned has caused (or not prevented) the reason for the impossibility or illegality. In cases of death, injury or incapacity, legislation may intervene to regulate the consequences of an intervening event. By analogy, a legal person is an incorporeal entity, created and recognised by law as having been conferred with legal personality. The equivalent is the dissolution of a company or partnership.

Building and construction 10.12 There is a discrete body of jurisprudence adapting the doctrine of frustration to building and construction contracts, in relation to the transfer of risk. Construction is a multifaceted, prolonged, and dynamic activity vulnerably exposed to the vagaries of natural phenomena and human error, with potentially calamitous and expensive consequences, not least destruction. Building contracts are often in lengthy, standard form, which invariably provides that in a ‘new build’ contract, risk stays with the contractor in respect of the works until substantial completion, whether that is done in parts or phases or on a final single event. Smaller projects (single dwelling constructions, etc) would probably be the same by dint of implied terms and the presumed expertise of the contractor. Where work being done is to build an extension to an existing structure, then the risk is usually divided between the parties, with the employer retaining risk in relation to the existing structure unless there is an express transfer to the contractor. Thus, the common scenario is that if, for example, the partially completed structure is destroyed by fire, the contractor’s obligation is not discharged, but not by applying the doctrine of frustration. What the jurisprudence has identified is that, natural and extraneous phenomena aside, this is improbably in consequence of a supervening event in the classical sense being beyond the control of the parties and more likely due to negligence of the contractor (for instance in not properly preparing the ground or exercising due care and skill) or a misrepresentation of the employer. This being the case, this jurisprudence is not developing on the basis of where the risk lies in consequence of frustration, but affirming the liability of one party to another along the lines of conventional contractual principles. In these cases the exact range of circumstances in which risk (or liability) stays with the contractor is a matter that must be determined from the factual matrix. 187

10.12  Frustration What this leaves over are two types of events that one may more accurately describe as supervening events to be assessed within the doctrine of frustration: (1) Natural phenomena (acts of God) and extraneous manmade events beyond the control of the parties (for example, terrorism, vehiclebuilding collision, domino-type destruction, etc) which, importantly, are uninsured. If the contract is silent on these events being insured then, possibly, they are not in the contemplation of the parties, in which case why should the contractor bear the risk of them? (2) The circumstance where destruction, attributed to the negligence of the contractor, or where liability falls on the employer for a misstatement, results in the unforeseen event that the land is unsuitable for performing the contract again. For example, land is toxically damaged in the process making it impossible to be used for many years or bear the weight of the development. There is a diversion in reasoning between US and England/New Zealand jurisprudence, and in particular whether it should extend to an antecedent event, but there appears to be a settled consensus that the contract should be discharged by frustration on grounds of impossibility. This would likely be the outcome where work to an existing building becomes impossible before the existing is destroyed or is damaged beyond repair. In some cases, when extending a property, it is difficult to assess whether the work to be done is part of the new build or work to an existing property. Often these cases turn on their own facts. The chose or person need not be unique or valuable, but it or they should be individual and necessary, not particularly by any objective standard, nor peculiarly material to one party or the other. The chose or person should be identifiable from the terms of the contract, such that it would become obvious to a bystander that the bargain was struck, and the contract is due to be performed, using, or deploying or involving the agreed chose, or by or in relation to the agreed person, and without it or them the contract falls into desuetude. This implies that the chose or person is described with sufficient precision to render it individual and necessary, which may be ascertained in the normal manner that terms of a contract are identified by express term, or by implication, custom or usage. Within its broad parameters it is the most nuanced form of supervening event because not every incidence of impossibility (death and destruction included) may bring about discharge of the contract. There are some events that are pretenders to supervening impossibility, and there many more examples of particular types of contract which do not qualify. For instance, the partial destruction of the subject property, or the unavailability of a particular (but not essential) person at the time required, or either of these but for a limited period of time (temporary unavailability). These will not 188

Specific contracts 10.12 automatically qualify as frustrating events. But they may qualify, if they pass a threshold, based on risk, that applies in relation to impossibility of events, and much less so with illegality and frustration of purpose. The litmus, but not complete, test of whether a contract is frustrated by reason of supervening impossibility is whether the contract can be specifically performed. Specific performance is an equitable remedy and thus not one a common law doctrine would give way to. It is not routinely applied in jurisprudence on frustration, if frustration is not raised as a defence to a claim of specific performance, because many cases may turn on the issue of risk, not the simple test of performance. Further, specific performance is not the antithesis of frustration if damages should be granted in lieu of an order. But the reality is that a contract cannot be frustrated if it can be specifically performed even if, on an equitable assessment, it should not be ordered, and damages is the appropriate remedy and should be granted in lieu. Therefore, if a contract cannot be performed, it can be frustrated, but whether it will be discharged may turn on the incidence of risk. The concept of risk means responsibility and liability, which may or may not coincide with ownership. Certainly where there is a transfer of ownership then the risk should pass at the same time. But in any case, the neutral questions are: (1)

Did one or other of the parties bear a risk (including one that is transferred) that has been ‘frustrated’ by impossibility?

(2)

If so, is there any reason why they should not suffer the loss that attaches to it?

This has a resemblance to the bargain test inherent in frustration of purpose, in that the bargain in a contract of sale may be the expectation that the seller (S) realise a cash profit from the sale, and the purchaser (P) the full premium value transferred. In truth this may have been in the joint contemplation, but it would hardly be said to be the purpose of the contract. For example, a share sale agreement where S agrees to sell shares in NewCo to P at a fixed price on a certain future date, with S, who does not yet own the shares to sell, hoping that the shares will reduce in value sufficiently to purchase and then re-sell to P thereby making a profit. The shares are acquired by a third party or the company dissolves. The contract is impossible to perform, but this ought properly to be a risk that S ought to bear, and S should not avoid the consequences of their own actions. The treatment of risk can vary by contract, and a retention of title clause will come under scrutiny as to whether it covers the event giving rise to impossibility. Jurisprudence (or legislation) has developed slight variations in the sale of goods, land, personal service, and to some extent in the area of shipping. In some jurisdictions, statute may regulate aspects of supervening impossibility, particularly in relation to goods, either generally or in particular sectors, for example carriage of goods by sea. The nuances proliferate when 189

10.12  Frustration the goods in question are specifically defined, or unascertained but sold by description, are an undifferentiated part of a bulk order. Where, however, goods are sold and delivered to the buyer, but before payment they are destroyed, as a general rule, so long as risk had passed to the buyer, then the destruction of the goods would not be a supervening event, as all that has yet to be performed is payment. It may be different if delivery at the point of destruction is partial, but payment has fallen due; risk has not passed and it falls then to determine whether the part destroyed is a supervening event, by reference to terms and intention. Impossibility also varies in application with regard to land, land upon which development has taken place, or not taken place, or indeed is due to take place or has been destroyed. Classically ownership of land, and therefore risk, passes on conclusion of the (necessarily) written contract of sale. But this category is also concerned with contracts of service on the land, such as construction, repair, or retention or improvement of, or excavation into the land. In these cases there will be a clash of principles, and so the transfer of risk may be varied if there is an associated service contract constituting a condition precedent to a transfer, such that the vendor promises to convey land having first developed an office, obtained planning permission, or made good a dwelling on the land to an agreed specification. In the case of service contracts, the risk in the work remains with the contractor until completion. But otherwise, unless there is a personal service element or a unique element that characterises a contract of service (for example, restoring an antique, picture or building) then such contracts are less likely to be frustrated if a service, affected by an intervening event, may be repeated. Where the artefact or building is lost or destroyed, then the contract may be frustrated. A  contract of personal service is the classic paradigm of an unenforceable contract, and equally classically, a contract that is typically frustrated for impossibility in the event of death, incapacity, or unavailability (see para 10.11 above).

CONSEQUENCES OF FRUSTRATION 10.13 In most situations, the consequences of discharge by frustration of a contract governed by English and Welsh law is regulated by the Law Reform (Frustrated Contracts) Act 1943 (LR(FC)A 1943). The LR(FC)A 1943 applies to every contract which results in discharge (albeit June 1943) by frustration. ‘Frustration’ as a concept or doctrine is expressly used, although not defined. Contracts expressly excluded by the Act are:11 11 Law Reform (Frustrated Contracts) Act 1943, s 2(5).

190

Consequences of frustration 10.13 (a) charterparties (other than time charterparty or a charterparty by way of demise, or to any contract (other than a charterparty) for the carriage of goods by sea; or (b) to any contract of insurance, save as is provided by the LF(FC)A 1943, s 1(5); or (c)

to any contract to which the Sale of Goods Act 1979, s 7 applies, which provision avoids contracts for the sale of perishable goods which perish before the risk has passed to the buyer, or where the contract is frustrated by reason of the fact that the goods have perished.

In essence, where the LR(FC)A  1943 applies, there is a right of recovery (restitution) save for value received, but preference is to be given to either an agreed solution to frustration or severance (if possible) of the part that has been fully performed. Where any contract contains any provision which applies (or would apply) in the event of circumstances resulting in the discharge by frustration, then the LR(FC)A 1943 may only be applied to such extent as appears to the court to be consistent with the said provision (s 2(3)). Next, the court should sever any part of the contract that can be. Where, at the time of discharge, part of any contract has been wholly performed, other than payment for it which is fixed or can be ascertained under the contract, that part of the contract shall be treated as a separate contract and had not been frustrated and shall apply the LR(FC)A  1943 only to the remainder of that contract. The remainder of the contract (or all of it if none can be severed) is regulated by the LR(FC)A 1943, s 1. Section 1(2) provides that in consequence of any supervening act of frustration resulting in discharge: ‘All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged (in this Act referred to as “the time of discharge”) shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable: Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in, or for the purpose of, the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.’ This permits the recovery of money even where there has been no total failure of consideration, subject to a discretionary power of the court, when just, 191

10.13  Frustration to allow the payee to retain all or part of the sums paid in respect of outlay incurred and paid in performance of the contract. Where though the party seeking recovery has obtained a valuable benefit, from the other party, in performance of the contract, then the amount recoverable is reduced by the value of that benefit (see LR(FC)A 1943, s 1(3)); in effect the payee is entitled to the value of his performance up to the point of discharge. In this regard the court is to take into account: ‘(a) the amount of any expenses incurred before the time of discharge by the benefited party in, or for the purpose of, the performance of the contract, including any sums paid or payable by him to any other party in pursuance of the contract and retained or recoverable by that party under the last foregoing subsection, and (b) the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the contract.’ This balancing exercise may be extended to take account of a benefit received by a third party, albeit pursuant to the contract itself (LR(FC)A 1943, s 1(6)). It is further regulated by allowing the performing party a measure of recovery against overhead expenses apportioned to the work or services personally performed for the paying party (LR(FC)A  1943, s  1(4)). But a court is to exclude any sums recoverable under a contract of insurance indemnifying non-performance, unless there was an obligation to insure under the contract (LR(FC)A 1943, s 1(5)). The common law position (outside the scope of the LR(FC)A 1943) divides between cases of total or partial failure of consideration. The general rule is that money paid under a frustrated contract was recoverable where the consideration had wholly failed. This was the House of Lords decision in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd,12 which led to the LR(FC) A 1943. This leaves an earlier common law rule in place for partial failure of consideration, which is that any losses lay where they fell.

12 [1943] AC 32, [1942] 2 All ER 122, HL.

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Index [All references are to paragraph number.]

A abandonment of right waiver of notice 7.15 acquisition agreements material adverse effect clauses burden of proof 8.10 ‘carve-out’ clauses 8.12, 8.16 case law 8.9 exceptions to ‘carve-out’ clause 8.16 generally 8.8 materiality 8.11 meaning of ‘industries’ 8.13–8.15 act of authority force majeure events 3.9 act of God force majeure events 3.14 frustration of building or construction contracts 10.12 allocation of risk performance dependent on third party 5.4 alternative sources of supply preventing, hindering or delaying performance Cattle Food Trade Association contracts 4.8 Grain and Feed Trade Association 100 form 4.9 ambiguity contra proferentem rule 2.12 waiver of notice 7.18 asset purchase agreements see acquisition agreements Australia case law 9.10–9.12 B beyond reasonable control foreseeability 5.10 introduction 5.1

beyond reasonable control – contd negligence of party introduction 5.2, 5.7 prevention principle 5.8–5.9 performance dependent on third party case law 5.4–5.6 generally 5.2–5.3 building contracts frustration 10.12 burden of proof exclusion clauses 6.5 force majeure clauses 6.6 material adverse effect clauses 8.10 business common sense meaning of 2.3 C Canada case law 9.2–9.4 Canada Steamship principles contractual interpretation 2.13–2.14 capacity frustration of in-person contracts 10.11 ‘carve-out’ clauses material adverse effect clauses 8.12, 8.16 causation common sense approach 6.2 exclusion clauses burden of proof 6.5 generally 6.4 two causes of equal efficiency 6.9 force majeure clauses burden of proof 6.6 generally 6.3 judicial consideration 6.7 two causes of equal efficiency 6.8 introduction 6.1 two causes of equal efficiency 6.8–6.9 clarity waiver of notice 7.18

193

Index common law frustration 10.3 notice 7.3 common sense causation, approach to 6.2 conditions precedent material adverse effect clauses 8.8 notice as common law 7.3 express provisions 7.9–7.10 generally 7.2 implication due to contractual interpretation 7.9, 7.11 construction contracts frustration 10.12 contra proferentem exception/exclusion clauses 2.12 contractual interpretation ‘business common sense’, meaning of 2.3 Canada Steamship principles 2.13– 2.14 difficulties of interpreting force majeure clauses 2.6 exception/exclusion clauses clarity 2.10 conclusion 2.11 contra proferentem rule 2.12 force majeure clauses as 2.7–2.8 modern approach to construction 2.9 negligence of party claiming benefit of 2.13 general approach to force majeure clauses 2.5 general principles 2.2 introduction 2.1 mistakes, correction of 2.4 unfair contract terms 2.15 D death frustration impossibility 10.9 in-person contracts 10.11 delaying performance introduction 4.1 mitigation allocation of goods in face of scarcity of supply 4.9

delaying performance – contd mitigation – contd alternative sources of supply 4.7–4.8 generally 4.6 obligation to buy goods ‘afloat’ 4.10 destruction of property frustration by impossibility 10.9 disease outbreak force majeure events 3.13 E embargo force majeure events 3.8 epidemic force majeure events 3.11 exclusion clauses causation burden of proof 6.5 generally 6.4 two causes of equal efficiency 6.9 clarity 2.10 conclusion 2.11 contra proferentem rule 2.12 force majeure clauses as 2.7–2.8 modern approach to construction 2.9 negligence of party claiming benefit of 2.13 express terms notice as condition precedent 7.9–7.10 ‘extensive military mobilisation’ force majeure events 3.5 F financial condition material adverse change clauses 8.4–8.5 force majeure concept 1.1 meaning 1.1, 3.2 force majeure clauses causation burden of proof 6.6 generally 6.3 judicial consideration 6.7 two causes of equal efficiency 6.8 purpose of 1.1 force majeure events ‘act of authority’ 3.9 ‘act of God 3.14 ‘disease outbreak’ 3.13

194

Index force majeure events – contd ‘embargo’ 3.8 ‘epidemic’ 3.11 ‘extensive military mobilisation’ 3.5 ICC 2020 Long Form Force Majeure Clause 3.2 introduction 3.1 one party’s power to determine event occurred 3.17 ‘pandemic’ 3.10 ‘plague’ 3.12 ‘piracy’ 3.7 requirement for 3.3 ‘riot’ 3.6 ‘sweeper’ clauses 3.15–3.16 ‘war’ 3.4 see also Prevent, hinder or delay foreseeability events beyond reasonable control 5.10 material adverse change clauses 8.6 frustration building contracts 10.12 construction contracts 10.12 development of 10.3 dramatic increase in price 4.12 illegality 10.8 impossibility 10.9 in-person contracts or obligations 10.11 introduction 10.1 meaning 10.4 mistake 10.7 modern doctrine 10.4 origins 10.2 performance of contracts 10.5 purpose, of 10.7 statutory remedies 1.1 supervening events 10.6

hindering performance – contd mitigation allocation of goods in face of scarcity of supply 4.9 alternative sources of supply 4.7–4.8 generally 4.6 obligation to buy goods ‘afloat’ 4.10 prevention compared 4.2 Hong Kong case law 9.13

G Grain and Feed Trade Association 100 form prevention/prohibition clauses 4.3, 4.8

K knowledge of rights waiver of notice 7.16

H hindering performance dramatic increase in price 4.11 introduction 4.1

I ICC 2020 Long Form Force Majeure Clause text of 3.2 illegality frustration 10.8 implied terms notice as condition precedent 7.9, 7.11 impossibility frustration 10.9 imprisonment frustration of in-person contracts 10.11 industries meaning 8.13–8.15 injury frustration of in-person contracts 10.11 in-person contracts or obligations frustration 10.11 intermediate term notice as common law 7.3 generally 7.2 international case law Australia 9.10–9.12 Canada 9.2–9.4 Hong Kong 9.13 introduction 9.1 Singapore 9.5–9.9

L latent defects waiver of notice 7.17 loan agreements material adverse change clauses case law 8.2

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Index loan agreements – contd material adverse change clauses – contd financial condition of company or group 8.5 financial condition of party 8.4 foreseeable events at date of signing 8.6 lender discretion 8.7 pre-existing circumstances 8.6 whether MAC occurred 8.3 M material adverse change (MAC) clauses introduction 8.1 loan agreements case law 8.2 financial condition of company or group 8.5 financial condition of party 8.4 foreseeable events at date of signing 8.6 lender discretion 8.7 pre-existing circumstances 8.6 whether MAC occurred 8.3 meaning 8.3 material adverse effect (MAE) clauses acquisition agreements burden of proof 8.10 ‘carve-out’ clause 8.12, 8.16 case law 8.9 exceptions to ‘carve-out’ clause 8.16 generally 8.8 materiality 8.11 meaning of ‘industries’ 8.13–8.15 mistake frustration 10.7 interpretation to correct 2.4 mitigation dramatic increase in price 4.11–4.12 ICC 2020 Long Form Force Majeure Clause 3.2 preventing, hindering or delaying performance allocation of goods in face of scarcity of supply 4.9 alternative sources of supply 4.7–4.8 generally 4.6 obligation to buy goods ‘afloat’ 4.10

N negligence events beyond reasonable control introduction 5.2, 5.7 prevention principle 5.8–5.9 party claiming benefit of exception/ exclusion 2.13 negotiations waiver of notice 7.21 notice case law in relation to force majeure clauses 7.4–7.8 condition precedent, as common law 7.3 express provisions 7.9–7.10 generally 7.2 implication due to contractual interpretation 7.9, 7.11 intermediate term, as common law 7.3 generally 7.2 introduction 7.1 right to impugn validity of 7.12 waiver abandonment of right 7.15 accepting part-performance 7.20 ambiguity 7.18 background to 7.14 clarity 7.18 continuing negotiations to reach settlement 7.21 insisting on one’s strict legal rights 7.19 introduction 7.13 knowledge of rights 7.16 latent defects 7.17 reliance on 7.22 unilateral waiver 7.15 P pacta sunt servanda frustration, origins of 10.2 pandemic force majeure events 3.10 material adverse effect clauses 8.16 part-performance waiver of notice 7.20 performance of contracts frustration 10.5

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Index plague force majeure events 3.12 piracy force majeure events 3.7 pre-existing circumstances material adverse change clauses 8.6 presumed force majeure events ICC 2020 Long Form Force Majeure Clause 3.2 prevention principle events beyond reasonable control 5.8–5.9 prevention/prohibition clauses burden of proof 4.4 dramatic increase in price 4.11 Grain and Feed Trade Association 100 form 4.3, 4.9 hindering compared 4.2 introduction 4.1 mitigation allocation of goods in face of scarcity of supply 4.9 alternative sources of supply 4.7–4.8 generally 4.6 obligation to buy goods ‘afloat’ 4.10 standard of proof 4.5 price increases frustration 4.12 prevention or hindrance 4.11 R reliance waiver of notice 7.16 riot force majeure events 3.6 S share purchase agreements see acquisition agreements Singapore case law 9.5–9.9 supervening events frustration 10.6 ‘sweeper’ clauses force majeure events 3.15–3.16

termination of contract ICC 2020 Long Form Force Majeure Clause 3.2 third parties non-performance 3.2 performance dependent on case law 5.4–5.6 generally 5.2–5.3 ‘truth of statement’ clauses negligence of party claiming benefit of exception/exclusion 2.13 U unfair contract terms contractual interpretation 2.15 unilateral waiver see also waiver waiver of notice 7.16 unjust enrichment ICC 2020 Long Form Force Majeure Clause 3.2 W waiver abandonment of right 7.15 accepting part-performance 7.20 ambiguity 7.18 background to 7.14 clarity 7.18 continuing negotiations to reach settlement 7.21 insisting on one’s strict legal rights 7.19 introduction 7.13 knowledge of rights 7.16 latent defects 7.17 reliance on 7.22 unilateral waiver 7.15 war force majeure events 3.4 warlike operations force majeure events 3.5, 6.2 warranties material adverse effect clauses 8.8

T temporary impediments ICC 2020 Long Form Force Majeure Clause 3.2

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