Nuances of force majeure clause

Andy Powell and Anna Devereaux at legal firm Ince have written a piece on the nuances of the force majeure clause. In NKD Maritime Limited v. Bart Maritime (No 2) Inc (Shagang Giant) [2022] EWHC 1615 (Comm), Bart Maritime (No 2) Inc (the seller) was contracted to sell the VLOC SHAGANG GIANT to NKD Maritime Limited (the buyer) by way of a Memorandum of Agreement (MOA) dated March 5th 2020. The buyer was an intermediary, specializing in acquiring tonnage for scrapping and/or recycling on behalf of a yard.

The writers noted that scrap/recycling sales of vessels were self-evidently quite different to second-hand sales, and no standard form of contract had been widely adopted. Although not stated expressly in the judgment, the MOA was almost certainly made on a broker’s bespoke form.

Relevant clauses under the MOA were:

Delivery Location

The Vessel shall be delivered and taken over safely afloat at outer anchorage Alang, West Coast India.

If, on the Vessel’s arrival, the Delivery Location was inaccessible for any reason whatsoever, the Vessel was to be delivered and taken over by the Buyer as near thereto as the vessel might safely get at a safe and accessible berth or at anchorage, which was be designated by the Buyer, provided that such berth or anchorage be subject to the approval of the Seller (which would not be unreasonably withheld).

If the Buyer failed to nominate such a place within 24 hours of arrival, the place at which it was customary for vessels to wait would constitute the Delivery Location. The delivery of the Vessel according to this paragraph would constitute full performance of the Seller’s obligations. All other terms and conditions of this Agreement would apply as if delivery had taken place.”

Clause 10 of the MOA included a force majeure provision that provided: “Should the Seller be unable to transfer title of the Vessel or should the Buyer be unable to accept transfer of the Vessel both in accordance with this contract due to …restraint of governments … then either the Buyer or the Seller may terminate this Agreement upon written or telegraphic notice from one party to the other without any liability upon either party and the Initial Payment referred to in Clause 1.b. hereof shall be released to the Buyer.”

The seller asked the buyer to nominate an alternate location for delivery, but the buyer did not do so. The buyer then sought to terminate the MOA, relying on the force majeure clause.

The buyer claimed that the Covid-19 restrictions imposed by the Indian government constituted a “restraint of governments” and had precluded the seller from being able to transfer title in the vessel in accordance with the MOA. This had meant that the necessary clearances could not be obtained, so the vessel had not reached the delivery location.

Consequently, the Notice of Readiness could not be tendered and no transfer of title in accordance with the MOA was possible.

The buyer was, therefore, entitled to terminate under clause 10 of the MOA and was entitled to the return of the deposit.

The seller disagreed, contending that Clause 10 of the MOA was not applicable.

The seller had not been unable to transfer title in accordance with the MOA. Transfer of title did not require ‘delivery’ of the vessel.

A second line of defence was that, in any event, even if delivery was a necessary feature of transfer of title, the seller had not been unable to deliver the vessel by reason of the force majeure event, namely restraint of governments.

The vessel had arrived at the delivery location, or as near thereto as it could safely get. The position where the ship had anchored was thus deemed to be the delivery location and its delivery there constituted full performance of the seller’s obligations under the MOA.

Commercial court decision

The court considered the construction of Clause 10 of the MOA and concluded that ‘delivery’ was not a necessary requirement of ‘transfer of title’. The phrases “delivery” and “transfer of title” were both used in the MOA and were not synonymous. Clause 10 conspicuously did not refer to ‘delivery’ but had deliberately used the term “transfer title of the vessel”.

‘Transfer of title’ only requires payment of the price, delivery of the Bill of Sale, and deletion from the relevant ships’ register. There was no condition precedent to transfer of title that there should be a Protocol of Delivery and Acceptance and physical delivery.

The force majeure provision at Clause 10 could not, therefore, be invoked where transfer of title was possible.

Additionally, the place at which the vessel anchored was not “outer anchorage Alang”. The vessel was, therefore, not at the delivery location under the MOA.

The question then was whether there had been a substituted delivery location under Clause 2(a).

The court held that the vessel was required to get as near to the delivery location specified as was possible, given the matter which rendered that delivery location inaccessible. The vessel had got as close to Alang outer anchorage as it could, subject to the fact that it did not have permission to come within the VTS Khambat area, which rendered the delivery location inaccessible. The reason the vessel had not obtained permission to proceed to Alang outer anchorage, and could not have been boarded by officials, was attributable to Covid-19 restrictions. These could be described as a “restraint of governments”. The key issue was then whether that position rendered the seller ‘unable’ to transfer title.

The court noted that ‘inability’ was significantly different from hindrance or delay. Whether there was ‘inability’ to perform for the purposes of Clause 10 by reason of a temporary restraint of governments would depend on whether the probable period of that restraint would materially undermine the commercial adventure.

In assessing this, the court indicated that similar considerations would apply as those which applied when considering whether a contract was frustrated.

On the facts, the court did not consider that the delay constituted an ‘inability’ on the part of the seller to perform the MOA for the purposes of Clause 10. The vessel was being sold for demolition and not for trading, and some delays to the beaching of the vessel were inevitable given its size. Nor did the temporary nature of the particular Covid-19 restrictions materially undermine the commercial adventure.

The buyer therefore was held to have wrongfully terminated the MOA. The seller was entitled to retain the deposit of $4.2m, but was not entitled to further damages, as the deposit more than adequately compensated them for their losses.

The writers noted that the judgment also contained useful guidance on the construction of similarly worded force majeure clauses and, in the context of the construction of MOAs, offered guidance on the distinction between “delivery” and “transfer of title”.

“This is particularly useful in the context of scrap sales, where sellers can face problems (and demands for re-negotiation) as a result of attempting delivery in accordance with unexpected local rules and practices in the end-buyer’s home port”, the writers noted.

Finally, the decision confirmed that Covid-19 restrictions did constitute “restraint of governments”, which was a common wording in force majeure and exception clauses. However, Covid-19 restrictions would not automatically excuse a party from performance, especially where Covid-19 delays were only temporary in nature and did not materially undermine the commercial adventure.