COVID disruption did not trigger force majeure clause

We continue to carefully monitor the law reports for case law which illustrates the impact of the pandemic on invoice financiers, both in terms of:

• the legal relationships between financiers, clients and providers of securities such as guarantors; and
• legal issues between assignor’s and debtors touching on the enforceability of assigned debts.

In previous Briefings we have offered high level overviews of what we believe to be the relatively limited impact of the pandemic on these legal issues, and have commented on some case law which seems to have a direct effect.

As we expected, the High Court has held that a force majeure clause applying when a party was “unable” to perform could not be relied on when performance was only temporarily delayed.

In NKD Maritime Ltd v Bart Maritime (No. 2) Inc [2022] EWHC 1615 (Comm) (24 June 2022) (Butcher J) the defendant was selling a ship to the claimant. The contract’s force majeure clause (clause 10) provided that:

“Should the Seller be unable to transfer title of the Vessel or should the Buyer be unable to accept transfer of the Vessel … due to … restraint of governments … then either the Buyer or the Seller may terminate this Agreement.”

The ship could not reach its intended delivery location by the contractually agreed date. Clearances needed from the Gujarat Pollution Control Board (GPCB) to enter port were not received for COVID-related reasons. On 14 April 2020, the Indian government extended lockdown restrictions to 3 May 2020. The claimant then terminated the contract under clause 10 explaining that government restraints constituted force majeure. The defendant replied that there was no force majeure event and the termination was a repudiatory breach.

The court decided in the defendant’s favour on other grounds before considering, if that was wrong, whether the force majeure clause was triggered. The judge concluded that the ship was not delivered by the termination date because GPCB staff were not granting anchoring permissions. They had been diverted to COVID response duties and this constituted a restraint of government. However, the clause required a party to be “unable” to perform for force majeure to apply. The judge noted that:

• Inability is a significantly higher bar than a provision that refers to being hindered or delayed.
• Inability for force majeure purposes should not be judged by inability to meet the contract’s delivery deadline. Otherwise, short-lived delays would trigger the clause.
• Inability depends on whether the likely duration of the force majeure event would materially undermine the commercial venture. This involved similar considerations to considering whether a contract is frustrated.

The court considered the background context. The claimant intended to demolish and recycle the ship. This was a lengthy process. Delays were to be expected. When the contract was terminated, it was clear that the government was under pressure to relax restrictions and not reasonably probable that disruption would last beyond 3 May 2020. In the judge’s view the delays up until the termination date, together with the likely extent of any future delays, did not constitute an inability to perform for clause 10.

Comment

This decision is very much in line with our expectations, and demonstrate that the English courts will be slow to recognise that the pandemic has significant legal effects in the context of commercially negotiated contracts.

For an analysis of a High Court case in which a party unsuccessfully argued that the contract was frustrated by reason of the pandemic see our Article from April 2021 “Frustration of contracts and COVID-19”

Contact our Invoice Finance team.