What is Force Majeure in Shipping?
Force Majeure is a common clause in charterparties and essentially frees both parties from liability or obligation when an extraordinary event or circumstances beyond the control of the parties such as war, invasion, act of foreign enemies, rebellion, revolution, blockage, embargo, strike, riot, crime, act of God, such as flooding, earthquake, volcano, prevents one or both parties from fulfilling their obligations under the contract.
In Force Majeure, neither party can have any part in the event. Force Majeure must be unexpected, and the consequences of the event must have been unavoidable.
It has been argued that in certain areas of the world where seismic activity occurs, such as California or Japan experiencing earthquakes, then they are not unexpected, however, here the test will move to the consequences of the event, for instance we might ask was it a severe earthquake which caused serious disruption and damage? An example of illegality to load a cargo could be where a government has changed and the new administration introduces a law prohibiting the export of single a given commodity.
Although the case law cited in the text books goes back to 1878 there are more recent examples. For example, the banning of grain exports from a South American country with a view to stabilising prices for domestic consumers and another where coal exports from China were limited to a certain maximum level to reduce the reliance on high cost imports in a time of unprecedented demand for coal from local power and manufacturing industries.
If the illegality exists at the time the contract was made but there was a reasonable expectation that the legal prohibition would be lifted by the expected loading time the result may well be that the charter is frustrated.
The risk under these circumstances is that it will be concluded that the charterer has taken the risk that the prohibition will be relaxed and will be liable, if the prohibition remains in force, for failure to ship.
What is Force Majeure in Ship Chartering?
Force Majeure is a French term that literally translates to “superior force.” In legal terms, it’s a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, epidemic, or an event described by the legal term “Act of God” (like hurricanes, floods, earthquakes, volcanic eruptions, etc.) prevents one or both parties from fulfilling their obligations under the contract.
In the context of shipping, a Force Majeure clause is typically included in shipping contracts to protect the parties in case an unexpected event makes the fulfillment of the contract impossible or impractical. These events could include severe weather conditions, natural disasters, strikes, civil unrest, wars, etc.
If such events occur, the party facing the force majeure event is usually not liable for damages or penalties for delay or non-delivery of goods. It’s important to note that the party claiming force majeure typically has to prove that the event was beyond their control, that it had an impact on their ability to perform the contract, and that they couldn’t have avoided or overcome the event or its consequences.
However, it’s also important to remember that the precise definition and effects of a force majeure event can vary based on the exact wording of the clause in the contract, and how courts in the relevant jurisdiction interpret such clauses. It’s always advisable to consult with a legal professional for advice on specific contractual matters.
When a Force Majeure event occurs in shipping, the impacted party generally has to follow certain steps. First, they usually need to notify the other party of the Force Majeure event as soon as possible, providing details of the event and how it’s impacting their ability to fulfill the contract.
Once the notification is made, both parties may enter into discussions to find a possible resolution. This could involve delaying the shipping schedule, finding an alternative route or method of shipment, or in some cases, canceling the shipment entirely. If a resolution can’t be found, and the Force Majeure event continues to prevent the fulfillment of the contract, the contract may be terminated without any legal consequences for either party.
However, not all events qualify as a Force Majeure. Standard business risks, like an increase in costs or market fluctuations, are generally not covered by a Force Majeure clause. Additionally, the affected party usually can’t claim a Force Majeure event if the event was foreseeable and they had the opportunity to prevent it, or if they just failed to meet their contractual obligations.
Another important point to note is that the interpretation of Force Majeure clauses can vary widely from one jurisdiction to another, and in international shipping contracts, the question of which jurisdiction’s law applies can be a complex issue.
Thus, while a Force Majeure clause can offer significant protections in shipping contracts, it’s important for parties to such contracts to understand their rights and responsibilities under these clauses, and to consult with legal professionals to ensure their interests are properly protected. They should also make sure they understand how to properly invoke a Force Majeure clause, and how to respond if the other party in their contract invokes such a clause.
BIMCO Force Majeure Clause 2022
(a) Definitions – “Force Majeure” means the occurrence of an event or circumstance as defined in (b) below (“Force Majeure Event”) that prevents a party from performing one or more of its contractual obligations (“the Affected Party”), provided that such party proves:
(i) the existence of a Force Majeure Event;
(ii) that such Force Majeure Event is beyond its reasonable control;
(iii) that the Force Majeure Event could not reasonably have been foreseen at the time of the conclusion of the contract; and
(iv) that the effects of the Force Majeure Event could not reasonably have been avoided or overcome by the Affected Party.
(b) Force Majeure Events – For the purpose of this Clause the following shall be Force Majeure Events:
(i) actual, threatened or reported war, act of war, civil war or hostilities; revolution; rebellion; civil commotion; warlike operations; laying of mines;
(ii) act of piracy and/or violent robbery and/or capture/seizure; act of terrorists; act of hostility or malicious damage;
(iii) blockade, generally imposed trade restriction, embargo;
(iv) act of government or public authority whether lawful or unlawful, compliance with any law or governmental order, expropriation, seizure of works, requisition, nationalisation;
(v) plague, epidemic, pandemic;
(vi) act of God, natural disaster or extreme natural event such as earthquake, landslide, flood, or extraordinary weather condition;
(vii) explosion; fire; destruction of equipment; destruction of port facilities; obstruction of waterways; cyber security incident; break-down of transport, communication, information system or power supply; in each case unless caused by negligence of the Affected Party;
(viii) ionising radiation or contamination by radioactivity, chemical or biological contamination;
(ix) general labour disturbance such as boycott, strike and lock-out, occupation of factories and premises; in each case unless limited to the employees of the Affected Party or a third party engaged by it; or
(x) any other similar event or circumstance unless caused by negligence of the Affected Party.
(c) Notices and Mitigation – The Affected Party shall:
(i) give written notice of the Force Majeure without delay to the other party identifying the relevant Force Majeure Event and its anticipated effect on the performance of one or more of its contractual obligations;
(ii) exercise reasonable endeavours to minimise the effect of the Force Majeure Event upon its performance of the contract and provide any relevant information and documentation to the other party in relation to the Force Majeure and the measures taken; and
(iii) notify the other party as soon as the Force Majeure Event ceases to prevent performance of its contractual obligations.
(d) Cooperation – The parties shall cooperate to minimise the effects of the Force Majeure on performance of the contract and shall discuss in good faith alternative ways in which the contract can be performed and/or the effect of the Force Majeure can be minimised.
(e) Non-liability for breach – Neither party shall be considered in breach of contract nor liable in damages for delay in or for non-performance of one or more of its contractual obligations to the extent caused by the Force Majeure from the time a valid notice under subclause (c)(i) was given.
(f) Continuing payment obligations – Nothing in this Clause shall impact on either party’s payment obligations under the contract unless those payment obligations are directly affected by the Force Majeure.
(g) Termination – Where a valid notice has been given in accordance with subclause (c)(i) above and the Force Majeure has the effect of:
(i) rendering the performance of the contract impossible, illegal or radically different from what was intended at the time of the conclusion of the contract; or
(ii) substantially affecting the performance of the contract as a whole and the duration of the Force Majeure exceeds [ …………..] days from the time notice was given (if this space is left blank then this subclause (g)(ii) shall not apply),
either party has the right to terminate the contract by written notification within a reasonable period to the other party.
Where a party terminates under this subclause (g) both parties shall be discharged from future obligations only and neither may claim damages for the other’s future non-performance. The parties must perform all obligations not affected by Force Majeure up to the date of the termination with any sums paid in advance and not earned or due being refunded, save where the contract or applicable law provides otherwise. Nothing in this Clause shall impact on any separate rights of termination under this contract or at law.
In recent years, extreme events have emphasised the need to provide contractually for the unexpected. When a force majeure event occurs that prevents a party from performing, the parties will need the protection of a clause to avoid claims for breach of contract and to provide a mechanism for handling the situation.
The philosophy behind the clause is that in a force majeure situation the parties should communicate and cooperate to handle the situation together. Termination should only be the last resort.
We kindly suggest that you visit the web page of BIMCO (Baltic and International Maritime Council) to learn more about Force Majeure Clause 2022 and to obtain the original Charter Party forms and documents. www.bimco.org
BIMCO Force Majeure Clause 2022 and Pandemic
“‘Force majeure’ is purely a contractual term, encompassing the extent of its operation as defined within the pertinent clause of the specific contract. The advent of the COVID-19 pandemic has prompted heightened attention towards force majeure clauses in charterparties.
In response to the unforeseen events and disruptions witnessed in recent years, primarily attributable to the COVID-19 pandemic, BIMCO has released a novel force majeure clause, namely the BIMCO Force Majeure Clause 2022 (referred to hereafter as the ‘Clause’).
BIMCO asserts that the Clause is tailored to assist parties in preparing for the unforeseen, which is becoming increasingly prevalent due to the erratic weather patterns induced by climate change, the COVID-19 pandemic, and the ongoing Russia-Ukraine conflict.
The Clause has been meticulously formulated to offer a comprehensive framework for the parties involved, facilitating the resolution of situations arising from unanticipated events that impinge upon contract performance.
Devised for utilization in all types of agreements, the Clause is accompanied by a cautionary note expounded upon in the ‘Explanatory Notes’ section. BIMCO emphasizes that the Clause functions as a model clause and, consequently, should not be incorporated into a contract without a diligent review of its applicability in the broader contractual context, necessitating potential adaptations.
The cautionary note also highlights that the Clause may not yield the intended outcomes in period time charter parties that encompass a broad trading range. This is primarily due to the fact that if a force majeure event arises at a location where the ship has been ordered, charterers typically have the ability to secure alternative employment for the ship, thereby resolving the force majeure issue.
The Explanatory Notes further encompass specific considerations and recommendations regarding charterparties and contracts of affreightment. They feature additional subclauses that can be appended to the Clause, encompassing matters relating to laytime/demurrage or hire, as well as addressing the appropriate course of action in the presence of cargo aboard the ship.”
Force Majeure Clause in Maritime Contracts
A force majeure clause in a contract is designed to excuse one or both parties from performance of the contract in some way following the occurrence of certain events which are beyond their control. These events are typically extreme and unforeseeable circumstances that prevent one or both parties from fulfilling their obligations under the contract. These clauses are common in many types of contracts, including maritime contracts.
Here is an example of how a force majeure clause might be written in a maritime contract:
“Force Majeure: Neither Party shall be liable for any failure to perform its obligations where such failure is as a result of Acts of God (including fire, flood, earthquake, storm, hurricane, or other natural disaster), war, invasion, act of foreign enemies, hostilities (regardless of whether war is declared), civil war, rebellion, revolution, insurrection, military or usurped power or confiscation, terrorist activities, nationalization, government sanction, blockage, embargo, labor dispute, strike, lockout, or interruption or failure of electricity or telephone service.
No party is entitled to terminate this Agreement under Clause [insert the relevant clause] in such circumstances.
If a Party asserts Force Majeure as an excuse for failure to perform the Party’s obligation, then the non-performing Party must prove that the Party took reasonable steps to minimize delay or damages caused by foreseeable events, that the Party substantially fulfilled all non-excused obligations, and that the other Party was timely notified of the likelihood or actual occurrence of an event described as Force Majeure.”
The purpose of the force majeure clause in a maritime contract is to protect the parties involved from events that are completely beyond their control. For example, a shipping company may be unable to deliver goods on time due to a hurricane. In this case, the force majeure clause can protect the shipping company from being held liable for the delay.
It’s important to note that the specific details and exceptions included in a force majeure clause can vary widely based on the specific contract and jurisdiction. Therefore, it’s always a good idea to get legal advice when drafting or signing a contract that includes a force majeure clause.
What is an example of a Force Majeure clause in shipping?
A force majeure clause is a provision in a contract that excuses a party from not fulfilling their contractual obligations due to unforeseen events or circumstances beyond their control. Here’s an example of a force majeure clause as it might appear in a shipping contract:
Force Majeure Clause
“Neither Party shall be liable for any failure to perform its obligations under this Contract if such failure is caused by an event of Force Majeure. For the purpose of this Contract, “Force Majeure” means any event beyond the reasonable control of the Party affected, including, but not limited to, acts of God, war, insurrection, riots, terrorism, crime, labor shortages or labor disputes, embargoes, sanctions, epidemics, pandemics, quarantine restrictions, freight embargoes, severe weather conditions, fire, earthquakes, floods or other natural disasters, or failures in electricity supply, network infrastructure, or any legal or regulatory constraint which would impede the performance of a Party’s obligations under this Contract.
Upon occurrence of any Force Majeure Event, the Party hindered by the Force Majeure Event shall notify the other Party in writing as soon as reasonably practicable, and in any event not later than five (5) days following the Force Majeure Event, of its inability to perform its obligations under this Contract.
The affected Party shall use all reasonable endeavors to minimize the effect of the Force Majeure Event and to bring the Force Majeure Event to an end. Both Parties shall use all reasonable efforts to resume performance of the Contract as soon as practicable after the Force Majeure Event has ended.
If a Force Majeure Event prevails for a continuous period of more than sixty (60) days, then either Party may terminate this Contract by giving at least thirty (30) days’ written notice to the other Party.”
Please note that this is a basic example and real-world contracts often contain much more detailed and specific language, and are drafted in consultation with legal professionals to ensure they accurately reflect the agreement of the parties and comply with the laws of the relevant jurisdictions.
Force Majeure in Shipping Example 1
Force majeure is a legal concept that refers to unforeseen, extraordinary events or circumstances that prevent a party from fulfilling their contractual obligations. The idea is that due to these unexpected events, the performance of the contract becomes impossible or impractical. A force majeure clause is often included in contracts, including shipping agreements, to address these potential issues.
Let’s imagine a hypothetical example of a force majeure event in the shipping industry:
Company A is an exporter of electrical goods based in Japan. Company B is a retailer based in the United States who has ordered a significant amount of these goods. The contract between Company A and Company B stipulates that the goods will be shipped from Japan to the United States within a set time frame. However, the contract also includes a force majeure clause, which outlines certain circumstances that could relieve Company A from its shipping obligations.
One day, a severe earthquake strikes the region of Japan where Company A’s warehouse is located. The earthquake causes significant damage to the infrastructure in the area, including the roads and the ports. As a result, the goods cannot be transported from the warehouse to the shipping port, and the shipment is significantly delayed.
In this situation, the earthquake is a force majeure event. It is an unexpected, extraordinary event that is outside the control of Company A. Despite their best efforts, they are unable to fulfill their contractual obligation to ship the goods to Company B within the agreed timeframe. According to the force majeure clause in their contract, Company A could potentially be relieved of their obligation or the obligation may be suspended until the situation is resolved.
Please note, the application of a force majeure clause may depend on the specific terms outlined in the contract and the laws of the jurisdictions involved. It’s always advisable to seek legal counsel to understand how force majeure might apply in a specific circumstance
Force Majeure in Shipping Example 2
Force Majeure is a contractual term that refers to unexpected circumstances that prevent someone from fulfilling a contract. It’s often described as an “act of God” and includes natural disasters, wars, strikes, and other events that are both unforeseen and uncontrollable. In shipping, this can have a significant impact.
Consider this example:
An import/export company, Global Commodities Inc., has a contract with ShipFast Freight, a shipping company, to transport 100,000 tons of iron ore from a mine in Brazil to a steel mill in India.
However, a massive and unforeseen volcanic eruption occurs along the shipping route in Indonesia. The eruption creates a huge ash cloud, making it not just dangerous but virtually impossible for ships to pass through that region. The ash cloud could damage the ship’s machinery, impair visibility, and even harm the crew. The volcanic activity also prompts authorities to declare a maritime exclusion zone around the affected area, further complicating the shipping route.
The Force Majeure Clause
Thankfully, their contract has a force majeure clause that includes volcanic eruptions as one of the enumerated events. It reads:
“In the event of war, riot, fire, explosion, accident, flood, sabotage, lack of adequate fuel, power, raw materials, labor, containers or transportation facilities, compliance with governmental requests, laws, regulations, orders or actions, national defense requirements or any other event beyond the reasonable control of either party, including an ‘act of God’, such as volcanic eruptions, or other similar cataclysmic phenomenon, that interferes with either party’s performance under this agreement, that party may, without liability, delay or suspend performance while such event continues.”
ShipFast Freight invokes the force majeure clause as soon as the maritime exclusion zone is declared. They notify Global Commodities Inc. that they are unable to complete the delivery as scheduled due to the volcanic eruption, which is an event beyond their control and covered by the force majeure clause. As a result, ShipFast Freight is not liable for the delay caused by the natural disaster.
Global Commodities Inc., although faced with delays, understands that the situation is beyond anyone’s control and appreciates that their contract protected both parties in such an event.
This allows both parties to navigate this unforeseen circumstance without resorting to legal action, preserving their business relationship while they work to find an alternate solution or route for the shipment.
Force Majeure in Shipping Example 3
Here’s an example scenario:
Oceanside Shipping Ltd., based in Japan, has entered into a contract with American Goods Co., an American company, to transport 10,000 tons of electronic goods from Osaka to New York. The contract stipulates a specific delivery date, and there are significant financial penalties for late delivery.
Force Majeure Event:
Unfortunately, a massive hurricane develops in the Pacific Ocean, preventing Oceanside Shipping Ltd. from departing on schedule. The hurricane causes severe disruption to shipping routes and it’s declared unsafe for any ship to set sail.
Application of Force Majeure Clause:
In the contract between Oceanside Shipping Ltd. and American Goods Co., there is a force majeure clause that states: “Neither party shall be liable for any failure or delay in performing their obligations where such failure or delay results from any cause that is beyond the reasonable control of that party. Such causes include, but are not limited to: power failure, internet service provider failure, industrial action, civil unrest, fire, flood, storms, earthquakes, acts of terrorism, acts of war, governmental action or any other event that is beyond the control of the party in question.”
Given that the hurricane is a natural disaster and is beyond the control of Oceanside Shipping Ltd., the company invokes the force majeure clause. They notify American Goods Co. about the situation, providing evidence of the hurricane’s severity and its impact on their ability to fulfill the contract.
Because the force majeure event is valid, and the inability of Oceanside Shipping Ltd. to fulfill their obligations directly resulted from this event, they are not held liable for the delay in delivery of the goods. However, both parties will need to negotiate a new timeline for delivery once the hurricane has passed and shipping routes have been reopened. It is also likely that the force majeure event may increase shipping costs due to the rerouting and delays, and the parties will need to discuss and agree on who will bear these additional costs.
Remember, this is just an example. How a force majeure clause is interpreted and enforced can vary depending on the specific language of the clause, the nature of the event, the jurisdictions involved, and the specific facts and circumstances of each case. In real situations, legal advice should be sought.
Force Majeure Vs Frustration
In contrast to the doctrine of frustration, wherein the contract shall automatically terminate, the ramifications of force majeure hinge upon the specific wording of the clause. For instance, the clause may temporarily halt the contractual obligations until the occurrence concludes or grant the involved parties the choice to annul the contract.
What is Frustration in Ship Chartering?
Frustration arises when, devoid of any fault on the part of either party, the execution of a contractual agreement becomes impracticable or alters the fundamental purpose of the party in entering into the contract, thereby rendering it “profoundly distinct” (Davis Contractors V. Fareham UDC  A.C. 696).
Determining what constitutes a contract being “profoundly distinct” is a matter of factual inquiry and relies on a comprehensive array of factors. The circumstances under which frustration can be invoked are rigorously regulated by the courts, as the mere presence of expenses, delays, or burdensome conditions does not suffice.
Among the factors that necessitate consideration are the stipulations of the contract, the parties’ contemplation (particularly with regards to risk at the time of contracting), the nature of the unforeseen event, and the parties’ reasonable and objectively ascertainable assessments of future performance possibilities in the altered circumstances (The Sea Angel (2007) 2 LLR 517).
The relevance of the event’s contemplation at the time of contract inception is noteworthy and has the potential, albeit not automatically, to undermine a claim of contractual frustration.
Causation: fault, election, and negligence
A self-induced occurrence cannot be deemed frustrating. If the alleged frustrating event is a result of a deliberate action or decision by one of the parties, they shall not be permitted to invoke the doctrine of frustration. Should a party to the charter bring about an event that renders further performance impossible through their breach of the charter or their own negligence, they will be unable to rely on the doctrine of frustration.
Although a frustrating event would inevitably lead to financial loss for a party if the charter were to continue, financial loss alone does not constitute frustration of the charter. “Mere increased burdens or expenses borne by one party, beyond their initial expectations, are insufficient to establish frustration. It must transcend mere difficulty or excessive cost. It must be manifestly unjust to hold the parties bound” (The Eugenia  2 Lloyd’s Rep 381). For instance, the unavailability of the envisaged route generally does not result in the frustration of the charter.
An exception for commercial loss: damage to ship
Nevertheless, a series of preceding legal precedents alludes to a deviation from this principle, emerging when a seafaring ship endures harm during its voyage, and the expenses incurred in restoring it to the necessary extent for its successful completion (even if the repairs are temporary) surpass its restored value to such an extent that no prudent owner would willingly bear such costs. Under such circumstances, the situation is treated akin to a scenario where physical repair becomes implausible, thus constituting a form of frustration (The Kyla  EWHC 3522 (Comm)). However, this exception does not apply when the charter agreement includes an obligation for the ship owners to maintain a certain level of hull insurance coverage, from which the repair expenses could be financed. In such cases, the owners cannot contend that they cannot reasonably be expected to cover the repair costs, as long as said costs fall within the agreed insured sum (The Kyla).
A charter may become thwarted if the execution of the charter experiences a significant delay. The primary consideration lies in determining whether the interruption will be, or is likely to be, substantial in comparison to the remaining duration of the charter agreement. The magnitude and impact of the interruption must be evaluated at the time when the cause of the delay comes into effect, devoid of the advantage of foresight. If, at the initiation of an incident, the delay seems to be of short duration, the contract will be frustrated when it subsequently becomes apparent that the delay will be excessively protracted.
The types of events capable of inducing frustrating delays include:
The same event may frustrate a voyage charterparty but not a time charterparty
War, ice, or strikes, for instance, may not necessarily lead to the frustration of the charter, contingent upon its terms. A conflict or a widespread labor strike might render a voyage charter frustrated, while they may have no impact on a time charter that encompasses a broader trading scope. Consider, for instance, a scenario where a time charterer had intended to engage in trade between the UAE and Yemen (a nation currently engulfed in war). If the charter permits the ship to conduct trade in other locations, then the charter will not be frustrated, even though the charterer may encounter difficulties in securing employment for the ship.
Events covered in the charterparty
As observed earlier, industrial actions, glacial conditions, and armed conflicts have the potential to lead to the annulment of the charter. Is there a provision within the charter that already addresses these circumstances? Can the charter still be invalidated, or does the fact that the contract already covers these occurrences prevent either party from claiming frustration? The prevailing perspective suggests that it is a relevant factor but not necessarily determinative. Unless a clause explicitly excludes the application of the frustration doctrine and provides a comprehensive provision, a party can make a frustration claim if the contract becomes “significantly altered” in its nature. This principle was expressed in the case of Fibrosa v. Fairbairn ( AC 32), stating that “where subsequent events render the fulfillment of the contract indefinitely impossible, and there is no obligation to remain bound under any circumstance, frustration occurs, even if the parties have accounted for a limited disruption.”
If the envisaged cargo sustains damage prior to its shipment, the contractual agreement shall remain intact, unless it pertains to a particular consignment. In such an event, the charterers shall be compelled to seek an alternative reservoir of merchandise. Likewise, if the charterers encounter delays in procuring the intended reservoir of cargo, a similar course of action shall be pursued. Nonetheless, should no alternative cargo options be available, the contractual agreement may be rendered frustrated.
Delay in obtaining the cargo
A charterer is obliged to fulfill an unconditional and nontransferable responsibility of supplying cargo for loading (The Nikmary  EWCA Civ. 1715). In the event that the charterer, due to their selected supplier, fails to provide the cargo, such circumstances would seldom qualify as a frustrating event or an event beyond the charterer’s control (The Mary Nour  2 Lloyd’s Rep. 526).
Force Majeure in Ship Chartering
Force majeure is a legal concept rooted in civil law and absent in common law. It bears resemblance to frustration, albeit with a broader scope. Under civil law, a force majeure occurrence terminates a contract, thereby releasing the involved parties from their obligations. To establish force majeure, three essential factors must be demonstrated:
Given the absence of force majeure within common law, parties often strive to replicate it through contractual agreements, outlining in advance a list of events where force majeure can be invoked. In many voyage charters, force majeure clauses exist, such as the one found in the “Sugar charter party 1969,” which includes provisions for strikes, lockouts, accidents, stoppages caused by ice or frost, government interferences, or any other force majeure events beyond the control of the Shippers or Consignees that impede or delay the loading and discharging of the ship.
Under English law, force majeure encompasses only two out of the three elements found in the civil law concept:
1- Externality: A force majeure clause can only be invoked if the event occurs without the involvement of any other parties. The party relying on force majeure must demonstrate that the non-performance was a consequence of circumstances beyond its control.
2- Irresistibility and the party’s duty to take reasonable measures to overcome the hindrance: The party invoking force majeure must establish that no reasonable measures could have been taken to prevent or mitigate the circumstances and their consequences. Additionally, they must employ reasonable means to surmount the obstacle, even if it results in losses for the party invoking the force majeure clause. For instance, if the port authority suspends loading at one berth but an alternative berth is available for cargo loading, albeit at additional time and expense for the charterer, the force majeure clause will not offer any protection.
This was recently exemplified in the case of Classic Maritime Inc v. Limbungan Makmur SDN BHD  EWCA Civ 1102. In this case, the charterers had long-term supply contracts with two Brazilian mining companies, Samarco and Vale. According to the Charter Party, the charterers had the option to ship from either Samarco’s port or Vale’s port. However, due to a dam burst, Samarco’s production ceased, leading to the charterers’ inability to obtain cargo from this supplier. The charterers were also unable to secure cargo from Vale. The court ruled that the charterers only needed to make all reasonable efforts to ship from the alternative port. If the charterers took reasonable steps to provide cargo but still failed, force majeure would be considered the cause for their failure to perform, and thus, the force majeure clause would serve as a defense against the owners’ claim for damages due to cargo non-provision, absolving the owners from substantial damages.
3- Unpredictability: English law diverges from civil law by emphasizing unpredictability and adopting a narrow interpretation of such clauses. Force majeure is only applicable if the event is explicitly listed in the force majeure clause, meaning it must be foreseeable. These clauses are construed against the party seeking benefit under the charter and are strictly interpreted. Any ambiguities within the clause render it ineffective in providing protection. Generally, they are construed in a manner similar to exception clauses in a voyage charter.
Impact of a Force Majeure
Contrary to the doctrine of frustration, wherein the contract shall spontaneously terminate, the ramifications of force majeure hinge upon the phrasing of the provision. For instance, said provision may temporarily halt the contractual obligations until the cessation of the event or grant the involved parties the prerogative to nullify the agreement.
Force Majeure as an Exception Clause
Many force majeure clauses are formulated as exception clauses (in contrast to frustration clauses where causation need not be established). This aspect pertains to interpretation. The differentiation holds significance because, in order to invoke an exception clause, the relying party must demonstrate that, had the event not occurred, performance would have transpired (i.e., causation). If the force majeure clause is articulated as a frustration clause, the relying party can invoke it without the necessity to establish the ability to fulfill its part of the agreement under alternative circumstances. This was recently exemplified in the aforementioned “Classic Maritime” case. The force majeure clause was determined to be an exception clause, thereby requiring the charterers to substantiate that, if the dam had not ruptured, they would have fulfilled their obligations under the COA. Unfortunately, they were unable to do so as they had previously defaulted on their COA obligations due to a weakened market. Consequently, the Court concluded that the charterers could not rely on the clause as a justification for their failure to transport cargoes.
In the event that the defaulting party proves unsuccessful in fulfilling the “but for test,” damages shall be computed based on the compensatory principle. The compensatory principle stands as a fundamental concept within contract law. It stipulates that parties seeking compensation for contract violations can solely recover their verifiable losses. Moreover, it necessitates that parties consider post-termination events that might impact the actual suffered loss when evaluating damages (Bunge SA v Nidera BV  UKSC 43).
At the time of this Guide’s publication, the “Classic Maritime” case had not adopted this approach upon appeal. The Court of Appeal made a clear distinction between this case and the Bunge SA v Nidera BV case, which primarily focused on assessing damages for an anticipated breach. In contrast, the “Classic Maritime” case revolved around an actual breach. This arguably signifies a novel development, though the verdict remains susceptible to further appeal.
Force Majeure Case
In March 2022, by allowing an appeal under section 69 of the Arbitration Act 1996, the Commercial Court determined that a shipowner had the right to invoke a force majeure clause in a shipping contract when the Charterers’ Russian parent company became subjected to sanctions imposed by the United States in 2018.
In reaching this conclusion, the Commercial Court, presided over by Jacobs J, opined that the contractual obligation to make “reasonable endeavors” to overcome the impact of a force majeure event did not oblige the shipowners to accept anything less than the fulfillment of their contractual obligations, which, in this case, entailed the right to receive payment in USD.
Background: MUR Shipping BV, referred to as the “Owners,” entered into a Contract of Affreightment (COA) with RTI Ltd, known as the “Charterers,” in June 2016. The purpose of the contract was to transport 280,000 metric tons of Bauxite monthly from Guinea to Ukraine. Within the COA, there existed a force majeure clause, absolving both parties from liability for any losses, damages, delays, or failures in performance caused by a force majeure event.
The COA defined a “force majeure event” as an occurrence or situation meeting the following criteria:
a) It falls beyond the immediate control of the Party issuing the Force Majeure Notice. b) It hinders or delays the loading or unloading of cargo at the respective ports. c) It is caused by one or more of the following: acts of God, extreme weather conditions, government rules or regulations, government interference, directions or actions, limitations imposed by authoritative figures, restrictions on monetary transfers and exchanges. d) It cannot be overcome through reasonable efforts by the affected Party. (emphasis added)
On April 6, 2018, the United States imposed sanctions on the Charterers’ parent company, United Company Rusal plc.
On April 10, 2018, the Owners issued a force majeure notice, contending that adhering to the COA would constitute a breach of sanctions, thereby preventing payment in USD, the stipulated currency for remuneration under the contract.
In response, the Charterers presented several arguments: firstly, that the sanctions would not impede cargo operations; secondly, that payments could be made in Euros; and thirdly, that the Owners, being a Dutch company, were exempt from the sanctions as they did not qualify as a “US person.”
The Owners, however, remained resolute in their assertion that a force majeure event had occurred, thereby limiting payment to US dollars. They argued that this limitation curtailed their ability to load and unload cargo as they could not be reasonably expected to do so without payment. Consequently, the Owners refrained from nominating ships under the COA based on force majeure grounds.
Subsequently, the Charterers secured alternative tonnage and initiated an arbitration claim to recover the additional costs incurred as a result.
The Arbitral Award
The arbitral tribunal ruled in favor of the Charterers, based on the premise that the situation could have been “overcome through reasonable efforts from the Party affected.” In this case, the “reasonable efforts” took the form of the Charterers’ proposition to make payments in Euros and bear any additional expenses or losses resulting from the currency conversion. The tribunal declared that this was a “completely viable alternative that [the Owners] could have embraced without any negative consequences to them.”
However, the tribunal did acknowledge that the Owners’ argument regarding force majeure would have prevailed in all other aspects as a matter of law (except for the obligation to exert reasonable efforts to overcome the event). The tribunal noted that, despite the minimal risk of sanctions being imposed on the (Dutch) Owners, these sanctions might have practically hindered timely payment in USD. Payments to the Owners would have been routed through an intermediary bank in the United States, and the bank, as a precautionary measure, would likely have initially held the funds pending investigations and due diligence.
In May 20221, the Owners were granted permission to appeal on a legal question under section 69 of the Arbitration Act 1996. This question concerned whether the scope of reasonable efforts included accepting payments in Euros, deviating from the provisions in the contract that mandated payment in US dollars.
Reasonable efforts and acceptance of non-contractual performance
The Commercial Court upheld the Owners’ appeal and concluded that the Owners’ duty to employ “reasonable efforts” to overcome the event did not oblige them to accept the Charterers’ proposal of conducting transactions in Euros.
In doing so, Judge Jacobs rejected the Charterers’ argument that a party’s contractual obligations are merely one of several factors to be considered when assessing reasonableness in a force majeure context.
Judge Jacobs stated that there is “no legal precedent that supports this broad assertion” and, to the contrary, the Charterers’ position contradicted the principles established in the Bulman v Fenwick2 and Vancouver Strikes3 cases.
In Bulman, the court ruled that the Charterers of a ship were justified in relying on a strike clause similar to force majeure, even though they were aware of a strike of coal porters at the Regent’s Canal (rather than redirecting the ship to another unloading location). The jury explicitly found that it was unreasonable for the Charterers’ representatives to allow the ship to proceed to the Regent’s Canal after learning about the strike. However, the court deemed that the central question was not the reasonableness of the Charterers’ actions, but rather what the contract entitled them to do. The Charterers had the right to rely on the contractual strike clause, and there was nothing that obligated them to alter that instruction once it had been given to proceed to the Regent’s Canal. The Court of Appeal subsequently upheld the court’s decision.
Judge Jacobs asserted that, in Bulman, the parties’ contractual obligations were not merely one factor to be considered but were, in fact, “paramount and definitive.”
Judge Jacobs also examined the House of Lords’ ruling in the Vancouver Strikes4 case, which deliberated on whether a Charterer would be obliged to ship an alternative cargo to that stipulated in the contract to avoid a Force Majeure event. Judge Jacobs found that, similar to Bulman, Vancouver Strikes supports the notion that the nature of a contractual obligation is decisive and not merely one aspect to be evaluated when assessing reasonableness.
The “causation argument,” as characterized by Jacobs J, was put forth by the Charterers. The central contention revolved around the Owner’s failure to load the cargo, which they claimed was a result of the Owner’s deliberate choice not to accept payment following the sanctions, rather than the sanctions themselves or any subsequent payment difficulties. The Charterers relied on a clause stipulating that payment should be made five days after the completion of loading to support their argument that it was exceedingly challenging to conceive how freight payment difficulties could impede or delay the loading process, even in theory.
Jacobs J dismissed each of these arguments, finding no legal error in the tribunal’s determination that, aside from the reasonable endeavours finding, the Owner’s force majeure case prevailed in all other aspects. The tribunal’s interpretation of the force majeure clause was accurate, as they established a high likelihood that an intermediary bank in the US would initially halt transactions involving a sanctioned party for investigative purposes. The Charterers’ interpretation, which limited the force majeure provision to events physically hindering or delaying loading or discharge, was unduly narrow. Moreover, the force majeure event was not “self-induced.” The restrictions imposed by the United States sanctions directly caused the prevention or delay in loading or discharge.
In conclusion, although the case pertains to the 2018 US sanctions on Russian entities, it may offer valuable guidance to parties considering the invocation of force majeure clauses in response to recent sanctions imposed on Russia and Belarus following the invasion of Ukraine.
Jacobs J’s ruling delves into the practical challenges faced by parties engaged in contracts with sanctioned entities concerning payment obligations.
The case clarifies that a party’s right to invoke force majeure is not constrained by any obligations to accept non-contractual performance. In this regard, the case may provide some reassurance to parties involved in contracts with sanctioned entities, although the ability to rely on force majeure provisions will depend on the specific wording of the force majeure clause in each individual case.
What are common examples of Force Majeure?
Here are some common examples of events often considered as force majeure:
- Natural Disasters: These are acts of nature or “Acts of God” that are beyond human control, such as hurricanes, tornadoes, floods, earthquakes, tsunamis, severe weather conditions like heavy snowfall or extreme temperatures, fires (provided they’re not due to human negligence), volcanic eruptions, etc.
- War and Civil Disturbance: War, armed conflict, terrorism, rioting, strikes, civil unrest, or rebellion can be included under force majeure. These disruptions are usually violent, widespread, and beyond the control of the parties involved in the contract.
- Government Actions: This can include new laws or regulations that make the contract impossible to perform, or unforeseeable government actions such as expropriation, embargo, blockades, or revocation of a necessary license.
- Pandemics and Epidemics: Recent developments in contract law have led to the inclusion of health crises like epidemics or pandemics, such as the COVID-19 outbreak, as they can significantly disrupt normal business operations.
- Industrial Accidents: This could include an explosion or a catastrophic accident at a factory or plant that halts production and makes it impossible for a party to fulfill its contractual obligations.
- Nuclear, Chemical, or Biological Contamination: Events causing contamination or environmental pollution that make it impossible to carry out obligations under a contract could fall under force majeure.
- Technological Disruptions: Technological disruptions such as widespread internet outages or cybersecurity attacks could potentially be considered a force majeure event if they prevent a party from fulfilling their contractual obligations, although this may depend on the specifics of the contract and jurisdiction.
- Supply Chain Interruptions: In the business world, significant disruptions in the supply chain can sometimes be considered force majeure events if they are outside of the company’s control. For instance, if a sole supplier of a critical component goes out of business unexpectedly and no other suppliers exist, this could potentially trigger a force majeure clause.
- Severe Economic Events: Some contracts may consider severe economic events, like a sudden and drastic change in the market or economy that makes fulfilling the contract impossible or extremely onerous, as force majeure. However, this is less common and again depends heavily on the specific language of the contract and jurisdiction.
It’s also worth noting that invoking a force majeure clause is not a simple process. It typically requires providing notice to the other party and demonstrating how the event has made it impossible to fulfill the contract. In many cases, the invoking party is also expected to show that they have made a reasonable effort to mitigate the impact of the event and fulfill their obligations as far as possible.
Also, force majeure cannot be invoked simply because a contract has become less profitable or more difficult to perform. The standard is generally impossibility, not inconvenience.
The interpretation of force majeure clauses can vary depending on the jurisdiction and the specific language used in the contract. It is often a point of dispute in legal cases, and there is considerable case law on the topic. In some jurisdictions, if a force majeure event is not specifically listed in the clause, it may not be covered. Other jurisdictions apply a broader interpretation. Legal advice is usually necessary in such cases to interpret the clause and determine the potential consequences of invoking it.