Force majeure clause construction – Covid-19 temporary delay not “inability to perform” leading to valid termination of contract

NKD Maritime v Bart Maritime [2022] EWHC 1615 (Comm)

The Question

Did a temporary delay caused Covid-19 restrictions allow a party to rely on a force majeure clause to terminate a contract?

The key takeaway

The High Court has held that it did not follow that a Covid-19 temporary delay meant that a seller was “unable to transfer title” allowing a buyer to rely on the force majeure clause and terminate the contract.

The background

The defendant, Bart Maritime (Bart), entered into a contract to sell a vessel to buyer, NKD Maritime (NKD), who specialised in acquiring shipping tonnage for scrapping and/or recycling. The intention was for the vessel to be scrapped and recycled in India. 

The contract contained a force majeure clause: 

Should the Seller be unable to transfer title of the Vessel …in accordance with this contract due to …restraint of governments, then either the Buyer or the Seller may terminate this Agreement…

The vessel was not delivered to the location stipulated in the contract due to Covid-19 restrictions set by the Indian government. NKD declined to nominate an alternative location and contended that delivery had not taken place in accordance with the provisions of the contract.
NKD sent Bart a notice of termination referring to the Covid-19 lockdown as a “restraint of the government of India” constituting an event of force majeure which prevented Bart from transferring title to the vessel in accordance with the terms of the contract. 

The decision

The court did not find NKD’s argument attractive. In its judgment it stated that when the force majeure clause refers to “transfer of title”, and not to “delivery” in the opening clause, this must be taken to be deliberate. “Transfer of title” would require 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 delivery.

The court also held that:

• “Inability” is significantly different from a provision that refers to hindrance or delay
• “Inability” should not be judged simply by reference to whether there was inability to perform by the contractual cancellation date 
• If “inability” were to be judged simply by whether there could be performance by the cancelling date, this would mean that potentially very short-lived and transient hindrances to performance might trigger the operation of the force majeure clause 
• Such an interpretation of the force majeure clause would potentially give the seller, Bart, the option to escape from a contract it was unable to perform by the cancelling date, even though the buyer would not have wished to exercise its option to cancel

The court found that a contract to acquire a vessel for scrap was one where delays should have been anticipated. The delays caused by the Indian government’s restrictions in response to Covid-19 were not such that they “materially undermined” the commercial adventure (in assessing this, similar considerations to those which would be involved in the, analytically distinct, question of whether a contract is frustrated would be applicable). NKD had been wrong to rely on the force majeure clause and was in repudiatory breach for having cancelled the contract.

Why is this important?

Wrongly relying on the force majeure clause was a costly mistake. NKD was found to have repudiated the contract and Bart was entitled to retain the sizable initial payment of $4,264,723.13.

Any practical tips?

Consider whether a temporary delay prevents performance of the relevant obligations to the extent required to engage the force majeure provisions. When drafting and negotiating a force majeure clause, test the provisions with likely scenarios, and consider whether to specify the duration and/or impact of an event (eg the force majeure event continues and prevents performance for, say, 90 days) before a party is released from its obligations.