March, 2022 - Stuck in the middle? Force majeure and frustration issues from a charterer’s perspective.
An imperfect world
Ideally, contracts and the transactions they govern would proceed smoothly – cargo would be available at the loading port when intended, ships would arrive on time to collect it and it would then be transported to and off-loaded at the intended discharge port.
In real life however, many things can go wrong.
The cargo or the ship (or both) could be delayed, either by the fault of a party to the contract, or, by contrast, due to entirely unforeseen events, natural disasters or third party causes - usually referred to as “force majeure” (“FM”). Indeed, due to climate change and increasing geopolitical tensions, we can perhaps expect to see an increase in FM events (floods, droughts, hurricanes, dam failures, landslides, war, hostilities, export prohibitions/embargoes, strikes, riots, fires and so on) and it is no coincidence that, in terms of insurance losses from natural catastrophes and extreme weather patterns, 2021 was reportedly one of the very worst on record [1].When understanding and providing for these risks in contracts, it is important to note however that under English law (unlike the laws of some other jurisdictions) there is no general concept of or protection from FM events. FM is an entirely contractual concept – in other words, FM is only what the contract says it is, and a party will only be able to escape its contractual obligations due to FM events to the extent that the contract allows.
Increasingly (and unsurprisingly) in the last couple of years, FM clauses have also included epidemics or pandemics in the list of specified FM events. It has also long been common for the list of specific FM events in a clause to conclude with a catch-all provision covering any other events beyond a party’s reasonable control. However, such catch-all provisions are usually construed narrowly.
It is also essential in most cases for the party seeking to rely on an FM event to excuse their non-performance to prove not only that the FM event took place contemporaneously with their failure to perform, but also that the FM event caused that failure.
The problem
If an FM event arises, parties might think their contractual terms will protect them, but they may not always be right. The problem can be particularly acute for a charterer who, in any given transaction, might be working under three separate contracts:
- A purchase contract (“PC”), under which the cargo is bought, and which governs the arrival and loading of the cargo at the loadport; and
- A sale contract (“SC”), under which the cargo is sold, and which may also governs the arrival and loading of the cargo at the loadport; and
- A charterparty (“CP”) for the ship that will load, transport and then discharge the cargo.
In the worst case scenario, a charterer might be faced with a situation in which its PC/SC counterparties can terminate and walk away from the transaction due to an FM event, but the charterer itself cannot similarly walk away from its CP with a shipowner.
Standard form contracts
The above problem can often arise because standard forms for PCs/SCs and CPs can differ greatly in how FM situations are dealt with.
These differences can include but may not be limited to the triggers or notification requirements a party must comply with following an event, the suspension of the parties’ obligations either in whole or in part during the event, or the right to terminate the contract after a certain period or duration has elapsed following the event. In extreme situations the contracts may not align on more than one of these issues, define separate or narrower types of events or, as a worst case scenario, be completely silent.
So, for example, whereas the commonly used BP General Terms and Conditions 2015 (for crude oil / petroleum product sales) contain substantial provisions at clause 65 dealing with FM issues, which allow the affected party to suspend performance and thereafter terminate the contract if the FM event renders performance impossible or would delay matters beyond the contractual laydays, these same terms by contrast are not mirrored or reciprocated in many of the customary tanker voyage charter party formats with BP’s own BPVOY4 standard wording only allowing the charterer to suspend time partially during any such delays.
Similarly, for coal shipments, article 15.5 of SCOTA 8 permits any shipment to be cancelled if FM delays it by more than 60 days following notice of the relevant FM event yet the corresponding AMWELSH93 contract, in its un-amended form, imparts no such right on the charterer.
Unsurprisingly, in agricultural commodity trades, this dichotomy is no different with the rights afforded to sellers (and to a much more limited extent, buyers) under GAFTA’s “prevention of shipment” provisions, which are vastly superior to the options typically afforded to a voyage charterer under standard grain charterparties such as the NORGRAIN and SYNACOMEX forms.
As can be seen therefore, while these standard form charterparties may include terms that recognise the risk or possibility of an FM event, it is entirely foreseeable that, in the absence of express and extensive amendments, they will not accommodate many possible scenarios nor cover the full ramifications of such an event happening.
As such, even where such contracts might allow or excuse a failure to perform a particular obligation under certain circumstances, they will not excuse a refusal to perform the CP as a whole. Further, if there is a laytime regime within the CP that contains exceptions, and the general exceptions clause does not state that it applies to laytime, then that exceptions clause will not apply to the running of laytime or demurrage.
Such a structure could therefore leave the charterer in the unenviable predicament whereby, following a significant FM event, their FOB seller is contractually entitled not to perform or load the shipment in question but the charter party nonetheless remains in full force and effect with no right to terminate or immediate trigger of frustration (see below) and with any attempt to unilaterally cancel this agreement likely to be deemed a repudiation on the charterer’s part. If the charterer has bought on FOB terms, and sold on CFR/C&F/CIF terms, their position may be even worse. For example, it may be that their seller is entitled to extend time for loading under their purchase contract, but the charterer is not entitled to do the same under their sale contract.
Any other way out?
In such a scenario, an alternative means of voiding the charter party or PC/SC might be if the charterer could argue or establish that the effect of the FM event has been to render the contract incapable of performance, under the English law doctrine of “frustration”.
In essence, if a contract is made and later events outside the parties’ control render the contract either impossible to perform (or, if it can somehow be performed, radically different from what the parties agreed) such that it would be unjust to hold the parties to the contract, English law deems that the contract has been “frustrated”. In such situations the contract is terminated automatically, regardless of any actions which either of the parties may take.
This sounds promising for a charterer, but consider this: how likely is it in a CP or PC/SC context that an FM event will make performing the contract impossible or radically different? A contract might be frustrated if the particular ship sinks or is requisitioned, or if the contract is for the sale or carriage of a specific cargo which is then destroyed. But outside of such extreme circumstances, when most contracts are for the sale or carriage of generic cargoes which could usually be replaced (and there is a demurrage regime to deal with unexpected delays), frustration in such a context is likely to be very rare.
Conclusion
Whilst it is never easy predicting the future, any charterer would be well advised to try and ensure that on both the commodity and shipping sides of any contractual structure, any terms in relation to FM are consistent such that, where unforeseen events do arise, a back-to-back position can be adopted or maintained if necessary.
Of course there may conceivably be times and instances where declaring FM might be impractical or counter-productive but having the option to comprehensively manage or reduce such an exposure would seem more valuable today than ever.
If it is not possible to incorporate or negotiate such terms into the contract due to commercial constraints, charterers should be wary of trying to rely on generic or imprecise contractual provisions (such as exceptions clauses) or the doctrine of frustration to try and escape the contract – getting it wrong could lead to a repudiatory breach. It can also be vital to follow any contractual requirements to give a counterparty timely notice of an FM event.
In any such situation however, and irrespective the contractual terms on either side, understanding the immediate, actual and likely extent of the problem and its genuine impact will be critical in this decision making process and there is as such no substitute for effective real-time information gathering and reporting at the time of the event.
[1] Source