by Stephen Kosmin, 11KBW
As the United Kingdom is in the midst of an extended period of lockdown pursuant to the Health Protection (Coronavirus Restrictions) (England) Regulations 2020 (“the Coronavirus Regulations”), contracting parties are turning to the often overlooked force majeure clauses in their agreements.
Stephen Kosmin was junior counsel in Seadrill Ghana Ltd v Tullow Ghana Ltd[2018] EWHC 1640 (Comm), a leading decision of the Commercial Court concerning the doctrines of force majeure and reasonable endeavours. Stephen also wrote the chapter on mistake, frustration and misrepresentation in Wilmot-Smith on Construction Contracts (OUP, 3rd Ed.). Seadrill is now cited in Chitty on Contracts, Keating on Construction Contracts, and Lewison on The Interpretation of Contracts. Stephen outlines the key principles identified in the judgment below.
Force majeure clauses
Although the drafting of each force majeure clause will have to be considered individually, in the ordinary course a force majeure clause specifies that a contracting party will not be responsible for any failure to perform a term of the contract if the cause of the default was a force majeure event beyond that party’s control. A force majeure clause tends to be drafted in conjunction with an obligation on both parties to use their reasonable endeavours to mitigate or overcome the circumstances of force majeure.
Assessing whether a force majeure event has occurred on a given set of facts will turn on contractual construction. Sometimes specific force majeure events are listed in a contract (as in Seadrill) and sometimes the term “force majeure” is used without any additional description. The latter context poses particular challenges and a court hearing a claim will doubtless be confronted with contrary submissions on the point, with each party drawing on aged authorities.
The alleged force majeure event must be the sole effective cause of the failure to perform the contractual obligations. In other words, where there are two effective causes preventing performance, one force majeure and the other not, the force majeure clause cannot be relied on. This position has since been confirmed by the Court of Appeal in Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102. That causation requirement is difficult to satisfy on the facts of many cases.
Reasonable endeavours
By a reasonable endeavours obligation attached to a force majeure clause, both parties are under an obligation to use reasonable endeavours to ensure that the force majeure does not prevent them from performing their obligations under the contract or, if it does, to ensure that the effect of the force majeure is mitigated.
In Seadrill at §85, Teare J held: “As a matter of language ‘reasonable endeavours’ is a phrase which enables account to be taken of all matters which bear upon the question whether it is reasonable to expect a party to take certain steps to avoid or circumvent a force majeure. There is no reason to exclude the absence of a business case or Tullow’s commercial interests from those matters which may be taken into account. However, the extent to which such matters may be taken into account and whether they are determinative will depend upon the contractual context in which the phrase is used. A duty to exercise reasonable endeavours can be found in a variety of contexts.”
He later held, however, that if the context of a reasonable endeavours obligation was a force majeure clause, a party in default cannot rely on its own commercial interests to excuse a failure to use reasonable endeavours. The party relying on the force majeure clause bears the burden of proving on the balance of probabilities that there was nothing that it could reasonably have done to avoid or circumvent the force majeure. In Seadrill, Teare J held that the fact that a step is contrary to a party’s commercial interests was insufficient to show that it had exercised its reasonable endeavours in the context of a force majeure clause because that party could not ignore the commercial interests of the other party in the force majeure being avoided or circumvented. The requirement in force majeure clauses that the party seeking to rely on the clause must use “reasonable endeavours” to avoid or overcome the force majeure therefore imposes a significant hurdle to successful reliance on the clause.
The Coronavirus Regulations
Each situation in which a force majeure clause might be relied upon will turn on its particular factual context. I note, however, that contracting parties will doubtless be obliged to consider the effect of Regulation 6(2)(h) and 7(d)(iv) of the Coronavirus Regulations, both of which bear on the ‘reasonable endeavours’ test. By Regulation 6(2)(h), “fulfil[ling] a legal obligation, including attending court or satisfying bail conditions” is identified as a “reasonable excuse” for a person to leave the place where they are living. Similarly, by Regulation 7(d)(iv), a person may participate in a gathering in a public place of more than two people “to participate in legal proceedings or fulfil a legal obligation”. The provisions, whilst not exhaustively drafted, suggest that the exceptions to restrictions of movement and gatherings will be construed narrowly. However, fulfilling an underlying “legal obligation” is presumably permissible.
