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.
