Force majeure judgment a reminder to ‘conduct thorough risk assessments’

Out-Law News | 24 Dec 2021 | 11:47 am |

A decision by the English Court of Appeal in a dispute over a contract’s force majeure clause “serves as a reminder to conduct a thorough risk assessment” before relying on such contractual provisions, according to one legal expert.

Andrew Herring, litigation expert at Pinsent Masons, said it was important for businesses to recognise that “the analysis of force majeure rights will turn on the express drafting of the force majeure clause in question under usual rules of contract interpretation”.

It comes after the Court of Appeal upheld a High Court decision to back Nord Naphtha Ltd against New Stream Trading AG in a dispute over the supply of ultra-low sulphur diesel, despite a “clumsily drafted” force majeure clause in the parties’ contract.

In February 2019, Nord Naphtha made an advanced payment of $16 million to New Stream for the diesel, but during the 20-day window specified for its delivery, New Stream notified the buyer of a force majeure event, stating that the refinery which the diesel had been sourced from was experiencing operational and production issues.

Nord Naphtha terminated the contract when the diesel was not ultimately delivered - in accordance with backstop termination rights in the contract’s force majeure clause - and sought repayment of the $16m from New Stream.

But New Stream said that it had no contractual obligation to repay the advance, and denied any unjust enrichment on its part because it had paid on the advance - minus commission - to the refinery as payment for the diesel. 

It argued that any liability to repay the advance rested with the refinery, which had issued a comfort letter to the Nord Naphtha that detailed how the refinery was liable for the advance payment until 25 April or until the diesel had been delivered - whichever came earlier. 

But the High Court granted summary judgment in the Nord Naphtha’s favour, rejecting New Stream’s argument since Nord Naphtha had no say in the drafting of the comfort letter, which was revocable at will by the refinery.

Herring Andrew

Andrew Herring

Partner

This serves as a salutary reminder for contracting parties to conduct a thorough risk assessment before relying on these types of contractual provisions.

The decision was later upheld unanimously by the Court of Appeal, which said the comfort letter issued by the refinery was “commercially worthless” to Nord Naphtha as it had already expired by the date of termination of the contract.

Handing down her judgement, Lady Justice Whipple described the contract between Nord Naphtha and New Stream as “clumsily drafted” but found that a natural reading confirmed New Stream’s obligation to repay the advance if the goods were not delivered in force majeure circumstances.

She said that it “offends business common sense and ordinary common sense” for a buyer to enter into a contract which lacks a right of repayment of the advance in force majeure circumstances.

“No reasonable buyer would put the advance at risk in that way,” she added.

Herring said, however, that a different outcome may well have resulted had the force majeure clause “been drafted differently”.

“Before relying on force majeure, it is therefore important not only to analyse whether circumstances amount to a force majeure event, but also the consequences of a force majeure event,” he added.

“In this case, the circumstances amounted to force majeure, but the dispute arose over the consequences, with the party relying on the force majeure event ending up on the wrong side of the Court of Appeal’s decision,” Herring said.

He added: “This serves as a salutary reminder for contracting parties to conduct a thorough risk assessment before relying on these types of contractual provisions.”