Get Ready to Confront the Force (Majeure)

Categories : Coronavirus

Types : Alerts

The maritime industry is awash with contracts that have a force majeure clause. It is understandable in an industry that must confront unexpected circumstances that could seriously impact business on all seven seas. While the clause has its origins in civil law, it is becoming a standard term in many common law cases as well. Under US Law, force majeure is a legal theory which is used “to relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated.” The U.S. Supreme Court has held that the event must not only fall within the scope of a force majeure clause contained in contract, but must be “unforeseeable” as well. Many of the marine contracts, including charter parties, COAs, bills of lading, and the like, commonly include “epidemics” and “quarantine” in the long list of events that relieve a party, or all parties, from any liability. With the coronavirus pandemic now affecting commerce around the world, the force majeure clause will certainly be tested in the coming months as shipowners, charterers, cargo owners, terminal operators, agencies, and others seek to avoid financial liability caused by the shutdown of business operations.

There is, however, a lack of uniformity among the different U.S. Circuits as to the effect that the inclusion of the specific terms “epidemic” or “quarantine” have in a force majeure clause. The problem almost always comes down to the critical requirement that the event be “unanticipated and could not have been foreseen or guarded against in the contract.” In the Third Circuit, the federal Court of Appeals required a showing of unforeseeability, even though the alleged force majeure event was specifically listed in the force majeure clause. The Fifth Circuit reached the opposite result and noted that “[e]xculpatory provisions which are phrased merely in general terms have long been construed as excusing only unforeseen events which make performance impracticable. However, because the parties had specifically addressed in the clause the risk that actually delayed the performance, a showing of foreseeability was not required.”

In arbitration awards, as opposed to court decisions, arising out of maritime contracts such as charter parties and contracts of affreightment, force majeure has been often interpreted as requiring that the event that delays performance, or renders it impossible, be unforeseeable. While there is no reported precedent among SMA arbitral awards that involves exceptions to laytime, demurrage, or justifies the cancellation of a charter party due to force majeure consequent to an epidemic, we believe that the rationale in some of the awards offer some guidance in determining how an arbitration panel would decide the matter at hand.

Epidemics, or pandemics and quarantine, are often accompanied by government orders which shut down resources needed to operate maritime transport. In Phoenix Bulk Carriers, the harbor master of Puerto Ordaz on the Orinoco river issued a notice of draft restriction that led to a reduction in the quantity of cargo that could be loaded on a vessel. When Owners claimed deadfreight, charterers invoked the force majeure clause which included “government intervention”, or “law, act, order, proclamation, decree, regulation, ordinance, instruction or request of government or other public authorities, federal, state, local or foreign”, or “contingency or delay or failure or cause of any nature beyond the reasonable control of Charterer.” The arbitration panel ultimately held that given the fact that the charter involved sophisticated parties, the fluctuations of the draft restrictions at Puerto Ordaz, even if reduced to a government order, were to be considered not unforeseeable. The Panel denied the charterer a defense of  force majeure. The award made clear that the underlying problem of draft change was the cause of the interruption and not the government’s order.

In Telair Shipping, the arbitrators held that even if a force majeure clause contained a specific reference to “shortage of barges” as one of the events that was intended by the parties to protect the Charterers from loss of time and payment of demurrage, the fact that there was indeed a shortage of barges did not constitute a force majeure because the shortage of barges was “not an unusual event.”

To the extent that the force majeure clauses in contracts do not reference epidemics or quarantine, but the clause does end with the catch-all phrase “or other similar causes”, it is doubtful that a panel would hold the defense applicable. The rule of ejusdem generis (i.e., “of the same kind”) would prevent the clause from being read to include dissimilar causes. On the other hand, if the clause ends with the phrase “all events whether similar or dissimilar”, then there is a better chance that coronavirus epidemic would be covered. The same is probably true of a force majeure clause that ends with the phrase “ and any reason whatsoever beyond the control…”

If the contract does not contain a force majeure clause, but is subject to US law, there may be a similar defense of “impossibility of performance” or “frustration of venture” available to the parties. But these defenses equally are dependent on a finding of an unanticipated and unforeseeable event which makes performance objectively impossible.

At this time, the U.S. Coast Guard and U.S. Customs and Border Patrol are allowing cargo loading and discharging operations to continue as normal in U.S. ports. On March 13, 2020 CLIA announced that CLIA cruise lines suspended operations from the U.S. Between January 31 and March 14, 2020, the US President has issued a number of proclamations suspending access to U.S. soil to passengers coming from China, Iran, the Euro-Zone, England, and Ireland [see links 1, 2, 3, 4]. In the U.S., measures to prevent a widespread diffusion of the coronavirus are being adopted at a progressively increasing rate as well as the level of restrictions on the freedom of movement of people. It is unclear at the moment if and when similar measures could be adopted to the transportation of goods, but it is not surprising that the trade world, and especially the shipping industry, are on an enhanced level of alert with respect to the impact of coronavirus [see link 1 and link 2].

Given the amount of worldwide attention on the coronavirus issue, it is conceivable that panels may give extra scrutiny in coming arbitrations to claims of force majeure, even if accompanied by governmental order, in countries heavily impacted by the pandemic. Certainly, close scrutiny has to be given to the negotiations of contracts and their force majeure clauses if they were executed since December 2019. The issue of whether the epidemic or quarantine is “foreseeable” will be a factual issue. That factual investigation is going to take into account the situation with the coronavirus in the designated trade route at the time the contract was signed and at the time when it is claimed that the disease prevented performance. Therefore, it is important that parties collect all communications surrounding the negotiation of the force majeure clause as well as news clippings and alerts about potential epidemic which may have influenced the call for a force majeure clause.

If a contract is being negotiated at the outset, or even in the middle of an epidemic or pandemic, it may be much wiser to negotiate specific and clear clauses which detail the consequences if the contract is impacted by the known and potentially foreseeable event. Relying upon the general language in a force majeure clause may be a mistake when a tribunal or a court can conclude that the parties were sophisticated enough to appreciate that their venture could be interrupted by the disease or the severe governmental orders that quickly follow such events.

Montgomery McCracken attorneys are available to assist clients with numerous issues related to COVID-19. Montgomery McCracken’s COVID-19 Resource Center is available here.