The ongoing conflict in the Persian Gulf appears to have triggered the same sort of issues that we dealt with extensively in the wake of the Russian invasion of Ukraine in March 2022.
One of those issues is Force Majeure. Many clients are now approaching us to ask (1) can we declare FM to suspend or get out of contractual obligations; and (2) how should we respond to a declaration of FM made against us?
In all such cases, the starting point is to look at the relevant contract. In some cases, the parties include a recognised FM clause such as the BIMCO Model Force Majeure Clause.
In most cases, FM clause is bespoke and careful interpretation is required to determine if there has been a genuine FM event and what remedies are available.
Finally, in some cases there is no FM clause at all – in which case the relevant issue is whether it can be said that the contract has been frustrated under the English common law doctrine of frustration (or to put it in layman terms termination of the contract due to it being impossible to perform).
One of the main requirements for FM is that the event in question (which may be listed or covered by a sweeper clause such as “any other similar event…”) prevents a party from performing one or more of its contractual obligations. That requires an analysis of what the underlying contract covers. By way of example, if a shipment of oil is on a ship bound for a stated port and the ship can’t physically reach that port due to threat of missile attack while transiting the Straits of Hormuz but the vessel has a liberty to discharge at another safe port then that would not be a FM event as the contract can be performed by other means. On the contrary, if an oil or LNG terminal has shut down due to drone attacks and/or threat of drone attacks and the contract requires ships to load at that specific terminal then that would likely be a Force Majeure event.
Major exports from the Middle East via the Persian Gulf include oil and LNG. The buyers are mostly China, India, Japan and South Korea who contract for regular supplies under long term purchase contracts often on “take or pay” terms. The entire infrastructure of LNG exports is built around these long term contracts. They secure the financing of LNG vessels which are then chartered out to consortia (which often include the Qatari and/or UAE governments). In this way there is a regular flow of LNG from the Persian Gulf. It is this regular flow that has been disrupted. Many of these contracts contain FM clauses and, understandably, clients are now asking for legal advice on how they can best protect themselves.
Another key issue with FM clauses is notification. In some cases, notification is clearly stated e.g. “within 5 days” but in others it is expressed more vaguely e.g. “without undue delay” or “promptly”. That gives rise to legal issues in circumstances where it might be argued that a notice is invalid. Likewise, check how the notice is to be given – usually it needs to be in writing and sent by one of the means stated in the “Notices” clause in the contract (so check that clause as well).
The FM clause may also deal with mitigation i.e. what the affected party needs to do to try to perform its obligations notwithstanding the FM event. In some cases, it may not be able to circumvent the problem e.g. the loading terminal has been closed due to threat of warlike actions. However, if the oil is on the ship, there may be a possibility of diverting and unloading elsewhere under a liberty clause. If that is the case, then the best practice is to serve a FM notice and notify the counterparty of what is being done to try to resolve the problem. These obligations to keep others informed can be couched in many ways – for example “best endeavours” or “reasonable endeavours” or “in good faith” and there is case law on what each of those means.
Finally, the FM clause may provide guidance on termination and what happens after termination. Notably, most FM clauses do not absolve the parties from their contractual obligations up to termination. They only discharge future obligations and, even then, they may not affect the common law position which may be that the contract is also frustrated.
One recent enquiry to the BDM team is a reminder that service of a FM notice does not always suspend obligations. If a vessel is loading cargo and loading is interrupted due to threat of warlike actions with the port subsequently being closed and vessel delayed at the anchorage, can a FM clause be relied upon to exclude liability for demurrage? In most cases, an FM clause is not explicit enough to stop the clock such that liquidated damages for delay continue to accrue until such time as the voyage charter can be said to be frustrated. An example is clause 19 of ASBATANKVOY which (although not an FM clause) has been held to not be specific enough to exempt liability for demurrage when read in conjunction with clause 8 (which deals specifically with demurrage exceptions). The position could arguably be different if laytime had not expired when the vessel was ordered out but ASBATANKVOY also deals with laytime exceptions and so the accepted view is that the position is the same. On the other hand, if a FM clause were to explicitly refer to delays in loading and discharging and there is no other provision in the contract dealing with this then it is arguable that the FM clause could operate to suspend the obligation to pay demurrage before the underlying contract is frustrated.
The upshot is that clients faced with FM issues should always take legal advice to avoid making mistakes which can prove costly later. The BDM team have been busy helping clients to draft messages when faced with FM situations so that they can avoid potential legal disputes. We shall have to see however if the situation in the PG leads to a wave of legal disputes as, in some cases, the contracts disrupted by FM events are worth hundreds of millions of dollars.
Nick Burgess
Partner
