Force Majeure And The Cost Of Unclear Contract Terms

Bizar Male

Disputes over the meaning of a contract can be costly and time-consuming. Take the 2020 English High Court case of Totsa Oil v New Stream Trading – a dispute over the meaning of a force majeure clause in a multi-million dollar chemical supply contract. It provides a clear illustration of the importance of ironing out any ambiguities in a contract at the negotiation and drafting stage. ParrisWhittaker, a leading law firm in the Bahamas provides specialist advice on commercial contracts, including tactical guidance to businesses that find themselves caught up in contractual disputes. Here we:

  • Examine how courts interpret provisions in a contract that are unclear in some way;
  • Highlight the increasing importance of well-drafted force majeure clauses in commercial contracts; and
  • Look at the lessons to be learned from the Totsa Oil case.

How Do Courts Interpret A Disputed Contract?

Sometimes there’s a misconception that courts will be flexible about accepting subjective evidence of the intentions behind a contract. On this view, even if the contract doesn’t clearly state something that was agreed, a party will be able to persuade a judge through his or her evidence in court what was agreed. This isn’t the case. In some very limited circumstances the courts will use information from outside the contract to interpret it. But the cornerstone of contract interpretation is the principle that the courts will only give effect to the parties’ intent as objectively expressed. Or to put it another way judges will look at what’s written down in black and white.

When there’s uncertainty over the terms – when one clause can reasonably be taken to mean more than one thing – then litigation is often the result. It’s our job to help clients avoid the risk of going to court where possible. We do this through paying meticulous attention to detail when drafting contracts for clients, and by providing practical advice on the merits of a client’s case in the event of a contractual dispute.

Getting The Force Majeure Clause Right

The force majeure clause in commercial contracts (what should happen when something outside one or more of the contracting parties’ control jeopardises the performance of the contract) is one of those clauses that comes under the umbrella of ‘boilerplate’ provisions. Alongside terms relating to issues such as arbitration and governing law, force majeure clauses tend to be the standard, template-type paragraphs that appear at the end of the contract. On occasion they are incorporated into the contract with less thought than those clauses perceived to be more important to the specifics of the deal covered by the contract.

In 2020 however the Covid pandemic forced lawyers across the world – and their clients – to consider much more carefully the precise wording of the force majeure clauses in their commercial contracts. If prevented from performing a contract because of the impact of Covid19 could parties rely on a force majeure clause to legitimately avoid their obligations?

Unlike some jurisdictions across the world, English law (which is highly persuasive here in the Bahamas) doesn’t clearly define force majeure. Therefore if a party seeks to invoke a force majeure event it will have to ask the courts to apply the relevant clause to the facts of the case in hand. Judges will consider the following:

  • How does the clause define force majeure?
  • Does the contract list what are force majeure events and what aren’t?
  • Does the clause exclude forseeable events?

In relation to this last point, whether or not Covid19 was a forseeable event is the subject of intense debate. In each case it will be essential to assess the forseeabilty of Covid19’s impact at the time the contract was made.

Interpreting Force Majeure Clauses: Totsa Oil v New Stream

This 2020 case decided by the High Court in London concerned events that occurred before the outbreak of the global pandemic. But it’s nevertheless significant. As we have seen, force majeure clauses have assumed greater importance against the backdrop of the pandemic and Totsa Oil shows how courts currently interpret force majeure clauses when the clause appears to conflict or overlap with other terms in the contract

In brief, the case involved an advance payment of $14million made by Totsa Oil in March 2019 to Stream Trading for a consignment of chemicals. A month after the payment Stream Trading notified Totsa of a force majeure event and failed to deliver the consignment. Totsa then asked for repayment of the $14million but Stream Trading refused. It cited the contract’s reimbursement clause and argued that Totsa’s rights under it were cancelled out by the force majeure event.

The reimbursement clause provided that, save for the force majeure clause, if “for any reason whatsoever” the product was not delivered the seller would, within five working days of the buyer’s written demand, reimburse the buyer their advance payment.

Maybe it’s with the benefit of hindsight but it’s easy to see how the cross-reference to the force majeure clause in et reimbursement clause (the words ‘save for the force majeure clause’) was capable of causing uncertainty.

The court found in favour of Totsa Oil and made an order confirming that the company was entitled to a reimbursement of the $14 million. The court found that the reimbursement clause when read alongside the force majeure clause, was the agreed provision between the parties for the repayment of the advance sum in circumstances where there had not been delivery of the cargo, either by reason of a force majeure event or for any other reason whatsoever. The purpose of the reimbursement clause cross-referring to the force majeure clause was to highlight the possibility that if a force majeure event arose, it was open to the parties to agree a different arrangement from the one that would otherwise apply under the reimbursement clause.

Comment

The decision is useful but not entirely satisfactory. You could be forgiven for concluding that the conflicting provisions resulted in the court jumping through hoops to arrive at a just outcome. If anything the case serves to highlight the necessity of clarity when drafting contracts. This means:

  • Taking the time at the outset of a business relationship to think strategically about what you want to happen if unforeseen events transpire
  • Using plain English throughout the contract and avoiding unwieldy or confusing expressions that will only lead to uncertainty
  • Where use of technical terms is unavoidable (as they will be in most commercial contracts) ensure these terms are clearly defined in the agreement
  • Including definitions to explain what you mean by any overly technical term
  • When cross-referencing different clauses be very clear how each clause relates to the other. Remember it was the interplay between two competing clauses that gave rise to the dispute in the Totsa case
  • When it comes to force majeure provisions be specific about which events will trigger the clause
  • Ensuring that all oral agreements between the parties are reflected fully in the terms

Of course in the real world there will always be room for contractual disputes. A party intent on arguing over their obligations will find ways to raise doubt. What matters is that you invest in expert legal support to ensure your contractual position is protected

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