Force Majeure and Repayment Obligations
Force majeure clauses are an important element of many commercial contracts, mitigating the financial and other negative implications of a force majeure event. Such events range from acts of God, extreme weather events, pandemics, terrorism and state acts.
But as with any contractual terms, disputes can arise in the context of a force majeure ‘event’ and how the contract works in such circumstances. A recent appeal court ruling1 provides important clarity on the interpretation of force majeure clauses.
What’s the background?
A dispute arose following the collapse of a major Russian oil refinery. The claimant had placed a significant order for ultra-low sulphur diesel and paid the bulk of an advance of US$16 million. In the event, the defendant could not fulfil the order because of the collapse of the refinery.
The contract included force majeure clause; the force majeure events were defined by reference to a non-exclusive list.
The claimant terminated the contract for non-delivery and claimed repayment of the advance. The defendant resisted on the basis of the force majeure term of the contract and under a Comfort Letter (which limited liability to the amount of the outstanding advance only). It argued there was no express right to repayment of the advance.
The Court of Appeal upheld the High Court’s ruling awarding summary judgment to the claimant for $16 million.
The appeal judges found the contract to be a straightforward bargain for the sale of diesel – even if “clumsily drafted” in parts. On its objective construction of the language of the contract, the reasonable person holding the information available to the parties when they entered the contract, would have no real doubt the claimant had a right of repayment of the advance in the event of non-delivery for force majeure reasons. The obligation to repay it was so obvious it was effectively an implied term of the contract.
The court also made the point that it made no business sense for a buyer to enter into a contract which lacks a right of repayment of the advance in force majeure circumstances. Whipple LJ said: “It offends business common sense and ordinary common sense”.
Key takeaway
Businesses and their lawyers must ensure all contract terms are clear and unambiguous, in order to mitigate the risk of expensive litigation.
Where significant sums of money are involved, it is also important to carry out an effective risk assessment ahead of entering the contract. Are you fully aware of the financial and practical risks of, for instance, a force majeure or other terminating event arising? If there is any doubt, take specialist legal advice.
· Important appeal court ruling on the meaning and extent of force majeure clauses. Court’s preference – the interpretation that did not offence business common sense (Nord Naphtha Limited v New Stream Trading AG)
1 Nord Naphtha Ltd v New Stream Trading AG [2021] EWCA Civ 1829
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