The Ebola Virus (EVD) is a deadly disease and the current outbreak has seen over 14,000 reported cases and 5000 deaths in seven countries, principally in Sierra Leone, Guinea and Liberia.
In our previous article – ‘Ebola Virus – The Legal Challenges’ - we discussed some of the relevant legal considerations from a shipping perspective. We showed how the EVD outbreak could affect the respective duties of parties trading on CIF and FOB terms, issues around the nomination and re-nomination of vessels, the substitution of vessels and ports, and potential exposure to quality disputes from cargo interests.
This article focuses specifically on sale contracts and the criteria under which force majeure and frustration might be invoked. The three worst affected countries are significant grain importers. Guinea is a major exporter of bauxite, the aluminium ore. There are growing fears that EVD could reach the Ivory Coast which produces two thirds of the world’s cocoa beans. Imported commodities such as rice and palm oil have already seen prices rise sharply due to perceived scarcity.
EVD is likely to cause delays and disruptions which may not be specifically covered by the sale contract. The question is who bears the risk of those disruptions and the associated costs?
(1) Force majeure
A force majeure clause is generally invoked when parties cannot fulfil their contractual obligations because of unforeseen and catastrophic circumstances.
Instances of force majeure may include:
- a port authority has closed its ports to foreign vessels because of a spread of infection;
- a port has refused entry to vessels which have loaded at West African ports; or
- a Master has refused to enter an open port because of their fears of contagion.
However, each force majeure clause is unique to the particular contract in question. Parties will therefore need to assess carefully whether a declaration of force majeure by them or their counterparty is valid under the terms of their contract. Such clauses need to be read strictly as to what the parties intended at the time the contract was concluded. If issues of public health are not specifically mentioned, a party may nonetheless seek to rely on a catch all exception such as ‘any other event…’. Whether they can will depend on the clause as a whole. Broadly drafted clauses, such as those adding the word ‘whatsoever’, can give the clause a wider reading.
If the event does fall within the scope of the clause, a party may not be entitled to declare force majeure immediately. They should follow the procedural requirements of the clause. For example:
- the clause may require the shipment period to expire before it can be invoked;
- the event relied on may have had to be in existence for a certain period of time; and
- there may be strict notice requirements to observe.
Parties trading on GAFTA terms will face additional uncertainty since the new ‘Prevention of Delivery’ clause does not automatically lead to cancellation but first provides for a temporary suspension of the contract. Where this or similar clauses are incorporated, it is important that parties do not make a premature declaration of force majeure. This could constitute an anticipatory breach of the contract, which carries the risk of oneself being held in default.
In addition to showing that their force majeure clause covers the effects of EVD, a party seeking to rely on an appropriately drafted clause will need to show that they are physically or legally prevented from shipping the goods. The virus must be beyond the parties’ control – they cannot have themselves contributed to the event. Parties will need to provide evidence of the impossibility of performing the contract. At the very least this will include showing the steps taken to try and prevent or avoid the impact of EVD. WHO have issued a number of circulars informing parties of preventative measures, including a blueprint to be followed. Failure to adhere to those standards could be fatal to a claim of force majeure.
For a party disputing that force majeure applies, there may be scope to argue that EVD was foreseeable at the time the contract was entered into and is not covered by the clause. There is no general principle in English law to this effect, and much will depend on the construction of the force majeure clause and when the contract was made. If the contract was agreed before the widespread outbreak of Ebola in the area or country of performance, then there may be a valid force majeure argument. If the contract was concluded after the problem was generally known, and particularly if the contract was to be performed in one of the affected countries, it could be implied that the parties agreed to performance notwithstanding the outbreak.
The consequence of invoking a force majeure clause will largely depend on the clause in question. Increasingly, commodity sale contracts permit an extension of time in which to perform, rather than relieving the invoking party of their obligations. When agreeing to such a clause, it would be prudent for a buyer to consider terms which modify the contractual price payable or give over monetary relief where EVD causes a delay to performance.
For contracts incorporating English law and jurisdiction the doctrine of frustration may apply. If an unforeseen event, caused by neither party, occurs after the formation of the contract, which renders it physically impossible or illegal to fulfil the contract, or transforms the obligation to perform into a radically different one, then frustration may operate to discharge the parties from their further obligations.
For example, if the discharge port in a CIF contract has imposed an absolute ban on cargoes coming from West African ports, the seller cannot perform. There will be scope for them to argue that the contract has been frustrated by supervening illegality.
If EVD was widely acknowledged as a problem at the time the contract was entered into, it is arguable that the party seeking to rely on frustration should have taken precautionary measures to ensure they could perform. This might include shipping from an alternative port, or shipping goods of a different origin. This may then be an insuperable barrier to a defence of frustration. A party seeking to rely on frustration will therefore need to demonstrate that there are no alternative means of performing the contract in accordance with its terms.
The legal effect of a valid frustration claim will largely depend on the terms of the parties’ respective contracts and the facts of the case. However, it is always important to note that, under English law, sums that have already fallen due before the frustrating event will generally remain payable.
Traders should keep up with the evolving situation, identify the commodities which are most likely to be affected, and pay close attention to their contractual arrangements. Much depends on the construction of individual clauses. When faced with a potential force majeure or frustration situation, it is of key importance to gather evidence that demonstrates that the event was unforeseeable, and to explore alternative (contractual) means of performance. Failure to do so could be fatal.
The narrow application of force majeure clauses means that parties would be best advised to draft specific detailed clauses which address: a) what diseases are covered by the clause, and b) the degree of seriousness required beforeforce majeure can be invoked. For contracts which are already in place, parties should consider whether specific addenda can be agreed.
- A clause which specifically addresses EVD reduces the potential for a dispute as to its application to the disease. However, new related diseases which are later identified may still not be covered by such a clause.
- Parties should consider the degree of seriousness required for the force majeure clause to bite. They should set specific criteria which can be measured objectively, for example the trigger could be that the disease is the subject of a WHO declared public health emergency of international concern (PHEIC).
However, parties should ensure that if they do incorporate bespoke clauses into their contracts, these are on back-to-back terms with their supply and on-sale contracts so as to limit exposure. They should also seek to incorporate specific clauses into their charterparties, where possible.