January 19, 2022
Contract Law

Force majeure clauses look to protect parties from unforeseeable circumstances that prevent the fulfilment of a contract. This usually works by freeing the parties of their obligations if a force majeure event occurs. In the recent case Nord Naphtha Limited v New Stream Trading AG, the Court of Appeal analysed a force majeure clause in light of a claimant’s (Nord Naphtha’s) advance payment of 90% of the provisional value of a contract’s services. This advance amounted to $16,059,600 and Nord Naphtha sought to reclaim it after a force majeure event caused services not to be delivered. Whilst usually giving parties the opportunity to terminate a contract, force majeure clauses often protect parties when advance payments are made – ensuring they are recoverable if an unforeseeable event occurs. This case particularly highlights the issues caused by poor drafting. Although often found as a boilerplate clause towards the end of a contract, force majeure obligations need to be thoroughly considered and drafted judiciously.

The facts

Nord Naphtha and New Stream Trading entered a contract on 21 February 2019 in which Nord Naphtha was to receive 30,000 metric tonnes of 10PPM ultra-low sulphur diesel. The contract provided for payment of an advance, calculated as $16,059,600 which amounted to 90% of the provisional value of the diesel. The diesel was to be sourced from Russia and delivered between 5 April and 25 April 2019.

On 17 April 2019, New Stream notified Nord Naphtha of a force majeure event, stating that delivery of the diesel was delayed due to ‘operational and production issues’ at the refinery. Initially it was thought delivery would take place ‘at the end of April or possibly beyond that’ but this failed to materialise.

On 30 June 2020, Nord Naphtha terminated the contract. Nord Naphtha sought repayment of the advance, whilst New Stream denied it was under any contractual obligation to repay it.

Force majeure clauses – the wording

The contract between Nord Naphtha and New Stream Trading contained clause 14 headed ‘Force Majeure’. It provided that neither party should be ‘deemed in breach of contract or liable to the other to the extent that any failure, omission, delay or hindrance arose from any force majeure event resulting from circumstances reasonably beyond the control of either party’. The force majeure clause included a list of possible events including those ‘related to hindrances or delays in delivery’ and ‘interference with supplies’ – which were both relevant to the events which unfolded. Most importantly, however, clause 14.5 was provided as follows:

“Subject to any agreement between the parties in relation to deliveries after termination of Force Majeure Event or any variation of the Contract with regard to the delivery affected by Force Majeure Event, in case of termination of the Contract, nothing herein shall impair the obligations by the Seller to repay to the Buyer the amount of the advance payment or any Outstanding Advance Amount under this Contract in the event that the delivery of the Product is not made or only partially made due to Force Majeure Event.”

This force majeure clause, as stated by the Deputy Judge in an ex tempore judgment, “was not well drafted and… is a mix of sophisticated commercial terms and other clauses which do not fit well”. Had this clause been better drafted, perhaps a dispute would not have arisen.

The court’s interpretation

It was now up to the Court of Appeal to ascertain the objective meaning of the language chosen by the parties, ‘looking to understand what a reasonable person would have understood the parties to mean, such person having the background knowledge which would have reasonably been available to the parties when they formed the contract’. As stated in the judgment, ‘if there are two possible constructions, the Court is entitled to prefer the construction which is consistent with business common sense and to reject the other’.

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Force majeure clauses – arguments presented

New Stream’s legal representation sought to argue that the judge in the summary judgment, against whom they were appealing, had adopted a ‘back to front’ approach to construing the contract, starting with the premise that it would be surprising if the contract did not contain a right to the return of the advance in a force majeure situation and proceeding from that start point to construe the contract to contain such a term, expressly or impliedly.

New Stream then argued that if the court were to focus on the language of the contract, and the force majeure clause 14.5 in particular, it would find nothing to support the proposition that after the occurrence of a force majeure event, Nord Naphtha would be entitled to repayment of the advance.

Another argument put forward concerned the wider commercial context. New Stream was sourcing the diesel from the JSC Antipinsky Refinery and had presented Nord Naphtha with a comfort letter. The comfort letter recorded that the refinery had been informed that Nord Naphtha and New Stream had entered into the contract. It stated that the refinery’s liability under the comfort letter was limited to the amount of the ‘Outstanding Advance’ only and expired on 25 April 2019 or on delivery of the diesel, whichever was earlier. The comfort letter could be revoked by the refinery at its sole discretion “with immediate effect” by giving notice to Nord Naphtha in certain circumstances, such as those which are beyond “our or the Seller’s control”.

New Stream therefore argued that, even though it made commercial sense to expect a force majeure clause to protect an advance payment, that repayment obligation fell on the refinery. This was further contextualised by the fact that New Stream had paid the advance less a commission to the refinery.

Language of the contract judgment

New Stream’s legal representation focused on the words “nothing herein shall impair” in the force majeure clause 14.5 (see above). They suggested that they are words of “preservation, not creation” and that there is no provision in the contract which creates the right (to repay the advance), so the right does not exist. To which the judge responded:

“On a fair reading, and one which a reasonable and informed observer would adopt, the words “nothing herein shall impair” are not the operative words in this clause; they are merely an introduction to what follows, which are the words “the obligations by the Seller to repay to the Buyer the amount of the advance payment… in the event that the delivery of the diesel is not made or only partially made due to Force Majeure Event”. This is what clause 14.5 is all about, this is its purpose. These are words which confirm that the seller is under an obligation to repay the buyer in force majeure circumstances.”

Force majeure clauses – wider commercial context judgment

The starting position that the Court of Appeal considered justified in the wider commercial context was that in a contract for the sale of diesel or “indeed for any goods”, it would be surprising not to find a provision requiring repayment of money paid in advance, in the event that delivery of the diesel or other goods does not take place.

New Stream’s legal representation used the comfort letter to counter this point – saying repayment was to be made by the refinery. The deputy judge responded by saying that the comfort letter was of “no real, commercial assistance to Nord Naphtha at all: it had expired by the date the Contract was terminated; but even when it was extant it was practically worthless given that it was revocable at will by the refinery”.

To this New Stream’s legal representation responded that just because the comfort letter arguably constituted a bad deal for Nord Naphtha, this should not impact upon the interpretation of the force majeure clause. English law enshrines the right for parties to contract freely. The Court of Appeal responded to this point by stating that the deputy judge was “obviously right that the Comfort Letter offered no real comfort to Nord Naphtha… so the focus returns to the contract itself. It does not make any business sense for a buyer to enter into a contract which lacks a right of repayment of the advance in force majeure circumstances”.

Here to help

Although the commercial context of this case worked strongly in Nord Naphtha’s favour, this need not have been a consideration had the wording of the force majeure clause been clearly drafted. The Court of Appeal had to analyse the clause using the principles of contract ‘construction’ because the wording and cross-referencing of the contractual relationship was uncertain. And although it seems the obvious and fair decision that Nord Naphtha retrieve the advance from New Stream, this may not have been the case had the force majeure clause clearly shifted the obligation to repay the advance to the refinery. It is therefore incredibly important to ensure that the drafting of any contractual relationship you intend to become party to is precise and has the effect you intended at the outset.

EM law specialises in contract law. Get in touch if you need advice on force majeure clauses or have any questions on the above.