Force majeure clauses serve an important purpose in commercial contracts, but disputes can arise following a force majeure ‘event’. The award-winning commercial lawyers at ParrisWhittaker are specialists in advising businesses on their contract terms and in commercial disputes.
An appeal court ruling1 on the interpretation of force majeure clauses is important for businesses and their lawyers and clarify the extent to which they may apply. The ruling has persuasive authority on the courts in The Bahamas and should therefore be noted.
A force majeure clause removes the parties’ liability when circumstances beyond their control arise, and which make performance of the contract impossible or illegal.
What’s the background?
In this case, a dispute arose following the collapse of a key oil refinery in Russia. The claimant had placed a large order for ultra-low sulphur diesel, paying an advance of US$16 million. However, as a result of the refinery’s collapse the defendant was unable to deliver on the order.
It sought to rely on the force majeure provisions in the contract and said there was no express right to repayment of the advance. Under the force majeure clauses, force majeure events were defined by reference to a non-exclusive list.
The High Court awarded summary judgement to the claimant for $16 million. The Court of Appeal dismissed the appeal. The appeal judges stated that the contract was a straightforward bargain for the sale of diesel, though it was “clumsily drafted” in parts.
On its construction of the language of the contract, the reasonable person reading the force majeure clause and knowing the information available to the parties when they entered the contract, would have no real doubt the claimant had a right to have the advance repaid in the event of non-delivery for force majeure reasons.
This right was clear on an objective reading. In fact, as the High Court judge had stated, a repayment obligation was “so obvious that it fulfils the requirements for an implied term”.
The appeal judges went further, making 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. The court said: “It offends business common sense and ordinary common sense”.
What does this mean?
This ruling demonstrates:
The importance of clear contractual drafting and conducting a robust risk assessment before entering the contract. It is somewhat surprising that a commercial relationship of this nature, with significant sums of money at stake, was characterised by “clumsy” drafting. Expensive litigation would probably have been avoided had the terms been clearly set out.
Commercial common sense and ordinary common sense are fundamental to the correct interpretation of contractual terms. Here, the repayment obligation was so obvious to the courts in the context of force majeure.
How can we help?
The key takeaway for business is to ensure all contractual terms are clear and unambiguous. For specialist assistance in negotiating and drafting your commercial contracts; or if a commercial dispute has arisen and you need expert help, contact the expert commercial lawyers at ParrisWhittaker for robust advice as early as possible.
