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Work under Force-Majeure Circumstances

19.07.12

Severe weather conditions during the 2012 winter have obviously caused serious negative consequences for business. The mass media and official sources have repeatedly announced the news related to a difficult ice situation in the Sea of Azov and the Black Sea as a result of which the loading/unloading in ports and vessels sailing to the destination were significantly delayed.

 

Execution of sale and purchase contracts on delivery of goods under CIF and FOB terms in such a situation could be considerably delayed or repudiated resulting in damages and losses for the parties of such agreements.

 

We turned to the experts, Artem Skorobogatov, associated partner, and Natalia Myroshnychenko, senior lawyer, International Law Offices, with questions as to what degree the parties of sale and purchase contracts connected with carriage by sea can invoke unfavorable weather conditions as an excuse for failure to fulfill their obligations under such agreements.

 

UJBL: Which obligations of the parties under agreements could be the subject of claims and disputes?

 

Artem Skorobogatov (A.S.): Both sellers and buyers under purchase and sale agreements on FOB and CIF terms are exposed to the consequences of difficult ice, depending on the particular terms of a contract. If one of the parties in pursuance of its obligations under sale contract chartered a vessel, it will be responsible also as the Charterers before the ship owner according to the charter party.

 

In particular, due to severe weather conditions the cargo shipment from a frozen port can be delayed or the obligation on vessel delivery in such port is unfulfilled. Depending on the conditions of a contract a party therefore can be liable for delay of the vessel waiting for ice convoy/loading (demurrage, detention), delay of cargo delivery or for repudiation of the contract as a whole.

 

UJBL: Severe weather conditions are often recognized as force-majeure circumstances in international practice. Is that happens in this case?

 

Natalia Myroshnychenko (N.M.): A lot of standard purchase and sale agreements as well as the majority of charter parties are governed by English law.

 

Unlike continental legal systems, there is no doctrine or concept of the force-majeure in English law. A force-majeure clause can be included in the agreement and so will have the force determined by the parties and English case law.

 

A force-majeure clause is so interpreted as an agreement between the parties which releases one or both parties from execution of the contract in cases when such performance is impossible in view of the occurrence of force-majeure circumstances listed in the clause. Such failure to execute will not be considered as breach of a contract and will not cause reimbursement of damages caused thereby.

 

UJBL: Was it enough for the party of sale and purchase contract to apply to the force-majeure circumstances such as ice situation in the Black Sea region this winter and to the relevant clause to avoid responsibility for failure to perform obligations?

 

A.S.: All depends upon what had been agreed by the parties in the Force-majeure clause and/or in the Ice clause of a contract. If existing weather conditions were directly stipulated in the agreement as force-majeure, the parties should exchange relevant notices and to wait for improving weather conditions to continue contract performance. If not, the parties should come to an agreement on prolongation of delivery (transportation) terms of and/or on redistribution of the losses connected with the delay in transportation. Such new agreements should be duly fixed in order not to become the cause of a new dispute. The best option is to agree the text with your lawyer as the counteragent’s lawyer would hardly protect your interests.

 

N.M.: Standard forms of purchase and sale agreements FOSFA and GAFTA are widely used in the business sphere. The force-majeure clause contained therein is rather ambiguous and, depending on particular circumstances, can be interpreted in different ways. The court shall take into consideration all details: whether force-majeure circumstances occurred during the stipulated period of delivery (shipment) or at the additional period agreed by the parties, whether a relevant notice was served or the circumstances are subject to the list specified by the clause, etc.

 

UJBL: How do other terms of the agreement affect the interpretation of the force-majeure clause?

 

N.M.: Most of the standard forms of purchase and sale agreements stipulate the default clause besides the force-majeure clause. As the default clause contains conditions regulating default of the parties to fulfill contractual obligations so it should be taken into account as well. In what way conditions of both clauses will be interpreted and in whose interests depends upon the particular situation which developed under the agreement at the moment of the occurrence of force-majeure circumstances: whether the cargo was loaded on board the vessel or not, how close the vessel came to the port, whether the cargo was ready for loading, etc.

UJBL: What actions should be taken by the party upon the occurrence of circumstances which interfere with performance of the agreement and can be recognized as force-majeure?

 

A.S.: If one of the parties has not declared a force-majeure event during the occurrence and effect of specified circumstances, then it will be more difficult to apply the force-majeure clause afterwards. Even though the party is not sure of the accuracy of its position, it is often more effective to refer to the clause at the first opportunity and then to collect the relevant evidence.

 

How to do it in the right way depends upon the terms and conditions of the agreement and it demands accuracy once the particular mechanisms stipulated by a contract starts working.

 

As a rule, under sale and purchase agreements the usual practice is to prolong the terms of contract performance. Only after expiry of such period, will one or both parties obtain the right to terminate the agreement.

 

N.M.: The situation with charter parties is different. If the force-majeure clause or the ice clause of the charter party does not interpret the occurred circumstances as force-majeure or such that exclude the Charterers’ liability and other similar clauses are not included in the charter party, it is always difficult for Charterers to avoid responsibility concerning payment of demurrage or detention in connection with the delay of a vessel. Such disputes are often the subject of arbitration proceedings where the award is made in consideration of all circumstances, intentions and actual actions of the parties.

 

UJBL: Are there any standard forms of documents which the party should draw up and submit to the counter-agent when force-majeure occurs?

 

N.M.: The list of documents and their form (written notice, notification, CCI certificate, etc.) to be submitted and/or produced by a party and terms of such submission may be explicitly agreed in a contract. Such terms should be fulfilled very attentively: because of an incorrect formulation, for instance, in the CCI certificate, this can be considered as irrelevant to the matter or invalid for the purposes of a contract. If the agreement does not contain such conditions or they are not specified explicitly, in case of failure to perform the obligations the party, as a general rule, submits a written notice to the counter agent where indicates causes of a contract non-performance (referring to the occurrence of the circumstances), relates such circumstances to the force-majeure (with reference to the force-majeure clause) and informs about the expected terms for contract performance.

 

The wording of such a notice should be defined clearly and carefully as upon it, to a great extent, depends the further acceptance of the force-majeure event by the counter agent and, consequently, discharge from liability and indemnification. The CCI certificate, survey report and weather report can be provided as evidence that particular circumstances occurred. Anyway, if the agreed course of the transaction is somehow disturbed it is better to consult with the lawyer promptly and to organize dialogue with the counterparty correctly. Finally, from possible options: to meet counterparty requirements, to stay with strong position or to find “the happy medium” one should choose the best way to suit the particular situation. Otherwise, as often happens, damages will considerably exceed those which were initially expected.