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Bulletin 3: Covid-19 and Force Majeure

News / 14-04-2020 / London

Since the start of the COVID-19 outbreak, we have increasingly been asked by our clients to advise on whether the pandemic itself or events arising out of COVID-19 amount to force majeure events, excusing one or both parties from performing all or part of their obligations under a contract. In this bulletin, we will consider how force majeure events are defined and how this is relevant to the yacht industry in the context of COVID-19, with a particular focus on yacht-building contracts and yacht charters.

 1.  What is “Force Majeure”

Where a party is prevented from performing its obligations under a contract due to the occurrence of certain events which are outside that party’s control, there are limited remedies available under English common law allowing that party to suspend performance of all or part of its obligations under the contract.  In the absence of an express clause, the common law doctrine of frustration may apply, but this doctrine only applies in certain restricted circumstances, typically where performance has become impossible or fundamentally different from what had originally been envisaged by the parties.

Against this background, English law contracts often include a “force majeure” clause, designed to excuse one or both parties from the performance of certain or all obligations following the occurrence of an event listed in that clause. A force majeure event is therefore what the parties have intended it be and it does not exist as a principle implied by English law. Force majeure clauses tend not to list “pandemic” as a specific event, and the question is likely to be whether typical force majeure events such as “act of God”, “any law or any action taken by a government or public authority”, “quarantine” will trigger the operation of the clause in a COVID-19 scenario.

The party seeking to rely on a force majeure clause has the burden of proving that a force majeure event has occurred, that the event is impacting performance of the contract (preventing, hindering or delaying it, as the case may be), that non-performance was due to circumstances beyond their control and what steps have been taken to avoid or mitigate the force majeure event or its consequences. In addition, the party seeking to invoke the force majeure clause will have to comply with any notification obligations and procedures set out in the clause.

2.  Could COVID-19 constitute a “Force Majeure” event?

If there is a “force majeure” clause in the contract, whether the COVID-19 outbreak or its consequences amount to force majeure events will depend specifically on the wording of the clause, the contract as a whole and the factual scenario. It should be noted that many issues experienced by our clients arise out of actions taken to counter the spread of COVID-19 rather than by the virus itself. If the inability to perform is the result of actions taken by governments to contain or delay the spread may be possible to rely on typical provisions such as “quarantine”, “embargo” or “government action”. Acts of God may be grouped with natural disasters, such as floods or earthquakes and if that is the case it may be difficult to argue that they also cover epidemics or pandemics; as always, the effect of a clause will be a matter of interpretation.

Yacht-building

In the yacht-building context, the ability of yards to operate is clearly being impacted by the pandemic. For example, as a consequence of COVID-19 directly infecting some of their employees, some yards are placing some personnel on leave and closing down segments of the yard. Furthermore, the government measures and travel restrictions imposed in response to COVID-19 are affecting their ability to source both the essential workforce and the material they require to operate, and hence their ability to comply with their contractual obligations, such as meeting the delivery dates for newbuildings and completion dates for repairs. Due to the travel restrictions, the buyer on the other hand may experience difficulties in sending their representatives to supervise construction, attend sea- trials and inspections of yachts, as well as organise a prompt departure of the vessel from the yard following delivery.

In this context, whether a party may rely on a force majeure clause under a yacht-building or refit contract to excuse non-performance is becoming increasingly important. The wording of the yacht-building contract will normally use the yard’s standard form or alternatively be a bespoke contract negotiated by the parties, but even though the position will vary on a case-by-case basis, most agreements will contain a force majeure provision. By looking at the category of shipbuilding contracts more generally, we note that most standard forms, including BIMCO NEWBUILDCON and the Shipbuilders’ Association of Japan (SAJ), contain a force majeure clause. These clauses include events such as “epidemic”, “quarantines” and “requirements of government authorities” which may be of relevance in the COVID-19 scenario.

It should be noted that force majeure clauses under these contracts are mainly for the benefit of the yard rather than the buyer. The difficulties experienced by yards with their employees, suppliers and sub-contractors triggered by the COVID-19 outbreak or its consequences may fall within the list of named events, but it will be for the yard to demonstrate that the force majeure clause applies, by identifying the event and showing that it caused the delay, as well as complying with any requirement identified in the clause, such as to serve notices. If the clause is properly invoked, this would typically allow the shipyard a “permissible delay” in the delivery date.

The buyers will therefore need to consider what practical difficulties might arise out of the pandemic and how these might impact on their ability to perform their obligations under the contract as a whole. For example, buyers might face difficulties in sending the required representatives on site when required under the terms of the yacht-building contract and, if the position as to non-performance is not allocated under the contract, should liaise with the yard in an attempt to find a solution, such as identifying different procedures or agreeing an extension of time. Of course, buyers facing delivery delays should also consider the consequential impact on any connected contracts, as well on their financing arrangements.

Yacht Charter Agreements

The COVID-19 outbreak is having a significant impact also on the yacht charter market. For example, as a result of lockdown measures owners might not be able to deliver the yacht on time or at all, charterers might be not allowed to reach the port of delivery due to travel bans or the yacht might be restricted from sailing due to port restrictions. Arranging the boarding and/or disembarkation of crew and passengers is proving to be another issue.

As a result of the above events, we are receiving a number of enquiries from owners and charterers relating to the cancellation or postponement of existing charters. The parties’ agreement to a force majeure clause is generally key to understanding the risk allocation in this context. Many yachts in the Mediterranean are chartered under the MYBA standard form, which incorporates a force majeure clause which may afford protection to owners in case of failure to deliver the yacht, for example if directly attributable to “governmental act or regulation”. If this clause is successfully invoked, charterers would be entitled to treat the charter as terminated, but their only remedy will be the repayment without interest of all the payments made by them, with no right to claim damages. Alternatively, if the parties mutually agree, the charter period shall be extended by a time equivalent to delay or postponed to a mutually agreed time.

The MYBA force majeure clause can be relied upon by owners in case they fail to deliver the yacht on time, but it does not typically allow protection to charterers in case they want to cancel the charter for force majeure. The MYBA has recently developed a special addendum to their charter agreement purporting to allow some flexibility in terms of change of scheduled dates or geographical areas, or giving charterers the option to cancel without penalty, and hence purporting to allow more protection to charterers in this context. This addendum can either be appended to existing charters or adopted in future contracts.

3.   Conclusion and way forward

Even though the position has not yet been tested by the English courts, and bearing in mind that force majeure clauses are to be considered on a case-by-case basis, overall we take the view that the COVID-19 outbreak and/or its consequences are likely to fall within the definition of a force majeure events under many contracts containing such clauses. This will however not automatically excuse non-performance of contractual obligations under a contract; we suggest that the party wishing to invoke a force majeure clause keeps a documentary record showing why performance was impossible, what steps they have taken to mitigate the loss and evidence of service of any notices and compliance with any other terms under the clause. Given that COVID-19 is now a known factor, if a contract is entered into now, it may well be difficult for the parties to treat the events connected with the pandemic and/or the consequences of the pandemic as force majeure events, and the parties should consider alternative methods of allocating these risks under the contract.

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