(Hint from the UK case)
On June 24, 2022, in the case of N KD Maritime Limited v. Bart Maritime (No 2) Inc (Shagang Giant) [2022] EWHC 1615 (Comm), the Commercial Tribunal of the High Court of England and Wales (hereinafter referred to as the Court) interpreted the "force majeure clause" stipulated in the contract, finding that the government restrictive measures taken in response to the COVID-19 pandemic did not constitute force majeure. The buyer's act of terminating the contract by invoking the force majeure clause is invalid. Therefore, the court supported the seller's claim, ruling that the buyer's termination of the contract constituted a breach of contract and had no right to demand a refund of the down payment already made.
1. Factual Background of the Case
To scrap all its large ore vessel "S HAGANG GIANT," built in 1993, Bart signed a contract (Memorandum of Agreement) with NKD on March 5, 2020, to sell the vessel to NKD, agreeing to transport the vessel from Singapore to Alang, India, where it would be recovered by the shipbreaking yard in Alang.
This case mainly involves the following two contract terms:
Clause 2
(a) Delivery Location
The Vessel shall be delivered and taken over safely afloat at outer anchorage Alang, West Coast India, which shall be the “Delivery Location”.
I f, on the Vessel’s arrival, the Delivery Location is inaccessible for any reason whatsoever including but not limited to port congestion, the Vessel shall be delivered and taken over by the Buyer as near thereto as she may safely get at a safe and accessible berth or at anchorage which shall be designated by the Buyer, always provided that such berth or anchorage shall be subject to the approval of the Seller which shall not be unreasonably withheld. If the Buyer fails to nominate such place within 24 (twenty four) hours of arrival, the place at which it is customary for vessel (sic) to wait shall constitute the Delivery Location. The delivery of the Vessel according to this paragraph shall constitute full performance of the Seller’s obligations and all other terms and conditions of this Agreement shall apply as if delivery had taken place.
Upon delivery, the Vessel shall be recycled at a Ship Recycling Facility …
( c) Delivery Notice s
The Seller and/or their agents will give 5, 3 and 1 (five, three and one) days approximate notice of arrival at the Delivery Location, in accordance with the terms and conditions of this Agreement.
I f for reasons beyond the Seller’s control the Vessel has not arrived at the Delivery Location on or before 1700 hours local time on the Cancelling Date and the Seller and the Buyer have failed, having acted in good faith, to reach mutual agreement on an extension to the Cancelling Date then the Buyer shall have the right to cancel this Agreement provided written or telegraphic notice of such cancellation is given to the Seller by the Buyer within 48 (forty eight) hours after notice of such delay is given by the Seller to the Buyer. …
Clause 10 Force Majeure
Should the Seller be unable to transfer title of the Vessel or should the Buyer be unable to accept transfer of the Vessel both in accordance with this contract due to outbreak of war between the nominated country of delivery and any other country, wreck, actual constructive or compromised total loss of the Vessel, restraint of governments, princes, rulers or people of any nation or the United Nations, act of God, then either the Buyer or the Seller may terminate this Agreement upon written or telegraphic notice from one party to the other without any liability upon either party and the Initial Payment referred to in Clause 1.1. hereof shall be released to the Buyer.
The suspension or termination of the activities of the Ship Recycling Facility shall not constitute a force majeure event under this Agreement and the Buyer agrees to pay for and take delivery of the Vessel in accordance with the terms and conditions of this Agreement and after delivery, the Buyer shall be at liberty to ballast the Vessel to another Ship Recycling Facility … for Recycling.
After signing the above agreement, NKD paid Bart Company 30% of the total contract price as a down payment (US$4,264,723.13). However, on March 21, 2020, the vessel was prohibited from entering the Khambat Bay Vessel Traffic Management Center area (hereinafter referred to as the VTS area), so it had to anchor outside the VTS area. Starting March 24, in response to the COVID-19 pandemic, the Indian government implemented restrictions including lockdowns, which suspended ship recycling activities at the Arang shipbreaking plant. On April 14, the Indian Prime Minister announced that the lockdown measures would last until May 3. During this period, the vessel involved was never able to enter the VTS area.
On April 14, NKD invoked Article 10 of the contract to terminate the contract, arguing that the blockade measures imposed by the Indian government starting March 25 were force majeure events that had persisted, preventing Bart from transferring ship ownership under the contract and NKD being unable to receive ship ownership under the contract. On April 15, Bart Company replied, stating that there was no force majeure event and NKD had no right to terminate the contract on this basis, considering NKD's request to terminate the contract as a refusal to perform. On that day, NKD invoked Clause 2(c) of the contract and issued another notice of contract termination.
On May 6, Bart sold the vessel to another company (Best Oasis Ltd.), and delivered the vessel to the latter on May 26.
2. Dispute between both parties
NKD Company argued: The Indian government's pandemic lockdown measures prevented Bart from transferring ship ownership under the contract. Under Article 10 of the contract, NKD had the right to terminate the contract and demand a refund of the down payment.
Bart Company argued: Clause 10 of the contract does not apply to this case. Bart Company did not encounter circumstances where the ship could not be transferred, and transferring ship ownership does not require delivery of the vessel; Even if delivering a vessel is a necessary condition for transferring ship ownership, Bart has not been unable to deliver vessels due to force majeure events (i.e., government restrictions). Therefore, NKD Company's notice of contract termination constitutes a refusal to perform, and Bart Company has the right to retain the down payment and claim losses and expenses incurred due to its breach.
NKD and Bart both filed lawsuits against each other, and on June 5, 2020, the court ordered a consolidated trial.
3. Court determination
The court held that the fundamental focus of the dispute was whether NKD Company's notice of contract termination was legal and valid. If the answer is yes, NKD has the right to demand a refund of the down payment; If the answer is no, NKD constitutes default, and Bart has the right to retain the down payment and receive compensation for losses exceeding it.
To address the above focus, the court began by analyzing and discussing the following specific aspects based on Article 10 of the force majeure clause on which NKD Company was based on the termination of the contract:
(1) Does the provision in this clause "transfer of ship ownership according to contract agreements" necessarily require delivery of the vessel?
(2) Does "delivery under contract" require delivery at a specific location? If so, did Bart fail to deliver at that location?
(3) Are these deliveries not caused by government restrictions?
(4) Was Bart Company's failure to fulfill the contract due to NKD's lack of cooperation?
Taking into account the relevant facts, the court held that:
(1) In the context of the contract, the "transfer of ship ownership" stipulated in Article 10 does not necessarily require delivery of the vessel. Therefore, in the absence of an impossibility of transferring ownership of the vessel, delivering the vessel solely under the agreed delivery terms is insufficient to support terminating the contract by invoking Article 10 (force majeure clause).
(2) Although the vessel involved was unable to reach the original delivery location due to failure to obtain permission to enter the relevant area, it had tried to approach the aforementioned location as close as possible. In other words, the vessel's inability to reach the originally agreed delivery location is due to the objective inaccessibility of the area at that location, while the actual anchorage is the "usual waiting area" for ships that have not obtained permission to enter the Alang outer anchorage during the same period. In this situation, NKD Company has failed to specify an alternative delivery location within the agreed timeframe. Accordingly, Clause 2(a) of the contract shall apply, and the vessel's anchorage outside the VTS area constitutes the place of delivery, and upon arrival at that location, the seller shall be deemed to have fulfilled its obligations to deliver the vessel. Accordingly, NKD Company claimed that the force majeure event did not hinder contract performance, and therefore it had no right to invoke the force majeure clause in Article 10 to terminate the contract.
(3) The vessel in question had not obtained permission to enter the Alang outer anchorage until April 14 (the contract termination date was April 15) because Gujarat Pollution Control Board (GPCB) personnel were instructed to fully collect and handle medical waste related to the COVID-19 pandemic. Moreover, even if the vessel entered the outer anchorage, the agency was effectively unable to conduct a written review or board inspection. Such circumstances are sufficient to constitute a "restraint of governments," but the key question is whether these restrictions mean Bart "cannot" transfer ownership of the vessel. The court held that the "cannot" here is clearly distinguished from the "obstruction" or "delay" used in general terms, nor can it be deemed "impossible" solely because the contract cannot be performed by the termination date; the key is whether the possible limitation period materially harms the commercial risk. After considering the nature of the contract and all relevant factors, the judge held that the delay until April 14 (which was reasonably foreseeable at the time of signing) did not constitute a "no" of performance under Article 10, and these delays did not materially harm commercial risk. If the contract is not terminated, the vessel is expected to obtain permission to enter the VTS area around May 1.
(4) The evidence is insufficient to support Bart's claim that the vessel's failure to obtain permits was due to NKD Company's failure to promptly seek local coordination, and that NKD Company subsequently took actions to obstruct the vessel's entry into the Alangwai anchorage.
Based on the above analysis, the court ultimately determined that NKD Company had no right to terminate the contract on April 14, 2020, and that the notice of termination constituted a breach of contract as stipulated in Article 8 of the contract and constituted a refusal to perform. Therefore, Bart Company is entitled to corresponding compensation.