Client Alert: COVID-19 and Force Majeure in the Shipping Industry
March 19, 2020
Governments and public health authorities around the world are in the midst of responding to the emerging outbreak of respiratory disease caused by a novel coronavirus (COVID-19). In addition to the public health implications posed by COVID-19, the commercial and legal implications are emerging apace. In the shipping and transportation industries, steep international market declines and asset price volatility may incentivize parties to seek relief under their contracts by using an intervening event such as COVID-19 as a tool to renegotiate unfavorable contract positions. For example, LNG cargoes due to land in China were reportedly at risk as certain customers had reportedly declared the virus as a “force majeure” event.1 As the footprint of COVID-19 expands globally, this scenario may continue to play out both in China and around the world — and merits a review of contractual clauses as to what unforeseen risks may have been contemplated at the time of the contract within the scope of any force majeure or similar clause.
The purpose of a “force majeure” clause is in general to relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated.2 The burden of demonstrating a force majeure event falls upon the non-performing party seeking to have its performance excused. That party must “demonstrate its efforts to perform its contractual duties despite the occurrence of the event that it claims constituted force majeure.”3 In one case involving a warranty contract to supply fuel on a daily basis, for example, the Third Circuit found that “the nonperforming party must still prove how it tried to overcome the event and its effects.”4 Under New York law where they are in play, these clauses are typically narrowly construed and “will generally only excuse a party’s nonperformance if the event that caused the party’s nonperformance is specifically identified. . . .[they] are aimed narrowly at events that neither party could foresee or guard against in the agreement.”5 Force majeure clauses also do not typically protect against risks that are contemplated or obligations expressly assumed at the time of the contract.
The outcome of any given dispute will of course turn on the facts, including the particular terms of the parties’ agreement as well as the governing law. For example, even if one market participant in the supply chain such as a government or port operator declares a force majeure event, that may not excuse a party’s performance under the terms of their own charterparty or supply agreement. A close review of the circumstances is necessary to navigate the questions around whether force majeure can properly be declared, or to review whether a force majeure declaration received from a counterparty is justifiable or instead an attempt to back out of an unfavorable contract position.
Seward & Kissel lawyers have handled force majeure cases following substantial natural disasters, and caution that even if the event is significant enough to be one of force majeure, courts and arbitrators are often hesitant to fully excuse performance or permit cancellations of charters or other contracts. If you should have any questions about these matters, please contact Bruce Paulsen at 212-574-1533 or Brian Maloney at 212-574-1448, or your primary Seward & Kissel LLP attorney.
Seward & Kissel has established a COVID-19 Resource Center on our web site to access all relevant alerts that we distribute.
1 Reuters, “France’s Total rejects force majeure notice from Chinese LNG buyer” (available at https://www.reuters.com/article/us-china-health-total/frances-total-rejects-force-majeure-notice-from-chinese-lng-buyer-idUSKBN2001XQ).
2 Phillips P.R. Core, Inc. v. Tradax Petroleum, Ltd., 782 F.2d 314, 319 (2d Cir. 1985).
3 See id.
4 Gulf Oil Corp. v. Fed. Energy Regulatory Com., 706 F.2d 444, 452 (3d Cir. 1983) (finding under a warranty contract to supply fuel on a daily basis that the force majeure clause might excuse nonperformance “only to the extent that the supplier has shown that it had available resources to meet its warranty obligation. . . .[w]hen force majeure events affect the availability of both the regular source of supply as well as the reserve, and damage the system of delivery, the supplier’s nonperformance is an excuse to delivery of the warranted amounts.”).
5 See In re Cablevision Consumer Litig., 864 F. Supp. 2d 258, 264 (E.D.N.Y. 2012).