24.08.2022

Force Majeure Defence Successful: Laysun Service Co Ltd v Del Monte International

The decision in Laysun Service Co Ltd v Del Monte International [2022] EWHC 699 (Comm) is the rare example of a successful force majeure defence to excuse performance.

While the case centred on Iranian payment and import restrictions, the principles are equally applicable to the ongoing imposition of sanctions against Russian entities following the war in Ukraine.

The judgment emphasises that a party seeking to rely on a force majeure provision will need to satisfy in the first instance that the qualifying event prevents performance, before looking at the ongoing effect of the event.  The onus is on the party seeking to rely on the clause to satisfy the evidentiary threshold.

Background

In a contract of affreightment[1], the claimant, Laysun Service Co Ltd (the Owners) agreed to ship refrigerated bananas (Cargo) for the defendant, Del Monte International GmbH (the Charterers) to Iran between 1 January 2018 and 31 December 2018 (Agreement).  The Agreement comprised of 3 voyages a month, 36 in total.

The Cargo was sold by the Charterers’ sister company, Del Monte UAE, to Prime International Fruit LLC and Marhaba MTA General trading LLC (jointly, the Receivers).  After 17 Cargoes had shipped, the Charterers stopped shipments issuing two declarations of force majeure.  The Charterers claimed that:

  1. Political action by the United States made it impossible to make payments from Iran to a foreign bank and/or for an international bank to facilitate transactions that had an Iranian link (Payment Issue); and
  2. The Iranian Government imposed new regulations comprising of additional import permit requirements before goods could legally be imported into Iran.  At the same time the Iranian Government put a hold on the issue of new import permits. Neither Del Monte UAE nor the Receivers had the required permits.  This made it impossible to import the Cargo into Iran (Import Permits Issue).

The Charterers relied on clause 8.1 of the Agreement, which entitled it to reduce the volume of Cargo to nil if circumstances beyond its reasonable control prevented it, practically or legally, from performing any or all of its obligations (Force Majeure Event).

Clause 8.1 was subject to clause 8.3 which required the Charterers to use all endeavours reasonably practicable to mitigate the effect of a Force Majeure Event and to resume the performance of its obligations as soon as reasonably possible.

The Owners brought a claim in the arbitral tribunal (Tribunal) for losses arising from the Charterers’ failure to perform the remaining 19 shipments.  The Owners were unsuccessful in the Tribunal, with the Charterers successfully arguing a force majeure defence based on the Payment and Import Permits Issues.  The Owners appealed to the English Commercial Court under section 69 of the English Arbitration Act 1996.

 Judgment of the Commercial Court

 The Court dismissed the appeal as the Owners’ alleged questions of law in respect of the Carriers’ reliance on cl 8 were either premised on factual findings the Tribunal did not make, or were not questions of law at all but rather “thinly veiled challenges to the Tribunal’s findings of fact”.  The Court referred to the following factual findings of the Tribunal in reaching its determination:

  • In respect of the Payment Issue, the Receivers could not obtain bills of lading without first clearing payment to Del Monte UAE. A bill of lading is, among other things, a receipt for the Cargo issued only once payment clears.  Without bills of lading, the Receivers could not clear customs and so could not unload the Cargo.
  • Mitigation was not possible because it was “impractical and entirely unrealistic” to suppose that Del Monte UAE would be able to open an account with a new bank that might accept Iranian payments.
  • In respect of the Import Permits Issue, the Owners’ produced no evidence to support its claim that the Receivers refused, as a matter of choice, to use its existing permits for Del Monte UAE’s benefit. Rather, it was found that the Receivers had either exhausted their permit allowance or did not have import permits at the relevant time.
  • The Receivers ended their contracts with Del Monte UAE as a result of the Import Permits Issue, and it was not reasonably practicable for substitute customers to be located before the expiry of the contract period. This was relevant to the Owners’ argument that a party seeking to rely on a force majeure exemption cannot rely on the acts/omissions of that party’s delegates (the Receivers in this case).  However, the Court concluded this principle is restricted to situations of an ongoing relationship and could not apply where the relationship had been terminated.

While the above factors resulted in a “doomed” appeal that was “constructed on an entirely false factual premise”, the Court nevertheless addressed in obiter certain force majeure arguments raised by the Owners, which are of note.

  • The Owners argued the Charterers were obligated to resume performance once the Force Majeure Event was over, which in this case was July 2018.  However, the wording of clause 8.3 made clear that it is the effect of the event on the Charterers’ obligations that must be mitigated, and the effect may well continue after the event has ceased.  As Del Monte UAE was unable to secure alternative customers even after the import restrictions were relaxed, the effect of the event preventing performance was ongoing.  Accordingly, there was no failure to mitigate in this respect.
  • The Owners also attempted to draw an analogy between a charterer’s absolute and non-delegable duty to provide cargo for loading, with the Charterers’ contractual obligation to load and discharge the Cargo.  The Owners argued that if bills of lading did not make their way to the Receivers (as a result of the Payment Issue), which prevented the Charterer from unloading the Cargo, then absolute liability fell on the Charterer.  The Court rejected this, concluding that a charterer’s absolute duty to provide cargo is distinct from that of a contractual duty to load and discharge, the latter being subject to a force majeure exclusion.

Our Comment

Where a party is entitled to rely on a force majeure provision, it may continue to do so even after the preventative event has ceased, provided its effect on performance is ongoing.  However, clear and concise wording will be required should the parties intend the clause to have this effect.  Clause 8.3 is an excellent example of how this can be achieved.  

The case further clarifies that a charterer’s absolute duty to provide cargo is distinct from its contractual obligations to load and discharge cargo.  The latter, in the absence of express wording to the contrary, can be subject to exceptions.

Finally, the decision serves as a reminder that appeals on a question of law should not incorporate challenges to the factual findings of the tribunal or court below.

If you have any questions about force majeure or contracts of affreightment, please get in touch with our Trade & Transport Team or your usual contact at Hesketh Henry.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

[1] An agreement whereby a shipowner agrees to transport specified cargo for the charterer over a specified period of time.

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