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FORCE MAJEURE CLAUSES IN CONTRACTS: Totsa Total Oil Trading v New Stream Trading [2020] (B2+)

[Note: Words and phrases in bold are explained in the Glossary at the end of the text.]


Sometimes, events happen which make the performance of a commercial contract impossible. One example of such an event might be a global pandemic, such as Covid-19, where lockdowns and other problems might prevent one party (or both parties) from performing the contract as they wanted.


The London Commercial Court has recently published its judgment in the case of Totsa Total Oil Trading SA v New Stream Trading AG [2020] EWHC 855 (Comm). The case is not a ‘Covid-19’ case, but it is another example of how an English court deals with a situation when a commercial contract cannot be performed because of external events which prevent performance.


Totsa and New Stream entered into a contract. Under the contract, New Stream agreed to supply chemicals to Totsa. Totsa made an advance payment (pre-payment) of US$140 million for the chemicals. New Stream later notified Totsa that it could not deliver the chemicals, because there had been a force majeure event. Totsa demanded reimbursement of the $140 million. New Stream refused to reimburse the money. It said that repayment should not apply under the terms of the contract.


The contract contained two clauses relevant to the issue in the case:


· A ‘reimbursement clause’. This stated that, except for the force majeure clause, if “for any reason whatsoever” the chemicals were not delivered, New Stream would reimburse Totsa for the advance payment within 5 working days;


· A ‘force majeure’ clause. This stated that, if a force majeure event happened, delivery of the chemicals would be extended. However, either party could terminate the contract if delivery was delayed more than 30 days because of the force majeure event.


In the case, the court held that Totsa was entitled to reimbursement of the $140 million from New Stream. The court looked at all the terms of the contract and decided that if the chemicals were not delivered for any reason at all, including force majeure, the obligation to reimburse was triggered. However, if the failure to deliver was because of force majeure, this triggered the 30-day extension. At that point, it could not be said that the chemicals had not been ‘delivered’, under the contract, until the contract was terminated in accordance with the contract terms.


The decision highlights that a valid force majeure claim will not extinguish a party of all its obligations under the contract (for example, the obligation to reimburse a pre-payment).

As always, it is good to look at what practical lessons lawyers can learn from this decision. Some of the lessons might be that when negotiating a cross-border commercial contract, lawyers must think carefully about:


· What kind of factors should count as force majeure?

· What kind of steps should the party trying to rely on a force majeure clause be required to take to invoke it? (For example, what kind of notification procedure should there be and what steps should the party take to try to mitigate the situation?)

· What should happen to any pre-payments made under the contract if a force majeure event happens?


GLOSSARY


force majeure – ‘Force majeure’ is an unforeseeable event that stops someone from performing (or fulfilling) their contractual obligations.

Note: It is very important to remember that, under English law, if you want to rely on force majeure event as a reason for terminating (ending) a contract, you must negotiate a clause (called a ‘force majeure clause’) into your contract to allow you to do so. English law does not have a written code, like civil law countries do.


reimbursement – This means to repay money that you have already paid to someone.


to terminate – This is a word often used in contract law to mean to bring to an end.


to hold – This is a verb which is used in relation to court judgments. Basically, it means ‘to decide’ or ‘to rule’.


entitled – To be entitled is to have the legal right, permission, or claim to do something.

triggered – This basically means to activate or cause something to happen.


in accordance with – This is a phrase you will see a lot in English contracts and contract documents. It means ‘in a way that agrees or follows something else’. If something is done ‘in accordance with the contract’, it means it is done in a way which follows and agrees with the contract.


to extinguish – Here, it means to end to something.


to invoke – This means to use something as an authority (including a legal authority) for some kind of action or to support an argument. For example, you can invoke Sir Isaac Newton’s law of gravity to support your argument why an apple falls from a tree.


to mitigate – To mitigate means to make a bad situation better than it is. It is a very important word in English law. For example, in English contract law, if you are in a contract and the other party breaches it in some way, you have a legal duty to mitigate your losses because of the breach.


EXERCISE

The eight sentences below have a word missing. Choose the eight correct words from those below to complete the sentences. Remember, eight of the words are incorrect!

in prevents triggered with into under stop mitigate

to term reimburse extinguish for caused clause permits

1. A force majeure event is an event which (1)………………. performance of a commercial contract.

2. The two parties entered (2)…….. a contract for the supply of chemicals.

3. Under the contract, the purchaser claimed it did not have to (3)……………………. the advance payment.

4. The contract contains a reimbursement (4)……………………… which specifies when any advance payment will be repaid.

5. (5)………………… the terms of the contract, the advance payment does not have to be reimbursed.

6. The force majeure clause is (6)……………………. if the seller cannot deliver the goods because of an unforeseen natural event, such as an earthquake or floods.

7. The contract can only be terminated in accordance (7)………. the terms of the contract.

8. If the contract is breached, the party not in breach has a duty to (8)…………………….. their losses.

ANSWER KEY:

1. prevents

2. into

3. reimburse

4. clause

5. under

6. triggered

7. with

8. mitigate

Note: This post is to be used as a teaching and study resource only. It is not intended to be an authoritative statement of English law and should not be relied upon to give any kind of legal advice. If you need legal advice, you should always consult a lawyer.

© Cambridge Legal English Academy 2020

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