In light of the unprecedented challenges faced by the shipping industry in recent years, BIMCO has recently released its long-awaited model force majeure clause for inclusion in charterparties and other shipping contracts.
Reed Smith first reported on the clause in January 2021 in our article ‘All eyes on BIMCO’s new clauses’ .
Now that the clause is finally here, what does it say and how can it support the industry?
BIMCO’s new clause aims to provide a comprehensive regime for parties to follow if certain circumstances arise, beyond their reasonable control, that prevent performance of a charterparty or other shipping contract. Force majeure clauses in carriage contracts are traditionally quite rare, with English law preferring to treat the issue as one of risk allocation.
A clearly drafted force majeure clause offers a party the flexibility to suspend performance, and potentially terminate a contract, without, in theory, facing a claim from the unaffected party for breach of contract.
But it must always be remembered that, unlike many civil law systems, force majeure is not a recognised concept in English law. If parties to an English law contract want to be excused or relieved from liability upon the happening of events outside their control, they will need to agree a clear provision to that effect.
Without it, the parties must resort to the doctrine of ‘frustration’, which can completely void a contract if circumstances radically change, but for which there is an extremely high bar. So, it is rarely an option.
A force majeure clause can therefore lay out the parties’ rights and obligations on the occurrence of an unexpected event. This is what the BIMCO clause sets out to achieve in the context of charterparties and other shipping contracts.
The BIMCO clause
When does it apply?
In order to claim that an event or circumstance is covered by the BIMCO clause, under clause (a) it must always be:
- Beyond the reasonable control of the claiming party;
- Not reasonably foreseen at the time of the conclusion of the contract; and
- Shown that its effects could not reasonably have been avoided or overcome.
Crucially, the clause makes clear that performance must be ‘prevented’, not simply hindered or delayed, as is sometimes seen. The English Courts have consistently defined ‘prevents’ narrowly. Performance must be legally or physically impossible. It is not enough that performance has simply become more expensive or difficult.
At the outset, therefore, BIMCO has set a high bar for reliance on the clause to prevent misuse and to ensure it only responds to a genuine inability to perform caused by extraneous events. This is in keeping with what BIMCO calls the ‘philosophy’ of the clause as a whole, which encourages parties to cooperate when performance is interrupted to ‘handle the situation together’.
Unusually for BIMCO, the clause starts with a ‘health warning’. It should not be inserted into a contract without ‘careful consideration’ of the nature of the contract and the rights and obligations it creates.
BIMCO says in particular that this clause may not be appropriate for use in a period (time) charterparty with a broad trading area (because force majeure can usually be avoided by the charterers finding alternative employment for the vessel).
That BIMCO sees the need for a ‘health warning’ at all recognises that the consequences of successfully invoking the clause can be dramatic. An affected party can simply stop performing and possibly terminate. This also explains the very detailed explanatory notes, which parties should take care to consult before they consider using the clause.
BIMCO’s definition of a ‘Force Majeure Event’ (clause (b)) covers the ‘classic’ force majeure events: fire, strike, acts of God, etc. Topical references include cyber security incidents, obstruction of waterways and pandemics.
Clause (b) is extended by a ‘catch-all’ provision covering ‘any other similar event or circumstances unless caused by negligence of the Affected Party’. This allows a party to claim that other events not listed in the clause, but which are nevertheless outside that party’s control, should be covered.
Importantly, these events must be of a similar type to those previously listed, which may lead to disputes. Parties may want to consider amending the clause to list any specific events that they perceive might prevent performance of the particular contract (e.g., the insolvency of a third-party supplier). This should prevent arguments later about whether an event constitutes a Force Majeure Event under the clause.
Under clause (f), a Force Majeure Event does not suspend a party’s payment obligations unless those payment obligations are directly affected. To this end, BIMCO has provided additional sub-clauses for use in charterparties to deal with laytime and demurrage, as well as hire provisions, in recognition of the fact that, under English law, a generally worded exceptions clause will not apply to matters of laytime and demurrage unless very clearly expressed to do so. This is often overlooked, and the BIMCO clause leaves it to the parties to handle separately.
Note that in order to invoke the clause, and so suspend performance, written notification of the Force Majeure Event must be given as a pre-condition to reliance on the clause and ‘reasonable endeavours’ made to minimise its impact. Given the draconian relief available under clauses of this nature, notification provisions will be strictly applied in English law. If they are not properly observed, the clause cannot be relied upon.
What’s the relief?
Assuming the clause applies, what can the affected party do?
In short, the clause offers a degree of commercial (and legal) flexibility in the event the unexpected occurs.
The clause is primarily designed to suspend the performance of the contract whilst a force majeure event is continuing, rather than terminating the contract entirely. But it also requires the parties to discuss solutions in good faith.
There is scope to terminate the contract if performance of the contract as a whole is substantially affected for a specified number of days (which the parties can insert) or has a frustrating effect. Again, there is scope for disputes here, especially if the parties lose the right to terminate, assuming they want it, by failing to insert the requisite number of days.
In some ways, the new BIMCO clause is an unusual addition to the suite of BIMCO clauses available to the industry across a range of topics. But it has been carefully designed to respond to an ever-changing landscape of unexpected events affecting the shipping industry and, deployed with consideration, it can provide flexibility when the unexpected happens.
The new BIMCO clause and explanatory notes are available on BIMCO’s website.
Further explanation of the principles of force majeure and frustration can be found on our Ship Law Log ‘Back to Basics’ series.