How to deal with Suez contractual claims

09:00 | 14/04/2021
After the Suez Canal incident last month causing wide disruption to global trade, attention has been turned to the legal implications surrounding the issue. Tony Nguyen,  founder and senior partner of legal consultancy firm EPLegal, discusses the varying laws and contracts that could come into play.
1539 p17 how to deal with suez contractual claims
Tony Nguyen, founder and senior partner of legal consultancy firm EPLegal

The Ever Given container ship, wedged in the Suez Canal for almost one week before it was finally freed from the shoreline, had an adverse impact on about 12 per cent of global trade. Around one million barrels of oil and roughly 8 per cent of liquefied natural gas passes through the canal each day, and it was estimated by Lloyd’s List that the crisis cost $400 million per hour in delayed goods. It was also projected that the canal’s revenues were taking a $14-15 million hit for each day of the blockage.

This was not the first time the Suez Canal was blocked, causing huge damages to one of the world’s most vital shipping routes. The closing of the Suez Canal for five months in November 1956 due to war triggered a number of British and American decisions involving claims of frustration of contract.

In 1967, the canal turned into a battleground between Israel and Egypt during national conflicts and was blocked for eight years. In three other circumstances (2004, 2006, and 2017) a large tanker and two cargo/container vessels got lodged in the waterway and caused the canal to be blocked for respectively three days, eight hours, and three hours.

All these accidents would invite a wave of claims due to the delays or cancellation of shipments via the canal. These claims generally arise between the buyers and sellers of goods being transported; the contract of carriage between the charterers and the ship owners/carriers; and parties in service and construction contracts utilising goods being transported. Would these claims be easily rejected by the fact that the accidents are by nature force majeure (FM) events and the parties in breach should be exempted from liability?

We can analyse the legal issue in the context of (i) English laws, being the most frequently applied laws to international trade contracts, (ii) the UN Convention on the Contracts for International Sales of Goods (CISG) – the substantive provisions applied to the buyers and sellers of goods which have their places of business in member states, and (iii) Vietnamese laws. The common element in these three jurisdictions is that they all require the event to be ‘unexpected’ to the party in breach. It is without doubt that the Suez events are qualified for this condition. But there are other conditions to be met.

English laws

Under English law, contractual performance will be excused due to unexpected circumstances only if they fall within the doctrine of frustration; or where the parties agree otherwise (most likely a ‘FM clause’) in their contract. The test of frustration is a very high threshold: it only applies where the events make the performance of the contract impossible, illegal, or radically different from that originally envisioned by the parties.

In the first Suez event waive of cases, the buyer and seller disputed over the alleged breach of failure to ship the goods via Suez Canal under a sales contract which applied Form No.38 of the Incorporated Oil Seed Association Forms of Contract.

It was found that closure of the canal increased the length of the voyage necessary for delivery from 2,300 to 10,500 miles (to go through the alternative Cape of Good Hope). The cost of shipment was raised from about £6 ($8.2) per tonne to between £27-29 ($37-39.8) per tonne.

The court held that “in the present case an unexpected event occurred, namely, the closure of the Suez Canal, and no doubt it may be said to have involved both inconvenience and material loss. But I am not satisfied that there was also such a change in the significance of the obligation as would call the principle of frustration into play.”

Thus, the fact that the alternative route for shipment of goods via Cape of Good Hope would incur huge additional costs to the obligor will not excuse them from liability. Similar results are expected for a contract of carriage between a charterer and a carrier, except that if the contract specifies that cargo should be shipped via the Suez, then the blockage would have frustrated the contract.

The CISG

Article 79.1 of the CISG provides a more specific description of the conditions for an “impediment” which stop a party from performing a contract: “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

According to Professor John Honnold, the term “impediment” must be interpreted to read that the event actually prevents performance. This also implies that an event that makes performance commercially impracticable does not satisfy the test.

The other conditions of an “impediment” under the CISG are (i) beyond a party’s control; (ii) the affected party could not reasonably anticipate the impediment at the time of signing the contract; and (iii) the affected party could not reasonably avoid or overcome it or its consequences. “Reasonably” means what a normal person in such circumstances knew or should have known at the time of signing the contract.

In addition, the affected party must inform the other party of the impediment and its effect on his ability to perform within a reasonable time, otherwise he will be held liable for damages resulting from such non-receipt (Article 79.4).

Putting the Suez events in context, it seems that a seller or carrier would face the same problem if he tries to avoid liability based on Article 79 of the CISG. It is theoretically possible (though commercially impractical) to have shipments via alternative routes and the very first condition of impediment is not met.

Notably, the affected party may seek to amend the contract using another doctrine under the CISG and the UNIDROIT (International Institute for the Unification of Private Law) Principles: hardship. It has been widely established by the academics that Article 79 of the CISG applies to hardship situations, and the UNIDROIT Principles may be applied to fill in the gap of Article 79 while determining the consequence of hardship.

Accordingly, if a hardship situation is established under Article 79, the affected party may request renegotiation of prices and/or terms (but he may not withhold performance). Upon failure to reach agreement within a reasonable time, either party may resort to the court, who will then terminate, or adapt the contract with a view to restoring its equilibrium.

Vietnamese laws

Vietnam has recognised FM since 1995 and the definition of FM is currently stipulated in the Civil Code 2015. Accordingly, an event is an FM if it satisfies the following three conditions: being objective; being unforeseeable; and cannot be overcome despite taking all necessary and possible measures.

The last condition means that the event must be an impediment that could not be overcome despite the affected party’s attempt to implement all solutions. The Suez events therefore shall not give rise to an exemption of the obligor despite the impact of these events.

In terms of hardship, Article 420.1 of the Civil Code 2015 renders the concept of “a fundamental change in circumstance” to describe hardship, and provides a solution to hardship situations which is similar to the UNIDROIT Principles.

Given the situation of the recent Suez Canal incident, applying English laws, the CISG, or Vietnamese laws will result in the same consequence: contractual claims against the party affected by the blockage will likely succeed. However, the party in breach may declare a hardship situation in a timely manner and request renegotiation of the contract prices and/or other terms with a view to restore the economic balance of the contract.

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