The contract needs to change, but the parties can't agree: what happens next?

The contract needs to change, but the parties can't agree: what happens next?

Overview

In a case which may be relevant to disputes arising out of COVID-19 or Brexit, the Privy Council has recently considered what should happen where an event occurs which necessitates changes to a contract, but the parties are unable to agree a variation. The Privy Council had to decide whether the supplier should be allowed to rely on a force majeure clause to relieve it of liability for future performance.

What happened in this case?

Delta Petroleum (Caribbean) Ltd ("Delta") and BVI Electricity Corporation ("BVIEC") were parties to a supply contract under which BVIEC (the sole provider of electricity in the British Virgin Islands) agreed to purchase diesel and gasoline from Delta on an exclusive basis for a period of four years.

The force majeure clause

The contract contained a clause which relieved the parties of liability for failure to fulfil their obligations if, among other things, Delta's leased storage facilities on the neighbouring island of Saint Croix were closed (which was a possibility that was known to the parties during negotiations and therefore specifically catered for in the contract). In such circumstances, Delta was "at liberty to withhold, reduce or suspend the deliveries to such extent as [Delta] may in its absolute discretion think fit". Although the contract did not actually use the term "force majeure", the provision had essentially the same effect (following a trigger event) as a typical force majeure clause (see textbox below).

RECAP ON FORCE MAJEURE

A force majeure clause generally relieves a party from performance of its contractual obligations and any associated liabilities for non-performance where its performance has been prevented or delayed as a result of an event or circumstance beyond its reasonable control. The applicable contractual obligations are effectively suspended for so long as the force majeure event subsists. There will often also be a right for one or both parties to terminate the contract if the force majeure event continues beyond a specified period of time.

Force majeure clauses can take a variety of different forms and the trigger will often be defined by reference to a non-exhaustive list of events and circumstances that are typically considered to be beyond a party's reasonable control (e.g. fire, flood, war, terrorism, etc). The burden of proof rests with the party seeking relief to demonstrate that the relevant event falls within the ambit of the force majeure clause.

Could Delta rely on the force majeure clause?

Delta's storage facilities did indeed close so Delta duly notified BVIEC that it was claiming relief under the force majeure clause. Despite this, Delta managed to continue supplies to BVIEC via shipments from Antigua, but this was more expensive, so it sought to negotiate a variation to the contract allowing for a price increase. Those negotiations eventually collapsed, at which point Delta sent a further notification that it was seeking relief under the force majeure clause and indicating that it would no longer continue supplies. BVIEC rejected this, arguing that, by continuing to supply via Antigua, Delta had exhausted any claim to relief and had opted to continue performing the contract on its existing terms (known as the principle of "waiver by election" – see textbox below).

WAIVER BY ELECTION

A party will be deemed to have waived its rights where:

  • it is entitled to alternative rights which are inconsistent with one another;

  • it chooses to act in a manner which is consistent with only one of the alternative courses of action available;

  • it does so with knowledge of the relevant facts; and

  • it has communicated this election to the other party in clear and unequivocal terms.

Once the election has been made, it is final and irrevocable.

The lower courts (the High Court and the Court of Appeal of the Eastern Caribbean Supreme Court) sided with BVIEC. The lower courts also made an order for specific performance against Delta, requiring it to continue performing the contract by supplying via Antigua at the same price, despite the extra cost involved. Delta appealed to the Privy Council.

What did the Privy Council decide?

The Privy Council disagreed with the lower courts and sided with Delta. It concluded that, as drafted, the force majeure clause clearly presented Delta with a range of options which it could exercise flexibly while the supply issues continued. These ranged from modified or reduced performance to none at all, rather than a "binary, all-or-nothing choice… to be exercised only once or at a single point in time". The available courses of action were not mutually exclusive, so the principle of waiver by election did not apply.

Delta was therefore able to claim relief under the force majeure clause for so long as the trigger event persisted. Delta had given no unequivocal indication to continue supplying via Antigua on the existing terms, so there was no question of it having waived its right to relief or having elected to continue performing the contract on its current terms.

Separately, while not the focus of this briefing, the Privy Council made some interesting observations on the inherent jurisdiction of the court to direct that a respondent restore, to the appellant, money paid or property transferred under an order which is reversed on appeal – in this case, an order for specific performance.

What can we take from this decision?

This is a reassuring outcome for suppliers. Not only does it emphasise the benefits to a supplier of a carefully-drafted force majeure clause, it suggests that doing its best to continue some level of performance during a force majeure event will not normally be held against the supplier. But there are several points that suppliers need to watch out for:

LESSONS FOR SUPPLIERS

  • First, this case highlights the importance of avoiding any communications or actions which could later be used by the customer to argue that the supplier has waived its rights under the force majeure clause or elected to continue performing the contract on the same terms.

  • Second, suppliers should not assume that this case means that force majeure clauses can always be relied upon to "rescue" them from a situation where the contract has become much more difficult to perform. As a general rule, the courts are inclined to interpret force majeure clauses narrowly – see our briefing on Brexit, force majeure and material adverse change clauses.

For customers, the key lesson is not to assume that if a supplier offers reduced performance in response to a force majeure event that it will allow the customer to require the supplier to continue doing so for the remainder of the contract and on the same terms as before. This case also acts as a reminder of the need to carefully scrutinise the drafting of force majeure clauses during negotiations.

Lastly, this dispute was about an issue that was known to the parties when they entered into their contract and which they made express provision for. When it comes to problems caused by COVID-19 (which will often be less predictable), it is possible that the courts may be prepared to display additional flexibility – as explained in our briefing COVID-19: a checklist of ways to dig yourself out of a contractual hole.

How can Travers Smith help?

The Commercial, IP and Technology team at Travers Smith have considerable expertise and experience in drafting and negotiating the full range of commercial contracts – including force majeure provisions, which have come under particular scrutiny recently in the context of both Brexit and the COVID-19 pandemic. We have also recently launched our force majeure app – an automated tool to help streamline the process of identifying and reviewing force majeure provisions in commercial contracts – which we are making available to clients free of charge.

 For further updates, follow our Commercial, IP and Technology team on LinkedIn.

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