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Force Majeure During Coronavirus - Can You Get Pre-Payments Back?

on Friday, 15 May 2020.

Force majeure clauses have risen from ignored boiler plate clause to top of the agenda due to coronavirus (COVID-19). The High Court has ruled on whether a pre-payment should be reimbursed in light of force majeure.

Totsa Total Oil Trading SA v New Stream Trading

Totsa and New Stream entered into a contract for New Stream's supply of chemicals. Totsa made a pre-payment of US$140m. New Stream later notified Totsa of a force majeure event and did not make the delivery. Totsa demanded to be reimbursed for the US$140m that it had already paid. New Stream said that repayment should not apply under the terms of the contract.

What Did the Contract Say?

A reimbursement clause provided that, save for the force majeure clause, if "for any reason whatsoever" the chemicals were not delivered, New Stream would reimburse Totsa for the advance payment plus any accrued interest within five working days.

The force majeure clause stated that, if a force majeure event occurred, delivery would be extended, but either party could terminate the contract if delivery was delayed for more than 30 days as a result of the force majeure event.

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What Did the High Court Decide?

The High Court awarded summary judgment to Totsa and ruled that Totsa was entitled to be reimbursed.

The Court interpreted the reimbursement clause as entitling Totsa to be repaid for non-delivery for any reason whatsoever, and this actually included due to a force majeure event.

The Court explained that the rationale for the reimbursement clause cross-referring to the force majeure clause was to make clear that, if a force majeure event occurred, the parties could agree to a different arrangement than that provided for in the reimbursement clause. However, in the absence of the force majeure clause excluding the possibility of reimbursement, reimbursement would still apply.

What Can You Learn from This Case?

Force majeure clauses have taken on an added importance in all contracts right now. There is a lot to consider when deciding how to draft these clauses, including:

  • What sort of scope of factors should count as force majeure?
  • Should the clause be mutual?
  • What steps should the affected party be required to take to benefit from the force majeure, including pre-planning, mitigation, and informing and updating the other party?
  • What is the impact of the force majeure event, including a party not being liable, or being able to suspend or terminate? Or what should happen to the allocation of funds already paid or the requirement to pay in the future?

This case applied to the last point. In a case where neither party is at fault, who should bear the loss? Should one party continue to pay the other, or should the party that has had no benefit be reimbursed? The answer to these questions will be determined by the drafting. What did the contract state? In cases such as this one, where there was ambiguity with a clause specifically providing for reimbursement for any reason but then muddying the waters by cross-referring to the force majeure clause which did not clarify things further, there were two possible interpretations. So the parties ended up in court to decide. Unsurprisingly, the Court's decision was in line with the legal concept of restitution - in that one party should not be unjustly enriched. However, far better to have clearer drafting in the first place to provide for what should happen.

If New Stream had wanted the force majeure clause to excuse repayment, this should have been stated in the reimbursement clause or force majeure clause, rather than simply cross-referring to a force majeure clause. Likewise, both parties could have been clearer as to what the cross-reference was intended to achieve, to save the matter taking up their time, energy and costs in being disputed.

If you would like advice on drafting a contract and addressing what happens in the event of force majeure events such as coronavirus, or interpreting your position under an existing contract, please contact Paul Gershlick in our Commercial Contracts team on 07795 570 072, or complete the form below.

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