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Introduction

The High Court has recently overturned a GAFTA Board of Appeal decision, ruling that reliance on a force majeure clause under GAFTA Form 48 required timely service of the force majeure notice, or otherwise the party serving the notice would not be able to rely on the force majeure clause even if no prejudice is suffered as a result. The decision also provides guidance on the meaning of “unforeseeability” in GAFTA force majeure clauses.

Background

The dispute arose from a February 2023 contract for the sale of 60,000MT of Ukrainian corn on GAFTA Form 48 terms between ADM (“the Buyers”) and Inerco (“the Sellers”)

Shipment was due between 15 April 2023 – 15 May 2023. Under the Black Sea Grain Initiative (“BSGI”), vessels entering the Ukrainian Black Sea grain corridor required inspection by the Joint Coordination Centre (“JCC”). However, from approximately 7-18 May 2023, Russian inspectors on the JCC ceased inspecting non-Russian vessels, preventing them from loading cargo in Ukraine.

On 16 May 2023, the Sellers invoked Force majeure pursuant to clause 20 of GAFTA Form 48 (“the Force Majeure Clause”), specifically the event set out in sub-paragraph (k) which concerns “unforeseeable and unavoidable impediments to transport or navigation”. The effect of this was to suspend the shipment obligation for the duration of the force majeure event and give the Buyer the option to cancel the uncompleted parts of the contract if the force majeure event continued for 21 days after the end of the shipment period.

The Buyers rejected the force majeure notice and held that the shipment remained due on 15 May 2023 even after the Sellers notified the Buyers on 19 May 2023 that the force majeure event had ceased. The Sellers treated this as a repudiation of the contract, accepted the alleged breach and resold the cargo

The tribunal in the first-tier arbitration found in favour of the Buyers, on the ground that the Sellers had not established a reliable force majeure event. The Sellers successfully appealed to the GAFTA Board of Appeal, which awarded them the sum of USD 3.12 million in damages as well as costs.

Issues

The Buyers appealed to the High Court under s.69 of the Arbitration Act 1996 on three questions of law:

• What is the meaning of “unforeseeable” in sub-paragraph (k) of the Force Majeure Clause?
• Under the Force Majeure Clause, is it a condition precedent that the sellers must have served notice on the buyers within 7 days of its commencement?
• Can a Seller rely on GAFTA 48, Clause 10 to extend time for performance beyond that permitted by the Force Majeure Clause?

“Unforeseeability”

The Board agreed with the Seller’s argument that the length of the BSGI inspection stoppage was unforeseeable, as 13 of the previous 14 stoppages had been for 2 days or less. The Buyers argued that an event is foreseeable if there is a “real risk”, and as interruptions to the BSGI inspection process had previously occurred, the relevant interruption was not unforeseeable.

The Court rejected the Buyer’s argument, noting that “unforeseeable” is to be interpreted in the context of force majeure provisions that are intended to allocate exceptional contractual risks, rather than by reference to tort law principles.

Therefore, the Court held that “unforeseeable” means an event which, at the time of contracting, has such a remote probability of theoretically and practically happening that it may be regarded as negligible (so small that in commercial terms it could be disregarded.

The court recognised that this approach will require “vague” value judgements, as the point at which a risk is small but notable enough not to be disregarded cannot be easily marked.

“Notice condition precedent”

The GAFTA Board concluded that the Force Majeure Clause requirement that performance is suspended by a force majeure event provided that the Seller serves notice within 7 consecutive days of the relevant event was not a condition precedent.

The Court disagreed and held that the words “provided that” are the language of a condition precedent and therefore make timely notice mandatory.

The decision on whether an effective force majeure notice had been served in this case was remitted back to the GAFTA tribunal.

“Extension”

GAFTA 48, Clause 10 contains an Extension of Shipment clause which gives the Sellers the option to extend the time for shipment up to 8 days beyond the “originally stipulated period”, on the basis that the price of the goods would be reduced accordingly. Notice must be given no later than the first day of the extended period.

The Court held that “originally stipulated period” can refer to the period after the 21-day extension given following the finding of a force majeure event under clause 20. Therefore, notice under Clause 10 should be given on the first business day following the extended period.

Summary

The case clearly highlights that notification requirements strictly under GAFTA 48, Clause 20, as well as other force majeure clauses with similar wording, will be interpreted as a condition precedent.

The case also provides useful guidance on the meaning of “unforeseeability” in GAFTA force majeure clauses. However, the court recognised that there is inherent uncertainty in the value judgements that must be made by the court to determine when a small risk is notable enough not to be disregarded. Therefore, it will still at times be incredibly difficult for commercial parties at the time of the event to make a judgement call on whether to invoke force majeure.

The full judgement can be read here: ADM Industries Centers Ltd (t/a ADM Israel) v Inerco Trade SA