Testing times: Revisiting contractual obligations in light of global crises and geopolitical events

EJ Hello and thank you for joining us.

I'm Emma Johnson. I'm a partner in the Disputes, Investigations and Advisory team at Ashurst, I'm based in London and the focus of my practice is specifically international arbitration; so acting for corporates and commercial disputes where there's been an agreement to arbitrate rather than litigate but also acting in disputes for and against States and that end up in arbitration.

MS I'm Matthew Saunders and I'm a partner in the arbitration team in London. I've been an arbitration partner for 24 years or so. My area of practice - significantly energy, also investment arbitration and geographically from my work in the former Soviet Union, India, Middle East, Africa and recently quite a strong focus on gas, so that's meant looking at the ramifications of non-performance around Covid, non-performance around Russia, Ukraine and most recently issues with the attacks in the Red Sea. So, it's a fairly, fairly broad practice.

EJ The theme of this webinar is revisiting contractual performance obligations in light of geopolitical crises and events, and our hope today really is to share with you some of the experience that Matthew's just mentioned, the experience that both of us have gained over the last four to five years, of helping clients to navigate the epic or unprecedented amount of disruption, volatility, and ultimately uncertainty that has prevailed in the commercial world. Now, that disruption initially arose as a result of Covid and related government imposed lockdowns, and the after effects of that are still being felt in our experience. But more recently there have been various territorial invasions and conflicts, related imposition of sanctions and other far reaching events and the reality is that we are still seeing the effects of events as long as four or five years ago today and clients wanting to work out how to deal with those. And even if everything that we are currently reading about in the papers were resolved tomorrow, which obviously is an unlikely outcome, the after effects will be felt for some time and there will no doubt be other events in countries that affect contractual performance day-to-day.

So how best to deal with some of those issues. We're going to start shortly by setting the scene, providing a bit of context and we're then going to talk through the contractual and non-contractual mechanisms that we commonly see being used to address geopolitical events. We'll also say a little bit about investment treaties which I mentioned just a few minutes ago and the relevance of those and, if we have time at the end, we will deal with some questions, but you do have a questions box and thank you to those of you who submitted questions in advance. We're hopeful we will deal with those questions as we go and if you pop any additional ones in the box, we will address those too.

MS So, there's a story in the 1950s, the then British Prime Minister was asked in a rather obsequious BBC interview, black and white, what he thought the greatest challenge was for the statesman and his response is reputed to have been "Events, dear boy, events".

That's really what we're looking at, events. On screen here, we've just picked out a few geopolitical events which we see in our practice having an impact on parties' ability and willingness to perform their contractual obligations.

This is just the last two years or so and the wheels of justice, or at least the wheels of international arbitration and they're not, they're not the same thing, those move relatively slowly so, what we are seeing, next week we have a hearing which addresses issues deriving from non performance of contracts around Covid, so really 2020/2021.

So it's taken 3 years. For that to find its way into an arbitration, and for that arbitration to proceed to a hearing. We have, early next year, a hearing that will address amongst other issues, consequences of pricing volatility following Russia's invasion of Ukraine in February 2022, and the termination of Gazprom gas supplies through natural gas pipelines to Europe. Those natural gas supplies having been essentially reliable from the mid 1980s until 2022. So the time frames that we're looking at in terms of how non-performance issues arising from crisis and geopolitical events. How long it takes for those to work through the legal process, that, I think is worth remembering. It's also worth distinguishing how some of these events are entirely unpredictable. Who saw Covid coming? Who saw Vladimir Putin deciding that he was going to invade Ukraine? Certainly quite a lot of the intelligence agencies in the West repeatedly didn't see it coming. So important to distinguish that some of these events may be entirely unforeseeable, and others may have elements of foreseeability.

Now, what do we see as the consequences playing out from these geopolitical events. Now, first of all and perhaps the one that everybody that pays an energy bill has seen over the last few years is volatility in energy prices, and it's fair to say, I think, that the great deal of the focus around that is on prices going up, but we are deliberately using the phrase, volatile, volatility because it's going down as well, and it's the volatility, which in our experience, gives rise to the challenges around performance, inflation, interest rates, supply chain disruption. That is something we have seen very, very recently and we may be about to see again with, I think, Iran-inspired Houthi attacks on shipping in the Red Sea, the consequences of which, was a 50% increase and the length of time it took for vessels unable or unwilling to go through the Suez Canal to reach their destinations in Europe. Very significant supply chain disruption arising from that and one that we both had to deal with for clients recently was the unavailability of specialist Ukrainian steel because the steel plant had been bombed into smithereens. I didn't know Ukraine was such a significant supplier of specialised specialist steel to the global construction industry. But that was again something we saw recently.

Delay, it is not simply things taking longer because of the geopolitical events, and COVID is a good illustration of that where you have workforce availability problems. And we will come on to how this might play out later, but was a workforce unavailable because it was suffering from COVID and off sick, or were they unavailable because they couldn't get on a plane and fly to the place where their labour was required?

Cost escalation this is important because law, legal systems treat significant cost escalation differently, and again we'll come on to this, but has the contract as a result of the events, has it become more expensive to perform or has it become impossible to perform? There's quite a difference there in terms of how civil law and common law systems will treat the situation. Now here what we are looking at, on the left-hand side of the slide really is what you must give yourself in terms of ways of managing the situation. On the left-hand side of the slide we see essentially contractual mechanisms which is open to the parties themselves to negotiate and put into their contract.

So on the left hand side from a common law perspective, we have the things that we can do ourselves. On the right-hand side of the page we have the things that the law will give you. So one way you can think about it. On the right hand side of the page if you're in the law library, anybody remembers that from university, you will see a part of the law library, or you'll see textbooks in the law library dealing with those things on the right. You largely won't find those dealing with the things on the left.

Now different legal systems, you would have a slightly different categorisation but it is important to understand when negotiating express wording dealing with the elements of relief on the left hand side of the page it's important to be aware of the influence on those items on the left hand side of the slide, that the supervening law will have because of frustration force majeure in a civil law context, partnership in a civil law context, or the approach that might be taken to deliberate breach of contract and we keep mentioning here how important it is to be aware of the governing law and broadly, in our experience, it's really important to understand that in civil law. So for current purposes most European Continental jurisdictions, it's important to understand how different that might be, and how in certain areas particularly hardship, the application of hardship doctrines, and the fact that in the civil law world force majeure is a legal doctrine whereas in the common law world it's just that part of the contract where the parties have put their wording. That distinction is really quite important. So we'll talk about some of this in the next few minutes.

And last here we've put down public international law. So what we are talking about predominantly in this presentation, is private law. It is also worth remembering that public international law, the law of treaties, the law of relationships between states, that also has a potential role to play here, and again in circumstances where you are structuring an investment relationship or a trading relationship it's quite important just to be aware of that body of law. So we will come on to that, we'll just touch on that very briefly at the end.

So looking at some of the things that you can do from a drafting perspective to deal with issues and challenges around performance that may emerge. So just some examples here. Flexibility around volumes, if you can't provide the full contractual volume is it okay to provide less? And many commodities contracts will provide some volume flexibility and sometimes that will be accompanied by what's called a make-up obligation. So this year, you may provide 90% of the contractual quantity, but next year you're going to have to provide a 110%. So those are clauses worth being mindful of, what is that payment obligation that attaches to delivery of a lower volume, and what happens if pricing in the market changes between the year of non-delivery and the make-up year. That's something to be aware of and you would hope that there is clear contractual drafting to address those issues. The abilities to extend time, abilities to negotiate contractual variations. Now here again it is quite important to understand the difference of approach that a common law and a civil law might apply.

Generally speaking, most common law systems have no obligations that good faith must be applied to the commercial relationship. So if A seeks to extend time with B and B says get lost, under English law that may have no consequences. Under French law, under Swedish law, under Finnish law that it may well have a consequence if B has not exhibited good faith in entertaining the request from A. So similar considerations around amending a contract and here whilst you can always, the parties can always agree that they will change the contractual provisions, and I think as lawyers focusing on disputes we sometimes forget that because everything we see has gone wrong, doesn't mean everything does in fact go wrong.

So very often parties may be in a position to negotiate quite happily and agree that they are going to have to deal with the consequence of COVID or the consequences of Russia Ukraine and sensibly in a very grown-up manner amend their contract. The ones we see where that hasn't for a variety of reasons been possible, remember the English law position on agreements to agree, they are generally void, they are generally not enforceable. So a provision in a contract whereby you will negotiate to address impact of supervening events that may not work, probably won't work as a matter of English law.

Lastly we've mentioned price review, now price review is an area of contractual flexibility that has become immensely important in gas sales agreements. It also features in other commodities supply agreements and really what it provides for is for the parties to agree that they will adjust a price, have a period of negotiation and if they can't achieve that, then they will go to a tribunal. Now this is quite specific, but we'll just go through this in a slightly more detail because it's an area that we see growing quite significantly really since probably 2008, 09, 10 in the gas world, and what it can contribute to a contract, starting to see that reflected in other commodities serve agreements.

So the things to look out for in a price review clause, so there are clauses that will allow prices to be changed because of what has happened in the market in which the goods are to be sold where competing goods are being sold at the higher price or a lower price there's a consequence of changes in the market, beware of the notice provisions like a lot of areas it's the requirements to give notice where people fall or where people are yet to find themselves in problems and where disputes subsequently focus. Beware of the obligation to negotiate. It shouldn't be dismissed, and there should be a record of a party having taken the steps open to it to engage in the process of negotiation. Look at what the events are that can trigger the obligation to negotiate and the opportunity to review price, and really there's quite an art in monitoring events and seeing where that trigger event is satisfied where the process can be kicked off. That's not something certainly for the external lawyers for the most part. It's something businesses internally need to have teams monitoring.

How to start getting a case together that will be compelling if this is going to a tribunal. In these cases, in these disputes there is a tremendous premium placed on expert evidence and there are certainly in the gas world of specialists economists whose entire practice is appearing as expert witnesses in these cases. They are absolutely invaluable and getting the right people early on is really, really important. Conflicts might be quite significant so getting the right economic expertise in early, where they may only be three or four suitable names is really important. If the dispute proceeds to arbitration, and generally it will be arbitration not litigation in court, terribly important to appoint the right arbitrator assuming a tribunal of three and speaking for myself, lots of lawyers may not be massively comfortable with statistical analysis, economics, even more than basic numeracy sometimes. So selecting an arbitrator comfortable with how to address economic evidence put before them is really very important.

Also be clear, what is it if the parties can't agree on the review of price, what is it the tribunal can do? Can it change the price if there's a benchmark? So selling oil, Brent, North Texas intermediate or whatever, if there is a benchmark in use can a benchmark be swapped? So a particular gas benchmark TTF, can we swap that for another one? JKM, the Asian benchmark is that something the arbitrator can do? If it's a commodity shipped somewhere, and the contract is a destination contract where destination is restricted, can the tribunal turn that into an FOB contract? Where destinations are limited that might have tremendous consequences if a European market is less favourable than let's say in Asian market might be. So, what is the arbitrator's mandate?

And lastly, in disputes around pricing in the context of geopolitical events, it's likely there'll have to be quite a lot of confidential commercially sensitive information deployed. How is that going to be protected? There is a real art in structuring arrangements that mean confidential information can be preserved. It's going to have to be put before the tribunal, it may have to be put before the other side's lawyers. How do you stop the other side's commercial people getting hold of it and knowing what your pricing strategy is for the next decade. So a real art in the systems that could be put in place, often confidentiality circles, confidentiality clubs where the lawyers get to see the material the clients don't. All sorts of professional challenges around that. But a real art there. So understanding from the get-go, what can we protect, what is super important to us in terms of confidentiality and how are we going to protect that information? So a real challenge there.

So that's, while something that is quite important to the gas sector, also, I think in our opinion, a way of addressing the implications of geopolitical events and crisis that may have a place outside of that part of the energy sector and we are starting to see it more broadly in other commodity areas, particularly minerals.

EJ So all we've spoken about so far are the express contractual ways that you might amend a performance obligation. Another mechanism that you might think about using is force majeure. Now we're going to spend a fair proportion of this webinar, the next 10 minutes or so speaking about force majeure and the reason for that is that it is the mechanism that we have seen being invoked most frequently over the last few years in response to some of the events that we mentioned at the start.

It's also the mechanism which potentially has the less extreme outcome. It will result in contractual performance obligations being put on hold. There's a need to beware of long-standing force majeure which may ultimately take you into termination territory and we'll come on to talk about that. But as opposed to rewriting the original bargain what you get with force majeure is a, is a holding of the ring. It's a suspension of performance for a period of time.

Before we go into the detail of how you might claim force majeure, how you might respond to a force majeure claim, I think it's worth saying just a few things about what force majeure is and isn't under English law. There's no creature or legal doctrine of force majeure under English law, it's a creature of contract. So we had a few questions in advance about the concept or standard of force majeure and the reality under English law is that there isn't a concept or standard. There's no particular hurdle or codified set of principles or benchmark that you have to pass to be able to claim it. Instead whether or not you can rely on force majeure all depends on whether there's a clause in your contract, and if there is what that clause actually says. It's all down to what the parties have actually agreed.

Now that's very different to the position under civil law where force majeure is generally a stand-alone concept. And so if you have a force majeure clause in your civil law contract, you may well also have a right to claim force majeure a common law. There will be a body of authority that would support that claim and there may therefore be more than one route for redress. And that's worth bearing in mind not only if you are party to a civil law contract, but also if you're a party to a common law contract but your counterparty is from a civil law background, or if you end up in a dispute and your tribunal is from a civil law background and that is because the concept of force majeure will mean something very different to those familiar with the civil law concept than those who are familiar with the English law concept. And we have seen on cases parties from civil law jurisdictions trying to run civil law force majeure claims even though there is no force majeure provision in the English law contract and that's often done on the basis of an argument that force majeure applies as a mandatory provision of the law at the place where the contract falls to be performed. There have been cases where that's been successful, cases where it's been unsuccessful. But really being aware of that as a possible option is hugely important if you want to avoid surprise in a dispute context.

MS This is just as a real example of that, Emma and I have been involved in a case where the contracts, substantial contracts were English law and our classes operated in Egypt and they operated in Egypt using two Egyptian companies. And the argument was advanced by the other side because it was two Egyptian entities performing in Egypt Egyptian law applied on a mandatory basis. And therefore the civil law contractual performance considerations under Egyptian law applied even though the parties have agreed that the contract would be governed by English law, and that played out in a certain way. But it's important to remember that in some circumstances, even though you've chosen the law of X place to govern the contract, if adoption of mandatory application of local law applies, you may end up with the law of Y.

EJ So let's look at the English law position a little bit more closely. If your contractors got a force majeure clause, there's scope to be relieved from performance obligations if the express requirements of that clause are met. You need to look at the clause, every clause is going to be different in some way but there are some broad principles that we see as applying across the board to agreed force majeure provisions in English law contracts. The first question is whether there's a force majeure event, so if there's a clause, what does it say? How is force majeure defined? Also, what is the impact that that force majeure of event? What does the force majeure event have to do to trigger relief? And that's really important and we'll come on to talk about that in a bit more detail. But that's often the element of force majeure that is overlooked and it's where parties can find themselves falling foul of the contractual provisions. We'll speak a little bit about time limits and notice periods, duties to mitigate and ultimately the consequences and whether claiming force majeure is something you should strategically be doing.

So taking first the question of force majeure events. Really what you need to do here is look at the definition of force majeure in your contract. What type of events have you agreed will excuse non-performance? There are two real approaches. You may have an exhaustive definition of force majeure where events like 'earthquake', 'terrorist attack', 'pandemics', 'civil unrest' are explicitly specified as constituting force majeure. You might have a more hybrid clause where there's a list of those sort of events and then a broad capsule which refers to events or circumstances beyond the control of the parties. Quite often we see the two and really the question is whether the event in question falls within those definitions.

Now the fact that you've identified an event which is covered for in the contract, is not enough. You need also to be able to demonstrate that that event has impacted performance, and the threshold in terms of impact on performance will be specified in the contract. It's generally not enough that performance has become more burdensome or more expensive and there's a clear line of English authority that arose in the aftermath of the global financial crisis to the effects that economic hardship will not be enough to trigger force majeure clause. Obviously, it would be enough if the clause explicitly says that economic hardship is enough, but that's rarely the case.

So what is needed? You normally need to demonstrate that you have been prevented, hindered, rendered unable to perform … the performance has become impossible. So there needs to be a cause or link between the defined force majeure event and that very specific limitation on your ability to perform. So when you're drafting a force majeure clause, care is needed to make sure that you're defining not only a broad enough category of events, to get you off the hook should you need that relief in due course, but also that the type of inability to perform does not lower that benchmark and allow the contract to be put on hold willy-nilly.

So, I mean Matthew picked up on a few examples earlier, but is the force majeure event COVID or is it actually the imposition of lockdowns and restrictions on travel that led to the inability to perform? Is it resulting supply chain disruption? Is it Russia invading Ukraine that prevented you from supplying or making payments to a Russian counterparty or was it the imposition of sanctions that followed that event that made performance of the contract difficult or even impossible? Have the tax on vessels in the Red Sea impacted your ability to supply LNG or other goods or actually is the case just that supply has become more difficult, more expensive as a result of the diversion of shipping routes?

It is hugely important that you think very carefully about what the specific event is, and how that is linked to your inability to perform and a clear link is drawn between the two. I mean, I think probably have a really good example of this is the cases that we spent years arbitrating, arising out of the Egyptian Revolution where there were various attempts to rely on the Revolution as a force majeure event. Many of the contracts we looked at did include civil unrest within the definition of force majeure, but the difficulty of drawing a link between unrest and an inability to supply gas for example, saw many of those claims falling at the first hurdle. The reality was that there wasn't an attack on a pipeline, that prevented the supply of gas. It was a conscious decision by government to divert supplies elsewhere. So framing the force majeure event and the impact it has had, is hugely important.

MS And if a party is taking a list approach, then I think sod's law all often dictate that you might list 15 events and what transpires will be the 16th. So you can imagine the number of disputes and the number situations in relation to COVID where we have given advice? I have only once seen express reference to a pandemic as a reason for excusing non-performance. And that wasn't in anything, but I looked at it in an Ashurst context. It was an agreement to buy a Škoda car, so not all law firm partners drive Ferraris. I was buying a Škoda from Škoda Norwich and they pointed out that they couldn't perform because the factories in wherever it was it was closed, and they pointed out to the sales agreement that had pandemic as a reason for non-performance, excusing non-performance. That was the only instance in all the contracts we ever looked at, that we saw express reference to pandemic. So well done Škoda Norwich. There you are.

EJ And even to the extent that there has now been a turn in the tide and a writing in a pandemic into force majeure, definitions … it's not actually all that helpful because it's quite often not the fact of the pandemic itself that leads to an impossibility to perform. It's all of the consequences that flow from that. The inability to travel, the fact that supply chains have been disrupted, things have become more expensive so.

Just a quick word about time limits, notice and reporting requirements. Sending a force majeure notice or receiving one is generally not the be all and end all. It's quite common to see in force majeure provisions a requirement to provide a certain level of detail when force majeure is claimed. To do that within a specific period of time or at least promptly once there has been a force majeure event, and to provide regular updates as to the situation. Now adherence to those sorts of requirements can be key because there may well be an argument that there are mandatory preconditions, and that would mean that a failure to give timely notice, provide updates and reports could result in you not being able to claim force majeure at all. So general rule of thumb, don't just send the notice and assume that that's the end of it and if there is a timing requirement or a time limit and particularly if it's a vaguely worded one and requires prompt notice, always err on the side of caution. And there's a bit of a balancing act, I think when you're giving or responding to a force majeure notice. You need do enough to show that you've complied with the clause but also at the same time not say so much and paint your colours to the mass to the extent that you've then limited your position, should things develop and the situation change and you end up in a dispute and essentially you're then barred from running the argument, because what you're now claiming as force majeure is not what you put in the notice.

MS And probably worth recognising that in practical terms this is where we find the argument often focussing, not so much on was the event captured buy the FM clause but were the pre-conditions or are they pre-conditions at all, that they are pre-conditions are they met. And this just ends up being where an enormous amount of time and money gets spent, depending which side of the fence you're on, but this is where people get it wrong, or at least arguably get it wrong.

EJ That's right. The other place we see people getting it wrong is receiving a notice and sitting on it and doing nothing. You are then running the risk if you end up in a dispute of there not being an argument that you've agreed that there was force majeure or at the very least you've waived your right to take a different position now and should be prevented from doing so. So if you, if you receive a notice think very carefully about what to do next and at the very least if you don't agree there's force majeure, respond making that clear and reserving your rights.

Duties to mitigate, it's not unusual to see a requirement to the force majeure clause in an English law contract, that requires the party claiming force majeure to take steps or use reasonable or best endeavours to overcome the force majeure situation. Under English law now, it's now clear that even if there is not an express mitigation obligation one is likely to be implied into the contract. Now we could spend a whole session talking about that. I guess in terms of recent developments, the Supreme Court in the RTI and Mur case was quite clear that an obligation to mitigate force majeure would be implied into contracts under English law. And that at least in a sanctions type context that obligation to mitigate would not oblige a party receiving payments to accept an offer to be paid in a different currency. So if absent a provision in the contracts that allows an alternative payment method or currency, if that offer is made and you do not want to accept it that's not going to bar a force majeure claim. But you do need to think very carefully whether there is anything that can be done, as a means of trying to mitigate the consequences of force majeure, and to create paper trail demonstrating that you have done that because again it's likely to be an area of dispute if you end up in a formal proceeding.

So don't just send a notice and sit on your hands. And equally if you're in receipt of a notice remember there's a duty to mitigate because it may well provide another bow to your string in terms of disputing whether the contract should be put on hold.

We mentioned at the start that the consequence of force majeure under English law is suspension of the contract but it's important that you follow that through in terms of what the contract says. It's not unusual to see force majeure claims triggering termination rights, particularly in cases where force majeure prevails for some time. So whilst declaring force majeure can provide an immediate pressure release, it can have much further reaching unintended consequences. And if you end up in an automatic termination of contract outcome that may well be not what you had been trying to achieve by claiming force majeure at the start. So don't assume that you can use force majeure just to put the contract on hold indefinitely. You may well retain some exposure to your counterparty. You may well still have to pay, and I think what we have seen very frequently in long term gas and LNG supply contracts and other commodity supply contracts, is that even if there can be relief in terms of the supply obligation, if there is a take or pay or a toll or pay commitment, that will remain in place notwithstanding force majeure. There will still be an obligation to pay notwithstanding the fact that there's no obligation to supply for a period of time.

MS Also actually the make-up clauses I referenced earlier, I mean we spent the best part of two years arbitrating a dispute around the non-delivery of cargoes from an Australian producer of gas to a Chinese biogas. And there was a great deal of focus on whether a validly invoked FM instance to do with sea conditions that meant a vessel couldn't berth and take on the gas cargo. Did that mean there was no obligation under the make-up clause to the volume make-up clause, to supply that cargo of gas the next year. So, how some of these clauses interact, can be quite important.

EJ Let's move on from force majeure and speak briefly about hardship which in some jurisdictions is known as excessive onerousness, in Scandinavia the doctrine of failed assumptions. As with force majeure under English law, there's no standalone concept of hardship. It's all a question of what the contract says and so if there is a hardship clause you're good but if not, generally you're not in hardship territory under English law.

The exception to that, is the point we mentioned at the outset, if there's scope to argue hardship under civil law, on the basis that's a mandatory law at the place where the contract falls to be performed. And it's worth being aware of the ability to get the argument in that way, because that is something we have seen parties with the civil law background trying to do. Even though they've signed up to an English law contract. Hardship will typically apply, where there's a fundamental change in circumstances that makes performance impossible or excessively onerous or burdensome as a result of extraordinary and unforeseen events. And the parties bargain as a result of these events, is effectively fundamentally altered. This is a very, very high burden, much higher than force majeure. And where hardship takes you is essentially a resetting of the economic equilibrium, the economic bargain that the parties have reached so an adjustment of the contract terms. It differs from civil jurisdiction to civil jurisdiction in Italy for example, there's an obligation first to negotiate and it's only if you can't successfully renegotiate as between the parties, that you may well end up with a termination. In others it would, it would fall in the absence of an agreed outcome to a tribunal or a court to rewrite the bargain. And that, that can provoke hugely different outcomes than parties expect if careful limits are not put around the tribunals mandate from the outset and that's something that you mentioned at the start.

MS It's also something that I still remember the first time a Swedish lawyer explained to me what section 36 of the Swedish Contracts Act said. Enabled a tribunal at least in theory to do. I couldn't believe it. I've grown up in the world where the four corners were the page of the contract. Courts and tribunals can't change what the parties agreed. Well here they can and it's important, certainly for a common law lawyer, it's important to just be aware that in certain … quite limited but in certain circumstances, this may be an option in a civil law governed contract. And in fact the reason in our Egyptian example the reason the Egyptian counterparty argued that Egyptian law applied on a mandatory basis, was precisely because the Egyptian civil code includes a hardship clause. And they wanted to invoke that hardship clause as a way of getting out of the supply obligation. They were unsuccessful, but that was the … that was the … that was the reason for it.

EJ And I mean many of the civil law jurisdictions that we have had cause to look at in terms of hardship arguments, restrict the application of the principal to contract where there's some imbalance between the parties. Generally it's not accepted that sophisticated commercial parties should be allowed to rely on hardship. But there's equally no real precedent, in terms of the invocation of hardship in circumstances like the ones that we set out at the start of this webinar. So it remains to be seen to what extent hardship will be pleaded in disputes, and to accept … to what extent it will be accepted by tribunals and courts.

MS And there are instances of awards in the public domain you could you can read where two perfectly sophisticated commercial parties have one of it's invoked, successfully invoked hardship. So it does happen.

EJ Yeah. The big thing really I think to think about if you're going down the hardship route, is to act swiftly. It hugely undermines the argument that the party's bargain has been rendered impossible or excessively burdensome, beyond all possible anticipation if there's a period of time between the relevant event and seeking to rely on not the hardship doctrine. So act quickly. We're going to stop there and Matthew is now going to talk about some of the non contractual mechanisms.

MS We're heading back to what for me is the safety of the English and the common law world. If ever a doctrine was well named, it's frustration. Immensely frustrating to find yourself in this situation and indeed the law of frustration is quite frustrating, because of its lack of clarity and it's unpredictability, from an English law perspective. So this is what English law or common law, English law certainly gives you in circumstances, where the contract cannot be performed. But it is, cannot be performed. It's not more expensive to perform, it is not even a thousand times more expensive to perform. It cannot be performed, and that is quite important. So we are looking, if you look at the case law and anyone who studied law as an undergraduate might remember cases about coronations where the king had a cold and a room was rented to look over the route of the procession and there wasn't going to be a coronation, for the day that the room was rented, and therefore, their hired agreement was frustrated. So that is a nice clear cut historic example.

But that is the threshold, it is a high threshold. It is not enough, but something has simply become more expensive, it might be enough. That for example the building that the builder was working on has burned down that may well be sufficient. So importantly there is no need to demonstrate fault. This is a way out of contractual obligations in circumstances where there is no fault. And it's important to understand, this is not the world of force majeure. We are not here suspending the contract, suspending the performance obligation on the basis that the FM event, their landslip flood will be alleviated. This is a discharge of the parties' contractual obligations or pretty much of the obligations are discharged. So the event that comes along, which the parties are not responsible, the event that comes along and means it is no longer possible to perform the contract, then the appropriate relief is likely to be to seek the discharge of obligations under the contract, on the basis of frustration.

Impossibility is very obviously a high threshold, and time and time and time again and then we saw this happening in the context of the global financial crisis that Emma mentioned. The English courts have reiterated, that the contract must be impossible of performing, in the form which the parties agreed, so if the only element of performance that is possible is something completely different, then frustration may apply. So I said, it's quite frustrating, the law around frustration, and one of the areas that is frustrating is uncertainty as to what the consequences are going to be, in terms of money that's been paid and payments. Now there is something called the Law Reform (Frustrated Contracts) Act. Now the date gives you a clue as to how important this was at the time, in 1942. Peak of the second world war, all sorts of contracts were not capable of being performed, because of the legislation of trading with the enemy and so on, meant it was no longer possible, but what were the financial consequences going to be of that? So legislation was passed in 1942 to address that, it is unfortunately very hard to predict. How its legislation will play out. So, I'm not even going to try, and go through that now. But simply make the point that if you find yourself in circumstances where performance is impossible it will be important to get legal advice on what the consequences are in terms of monies paid, monies payable, expenses incurred by a party starting down the path of performance. That will be very fact specific, and then the 1942 legislation does not give you an enormous amount of help.

Now we had a question asked, some I think a couple of days ago, that we address the issue of sanctions. Now sanctions are one of the most challenging and problematic areas in terms of issues that impede contractual performance of recent years. And I think it's clear to anybody that, we are going down a path of sanctions being the accepted response from states to bad behaviour by states. That is very much a thing of the past few years especially post Russia Ukraine. Now this is the area of law that kicks in. The sanction is likely to make it a criminal offence to trade with the sanctioned individual. That means the contract has become illegal to perform. It is supervening illegality. So it is the doctrine of frustration that kicks in. So this is an area of law, that is becoming increasingly important. That people have at the back of their mind. Because this is, this is the get out of jail card in circumstances where a sanction applies. We'll just move on to look at the area…wilful breach, the world away from frustration but equally frustrating. What happens when a party decides it is deliberately not going to perform? Maybe that is what we call a cynical breach, and the important starting point, is that English law does not generally impose an obligation for a party conducting its contractual relations in good faith and this is very often not acting in good faith. So English law will (generally speaking) not treat a cynical and deliberate breach of contract as fundamentally different for many other breach of contract. So is it possible to carve out cynical breach from other types of breach? Generally speaking it is extremely difficult to do so. It is also important to note in the context of the delivery of cargoes, that for 150 years English law has provided a prima facie measure of loss. Which is the damages you get is under section 51 through the Sale of Goods Act, the damages you get are the cost of replacement cargo at the time of breach.

Now we started out this presentation by putting out volatility. What this means, is there might be an absolute windfall available to a buyer who is at the wrong end of breach. And we'll call this the innocent buyer and of course that might not be an accurate description in all circumstances. But if the price of a cargo has shot up and maybe an 800% increase as we saw in the gas markets, the damages they receive are going to be an absolute windfall, as compared to what they were expecting, to have to pay for their cargo. So this is a situation where buyers may see an absolute windfall available to them and you may find them engineering, to bring the situation where they can bring themselves into section 51(3) because they are going to be in the sun-kissed uplands if they succeed in this type of a claim. So it's something to be aware of.

Now in our experience, parties often place or often obtained far too much comfort from contractual limits on liability. Caps on damages, liquidated damages, wilful misconduct. What on earth does wilful misconduct mean in any given situation? The words sound quite positive. We ought to take some degree of comfort from them. But in our experience it's very difficult to define what wilful misconduct means. And wilful misconduct in the context of a 25 year duration contract, may be very different to wilful conduct in the context of a spot tray. So difficult to take too much comfort from a wilful misconduct liability cap or a carve out.

How does the capped sum sit, as against other remedies and what about consequential loss of profit? These are all areas where drafting needs to be super careful but beware of what the overall package of caps on liability, how it operates and the gateways to it. There is a case called Kudos Catering which is cause for concern, it illustrates the problems that might ensue. And there what the court found, is that the caps on liability didn't apply in circumstances where there was no contractual performance at all. So that's just something to be aware of. The comfort in that instance that was taken from the many caps on liability on the contract, was worthless. Because the gateway to that clause presupposed there was some performance but it fell short of the contractual requirements. In reality in that situation, there was no relief available under the capping mechanism. So a word of warning there.

We're going to skip onto the international law point and here we are in a completely different part of the law library that I mentioned earlier. But what we're looking at here, is the protection available under international treaties. There are things called bilateral investment treaties or multilateral investment treaties entered into between states intended to encourage investment from state A into state B. Now they have only relatively limited application to trading relationships however a lot of trading relationships will also involve the making of an investment. It might be the opening of an office in country B by somebody or a corporate entity with a nationality of country A. So in that situation, a treaty might well be relevant. And where we have found people looking at bilateral and multilateral investment treaties in the context of non-performance is around sanctions and around covid. So where a state has implemented a law or regulation that makes trading or performance harder or impossible, does that process by which the state did that, does that infringe rights, under a treaty? And there are protections that most of these treaties afford under what are called doctrines of expropriation and fair and equitable treatment. And just for now I think it suffices to be clear that expropriation is a tremendously broad concept, in international law. Much, much broader than in private law. So it's not parking the tanks on your lawn, it's preventing you from enjoying the value of your investment. So it may be that recourse could be obtained when non-performance arises because of a sanction or government action under this mechanism, but that's a whole other side.

EJ So a bit of a recap before we finish. It's been a bit of a whistlestop tour, but if your contract has become more difficult to perform, or impossible to perform but more difficult as a sort of minimum, can you amend it? All that contractual provisions that would allow you to do that. Can you just negotiate something with your counterparty? Can you rely on force majeure? Is there a force majeure clause? What is it? What types of performance obligation does that relieve you from? And we've had a few questions in about whether under English law force majeure would relieve a payment obligation. The position being very clear under French law, the point being made by analogy. And the answer is generally no, it does depend what the clause says but what we have seen of the last few years is many clauses particularly in terms of commodities contracts, where a supply obligation will be relieved by a force majeure claim but not a payment obligation. So what does the force majeure clause say? What is the event? Can you draw a link between that event and the impact on your performance? If not, is hardship an option and it may well be an option even though you are dealing with an English law or common law governed contract, or can you look to other possible remedies? Frustration or even strategic breach of the contract or accepting the breach of a contract and claiming liquidated damages.

MS There's a lot of ground here and we've probably given rise to more questions than we've answered. The reality I think is that none of this is straightforward and it's an area that is filled with risk and one that we see often ending up in dispute. But there are ways to mitigate that risk with a view to trying to avoid ending up in a formal dispute. And hopefully it's clear from the last 58 minutes and this is a topic that we are hugely passionate about and like speaking about. So if there are things that you have heard today and you'd like to discuss further, if you're dealing with particular consequences of events at the moment, please feel free to pick up the phone. We're always happy to have a, have a chat through and see if we can support you.

EJ And I think one thing that we can assist with, I think is the fact that, the events change of course they do. I mean, reading this morning's newspapers you can imagine, the type of performance events that are likely to arise as a result of current developments in Lebanon. That may, you know that may expand. But the legal consequences, they do have a repeating story. So that is a situation I think where the collective experience that we have and I'm sure other law firms have, that I think can be brought to bear. Yes, the events will be different but the way those play out in terms of a contractual analysis you can draw lessons from that, and hopefully we've managed to illustrate a few of those, over the last hour. Our contact details are on the screen and there's a QR code if you're interested in any of our written materials on this subject or other arbitration subjects. We'd love to hear from you. Thank you.

MS Thank you very much.

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