22 April 2020 by and Dispute Resolution Alert

Navigating commercial risk during uncertain times in Africa: When the law is Foreign

In Africa, a significant number of international commercial contracts are governed by English law. When concluding cross-border or international commercial transactions most parties do not give much attention to the governing law clause or for that matter, the dispute resolution clause. It’s only when trouble strikes and advice is sought from lawyers on performance obligations that attention is given to the law governing the interpretation of contractual provisions such as force majeure.

What one generally finds is that choosing English law to govern a contractual relationship has no direct or indirect link to the subject-matter of the contract (i.e. there is usually no performance obligation in England) or nationality of the parties to the contract. Parties generally for historical reasons (i.e. well known, well-developed and reputable legal system) choose English law to govern the performance obligations.

In these uncertain times it’s important to ensure that a thorough risk analysis is done of your contractual rights and obligations of cross-border and international commercial agreements, including understanding what the particular selected governing law requires to legitimately invoke certain contractual provisions (i.e. force majeure, hardship or exclusion provision) and in the absence of such clauses how the governing law may come to your aid. An important consideration for contracting parties when attending to a risk analysis of their contractual obligations, options and remedies is whether an arbitral tribunal or a court will uphold a defence of force majeure (i.e. inability/impossibility of performance) against a claim for damages or loss by the counterparty for breach of contract where the party invoking force majeure was already in serious financial distress prior to the force majeure event (i.e. COVID-19). In particular where the counterparty had a reasonable suspicion that the party now claiming force majeure will be unable to perform under the contract or to meet such future obligations as they fall due. 

The English case of Classic Maritime Inc v Limbungan Makmur SDN BHD and Lion Diversified Holdings BHD [2019] EWCA Civ 1102 sets-out how the English courts have approached cases where the inability to perform was not upheld as a defence based on the fact that the party who raised the inability was not willing and able to perform its obligations prior to the force majeure event. The facts in the case of Classic Maritime are briefly the following:

  • the parties concluded a long-term contract of affreightment for the shipment of iron ore pellets from Brazil to Malaysia, which contract was governed by English law.
  • On 5 November 2015, in the industrial complex where the iron ore was mined in Brazil, the tailings dam burst and as a result of the bursting of the dam the production of iron ore was halted. All means of the charterer sourcing iron ore were destroyed and it was prevented from any possible performance of the contract of affreightment. Consequently, it rendered the shipping of iron ore pellets from Brazil to Malaysia impossible between November 2015 and June 2016.
  • The contract contained a force majeure clause which excluded liability for loss or damage “resulting from” a series of specified events and included an event applicable to the dam-burst (i.e. “directly affect the performance of either party”).
  • The charterer raised impossibility of performance in reliance on the clause in the contract of affreightment, which dispute concerned five shipments which should have taken place between July 2015 and June 2016.
  • Prior to the incident in Brazil the charterer to the contract was in financial difficulty and missed several shipments of iron ore.

The English Court of Appeal held that the charterer was unable to rely on the force majeure clause, even though objectively viewed, performance under the contract was wholly impossible due to the dam burst. In using the “But For” test the court in assessing the facts held that “but for” the dam burst, the charterer would anyway not have performed under the contract. The charterer under the contract of affreightment would not have been ready and willing to provide cargoes for shipment even if the dam-burst had not occurred. By virtue thereof the court held that the charterer was in breach of an absolute duty to provide the cargoes, but that nevertheless the ship owner was not entitled to recover substantial damages because this would put it in a better financial position than it would have been in if the charterer had been ready and willing to provide cargoes.

For businesses operating in Africa, with various international commercial agreements it is important to do a proper risk analysis on one’s rights and obligations, with proper consideration given to the governing law and the dispute resolution provision. In doing that proper regard must be given to the trigger events for a dispute and the nature of the dispute resolution clause, in particular whether such clause provides for alternative dispute resolution methods such as conciliation, mediation or arbitration. An important point for African businesses to note is that whether the performance obligations under your cross-border contracts or multinational contracts are governed by English law, South African law, Kenyan law or any other, international dispute resolution experts in Africa – no matter their location on the continent – can seamlessly provide risk advice and deal with any international dispute effectively, efficiently and on a cost-effective basis.  

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