The recent missile strikes by the Houthi in the Red Sea added an unexpected and disruptive twist to supply chain operations worldwide. The global economy has – once again – received a strong reminder of how regional events can have a detrimental impact on international trade. The narrow sea route stretching from Yemen’s Bab-el-Mandeb strait to the Suez Canal is no exception. More than 12 percent of global trade – representing 30 percent of the world’s container traffic – passes through this route. The Houthi’s strikes have already led at least six of the largest shipping companies to pause or divert their operations in the Red Sea. This obviously led to disruptions or failures in the delivery of goods. It is therefore not surprising that some of these companies have already declared force majeure, to try to excuse delays in their performance or non-performance altogether of their obligations.
This begs the question whether this situation actually gives rise to force majeure. As usual, it depends. Relevant factors include the wording of the contract, the law governing it and the specific circumstances of each supply. A careful case-by-case analysis is essential. The below checklist should serve to perform a first high-level screening.
What does the contract say?
If the contract includes a force majeure clause, then the question is whether the disruptive events fall within the definition of force majeure.
Contractual definitions of force majeure often point to the occurrence of an unforeseeable event preventing a party from performing one or more of its obligations, provided that the affected party proves that such impediment is beyond its reasonable control.
Force majeure provisions usually contain a non-exhaustive list of presumed force majeure events. These may include war, hostilities, invasion, and acts of terrorism, thus potentially encompassing the armed hostilities involving the Houthi missile attacks.
If the contract includes no force majeure provision, then the law governing the contract becomes relevant. Certain legal systems provide for (broader or narrower) statutory force majeure defence. This is the case – for instance – under most laws of the Middle East, French, Spanish, and PRC law. In these cases, force majeure can be invoked despite contractual silence. Whether a particular event – such as military hostilities – falls within the scope of a statutory force majeure defence varies from jurisdiction to jurisdiction.
Other jurisdictions – such as England, Germany, Singapore and most States in the US – do not provide for a statutory force majeure defence. In these cases, contractual silence would in principle result in the unavailability of force majeure, although different contractual or statutory remedies may apply.
Did the event cause the non-performance?
If force majeure is available and the disruptive event falls within its scope, the next step is to check whether non-performance was actually caused by the force majeure event. Some contracts adopt a high threshold, requiring force majeure events to “prevent” performance – i.e. making it impossible rather than merely more expensive. In other contracts the threshold is lower, thus a “hindered” or “delayed” performance would be deemed sufficient.
Following the Houthi’s attacks, some shipping companies are rerouting away from the Red Sea, choosing to circumnavigate Africa instead. This adds an extra 15-20 days to each voyage. Other shipping companies decided to moor in a safe harbour and pause their voyages until further notice. In these cases, legal consequences will depend on the specific circumstances of the cargo, e.g. the type of goods transported. For perishable goods – such as food or pharmaceuticals – a delay in delivery may, in specific circumstances, amount to contractual non-performance. In other situations, there may only be delayed performance.
Whether this is sufficient to excuse a party from fulfilling its obligations under the contract will depend on the specific scope of the force majeure clause (or statutory force majeure defence) and the specific circumstances of each case. Different force majeure clauses and statutory provisions provide for different consequences for a force majeure event.
Could the disruption effects be overcome?
Force majeure clauses and statutory provisions often require that a party must be unable to overcome the effects of the force majeure event through reasonable endeavours.
Thus, tribunals often assess, in case of an obstacle preventing delivery, whether the party invoking force majeure could not remove such obstacle even after employing reasonable efforts. Often a mere rise in costs for raw materials and energy has not been found to prevent the production of goods. It merely made it more expensive. Accordingly, this effect may, in of itself, be deemed insufficient to fall within the scope of the applicable force majeure clause.
Such considerations may also be relevant in this context. One relevant question would then be whether disruptions in the Red Sea actually prevent shipping companies from reaching Europe where alternative (albeit more costly) routes do exist. The reasonableness of these – longer and more expensive – alternative routes will have to be considered carefully.
Have notice provisions been complied with?
Force majeure clauses often include notification requirements. For instance, the ICC model clause provides that notice must be sent “without delay” after the force majeure event causes a party’s impediment to perform.
The key question is thus to establish when performance truly became impossible. In a rapidly changing context, like the Houthi escalation or more broadly the current Middle East crisis, this might not be straightforward. Yet clarity on this point, which requires a case-by-case analysis, is key. Serving a late force majeure notice will generally not excuse prior non-performance. Service of a notice may also trigger related obligations, such as requiring the parties to negotiate mutually acceptable mitigation measures.
Hence, force majeure cannot be simply assumed to apply or not. Rather, the specific language of the contract, the applicable law and the specific circumstances of each case are paramount. Only a proper legal analysis may in fact reveal in the current circumstances whether force majeure is a viable remedy or can be successfully rebutted. Even if force majeure is unavailable, other contractual remedies – especially those meant to re-establish the economic equilibrium when performance has become excessively onerous – could apply (such as frustration, hardship, material adverse change clauses).
