SMA Arbitration Panel Rejects Claim of Force Majeure

On October 9, 2008, Claimant Agrifos Fertilizer Inc. ("Agrifos") commenced arbitration against Respondent, Transammonia, Inc. ("Transammonia") before an SMA Arbitration Panel. The dispute arose from contracts in which Agrifos purchased two parcels of sulfuric acid from Transammonia. The parcels were to be transported on the vessels BOW HERON (at $490 per metric ton), and HOLMEN (at $265 per metric ton), and delivered to Agrifos' Pasadena, Texas plant in October 2008. On September 13, 2008, Hurricane Ike struck the Texas coast, causing damage to Agrifos' plant and disrupting operations. On September 18, 2008, Agrifos declared force majeure and announced cancellation of the BOW HERON cargo, stating that its facilities could no longer accommodate the cargo. Agrifos did not cancel the HOLMEN contract. Transammonia refused to accept Agrifos' unilateral cancellation, and both vessels were loaded in late September 2008. The HOLMEN arrived in Pasadena on October 29, 2008 and completed discharge on November 19, 2008. The BOW HERON arrived in Pasadena on November 15, 2008 and completed discharge on December 30, 2008.

Agrifos alleged that Hurricane Ike was an event that allowed it to cancel the contract, pursuant to the force majeure provision contained therein. Furthermore, Agrifos asserts that Transammonia's refusal to accept Agrifos' cancellation of the contract constituted a breach of the contract itself, as both parties were required to jointly use their best efforts to mitigate damages. Finally, Agrifos maintained that it was not required to pay for the BOW HERON cargo, because loading had not been completed when Agrifos advised Transammonia of its cancellation due to force majeure. Transammonia argued that there was no express or implied right of cancellation under the contract and accordingly, Agrifos' unilateral cancellation due to force majeure was improper and constituted an anticipatory repudiation.

In its review of the matter, the Arbitration Panel determined that the threshold issue was not whether a force majeure event existed at the Agrifos plant, but rather, whether Agrifos had the right to cancel the contract on the grounds of force majeure, based on the provisions of the contract. The Arbitration Panel held that the contract in the instant matter did not allow for cancellation due to force majeure. The Panel stressed that in considering whether force majeure applies to permit cancellation of a contract, the outcome turns on the parties' express contractual agreement and the facts and circumstances of each case.

The Panel held that cancelling a contract is an "extreme measure" and that the party cancelling the contract has the burden of proving by a preponderance of the evidence that it had a right to do so. Reviewing the force majeure clause of the instant matter, the Panel determined that it did not entitle Agrifos to cancel the contract for the following reasons:

  • The contract did not contain an express right to cancel based on force majeure;
  • The contract requires the affected party to control or prevent the effects of a force majeure event;
  • The contract obligates that parties to make their best efforts to minimize damages, costs and "resulting waiting time";
  • Certain provisions of the contract expressly allow parties a right to cancel under particular circumstances, however, the force majeure provision grants no such right to the affected party

Accordingly, the Arbitration Panel held that Agrifos wrongfully cancelled that contract and that Transammonia was not obligated to accept Agrifos' cancellation. Further, Transammonia's attempt to find an alternate buyer for the BOW HERON cargo was in accordance with its obligation to mitigate damages.

In analyzing the force majeure provision of the contract at issue, the Panel held that a party claiming force majeure may be excused for nonperformance only if due diligence has been exercised to overcome the effects of the force majeure event. Citing Gulf Oil Corp. v. Federal Energy Regulatory Commission, 706 F.2d 444 (3d Cir. 1983), the Panel explained that, in order to demonstrate that it has attempted to overcome the results of force majeure, the affected party must "[do] everything within its control to prevent or minimize the event's occurrence and its effects."  Applying this standard, the Panel held that Agrifos failed to meet its burden to increase the sulfuric acid storage space in its Pasadena facility and to overcome the buildup of sulfuric acid in its tanks. While acknowledging that Agrifos' plant did sustain significant damage as a result of the hurricane, the Panel found that Agrifos "did not focus on trying to make space available for the HOLMEN or BOW HERON cargoes to any significant extent."

Accordingly, the Panel held that Agrifos failed to meet its due diligence burden and that it was liable to Transammonia for the unpaid balance of the contract price for the BOW HERON cargo. Furthermore, since Agrifos was not entitled to cancel the contract and the force majeure provision expressly provided that it would have "no application to the running of laytime or the Buyer's liability for demurrage," the Panel concluded that Agrifos was liable to Transamonia for demurrage incurred in discharge of the cargo. The Panel awarded Transamonnia total damages of USD 4,068,288.61 (inclusive of unpaid balance of contract, demurrage, incidental damages, attorneys' fees, and interest).

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