Farce majeure… or simple frustration?
Force majeure clauses are fairly common in commercial contracts but there is no standalone concept of ‘force majeure’ under the laws of England & Wales. Accordingly, such clauses are creatures of the contracts in which they appear, and their scope and effect will depend on the wording in question.
That said, typically a force majeure clause excuses or delays the performance of contractual obligations upon the occurrence of an event outside the reasonable control of the party alleging the force majeure event.
When force majeure is asserted there are a number of considerations for both parties.
Is there actually a force majeure event?
The event in question must fall within the contractual definition of circumstances or occurrences capable of triggering the force majeure clause. The list of events in the contract is exhaustive and the court will look at the natural meaning of the words used and whether the present circumstances were intended to fall within them. The courts will assume that the parties only intended to grant relief where the event was outside of their control, as anything else may lead to an unjust result.
Typical force majeure events are war, revolution, drastic government interventions and ‘acts of God’, among others. ‘Acts of God’ typically connote natural events which cannot be prevented against, such as earthquakes, tsunamis, floods, etc. Whether a virus pandemic amounts to an ‘act of God’ will depend on a number of factors, such as whether the phrase is defined under the contract, whether the clause defining ‘force majeure’ otherwise includes specific references to pandemics or epidemics that would support a noscitur all approach to construction, and the governing law of the contract (in contrast to England and Wales, ‘Act of God’ is a recognised legal concept in some jurisdictions).
However, general ‘sweep up’ provisions in force majeure clauses that attempt to cover off any deficiencies in the drafting will be interpreted narrowly. Consequently, they will not assist a party who seeks to rely on such provisions where the event in question has no connection with those which are expressly listed.
Has the party’s ability to perform its contractual obligations been prevented, impeded or hindered by the event?
The exact requirements will depend on the contractual wording but all clauses require the party alleging force majeure to show a causal link between the event and its inability to perform the contract. In more lenient contracts the event may only need to have hindered a party rather than prevented it altogether.
Either way, the event must be the only cause of the failure/under-performance in question.
Has the party alleging force majeure taken all reasonable steps to try to avoid or mitigate the event or its consequences?
Effect of a force majeure event
Typically a valid force majeure event will have one of two outcomes depending on the drafting of the contract:
Mutually suspend all obligations under the contract – obligations resume when the specified event ends; or
Be an event of termination – typically a notice must be served on the other party and all thereafter liability for non-performance (other than for prior breaches) will ordinarily be extinguished because there is no longer a valid contract.
Practical considerations – getting it right
Check your contract carefully! Those wishing to invoke a force majeure clause must assess carefully whether the requirements are met. Where one party wrongfully seeks to terminate on the basis of a force majeure event, the other party may in turn rely upon such a wrongful termination as a repudiatory breach entitling it to terminate. Both parties may be better served by opening a dialogue in order to find consensus on whether there has indeed been a force majeure event.
It is important, as ever to follow the notification provisions of the contract, including requirements for written notice and specified time periods.
Parties notified of a counterpart’s intention to invoke force majeure should consider checking their insurance arrangements and assessing any impacts that the force majeure event will have on fulfilling their own obligations under onward contracts. It may be worth checking the force majeure provisions of those agreements in case of any misalignment between the definitions of ‘force majeure’.
As far as possible, we recommend obtaining legal advice specific to both the circumstances in question and the wording of the particular force majeure clause.
Although ‘force majeure’ is not a recognised legal concept under the laws of England and Wales, the doctrine of frustration is a not-so-distant relative. Frustration applies where a significant change of circumstances renders performance of a contract radically different from the obligations that were originally undertaken. Such a change must result from an outside event or change of situation occurring independently from the party seeking to rely on it.
Where frustration applies, the parties are excused from all further performance and are not liable for damages for non-performance. The contract is permanently set aside.
Relying on frustration is only possible in circumstances where the contract does not already include an express provision catering to the particular force majeure situations. Moreover, it is a rare beast because of the courts’ general reluctance to hold that a contract has been frustrated. It is very much a place of last resort (much like self-isolation).
Final word of warning
The English approach to force majeure is much more restrictive than the approach to force majeure taken under Civil law systems. Therefore you should be alert to the fact that if you have force majeure issues being negotiated with Civil law counterparts or determined by Civil law arbitrators, even if the contract is governed by English law, they are likely to start from the position that if a force majeure event has been established, performance has been prevented under the entirety of the contract. In other words, in those circumstances, there is a higher likelihood that force majeure will be relied upon as a defence to a claim for performance.
This article was written by Tim Crockford, James Roberts and David Milner, partner, partner and senior associate respectively at Clyde & Co.
Source: Baltic Exchange