Force majeure ('FM') clauses excuse parties from performing obligations under contract because an act or event makes the contract impossible to perform.
Following on from law firm Thomas Eggar’s piece on force majeure, Sarah Grenfell, senior associate, Dundas & Wilson considers the protection on offer to small businesses.
Typically, when one mentions force majeure (FM), ‘acts of God’ spring to mind – for example, floods, fire, war or terrorist acts. But force majeure clauses may extend beyond these situations.
The traditional view
A traditional force majeure clause might read: “Should the seller fail to deliver the contracted goods…by reason of war, flood, fire, storm, heavy snow or any other causes beyond their control, the time of shipment might be duly extended…”
However, under English law, there is no recognised meaning of the term ‘Force Majeure’. This provides an opportunity to tailor force majeure clauses so that the risk of unforeseen events is appropriately managed. Carefully constructed force majeure clauses may be of particular assistance to small businesses where the commercial consequences of an unforeseen event have the potential to seriously impact financial performance and even jeopardise their survival.
Key points to be aware of when drafting or relying upon an FM clause
Carefully consider the appropriate force majeure clause. Force majeure clauses usually list the types of events to be treated as ‘FM’ along with a more general phrase to catch similar events. For example, in Tandrin Aviation Holdings Limited v Aero Toy Store LLC , the force majeure clause read:
“Acts of God or the public enemy; war, insurrection or riots; fires; governmental actions; strikes or labor disputes; inability to obtain aircraft materials, accessories, equipment or parts from vendors; or any other cause beyond Seller’s reasonable control.”
Bear in mind that the ‘catch all’ is likely to be read in the context of the specific examples provided. In this dispute, Aero sought to avoid its obligations on the basis of ‘unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets‘. The court interpreted the phrase ‘or any other cause …’ in the context of the specific examples provided, and found that these were not remotely connected with the economic downturn.
When relying upon an FM clause, you must be genuinely prevented from performing your obligations – it cannot simply be ‘uncommercial’ for you to take a particular course of action (much as you might wish for this to be possible!). In Thames Valley Power Ltd v Total Gas & Power Ltd, the FM clause applied to ‘any event or circumstances beyond the control of the party concerned resulting in the failure by that party in the fulfilment of any of its obligations under this agreement…‘. Total attempted to rely on force majeure because the price of gas had changed so dramatically that it ‘could only perform the contract at a degree of loss‘ not contemplated at the time of the agreement. However, the court held that a commercially impractical contract did not invoke the FM clause.
The behaviour of the party claiming FM is also relevant; some FM clauses include a ‘reasonable and prudent operator’ requirement and the courts will generally apply an objective industry standard when interpreting this phrase. Therefore, parties relying on FM should seek to observe or apply industry standards, cognisant of the fact that the decision making process may come under scrutiny if an FM clause is relied upon and the claim is challenged. Dundas & Wilson’s commercial litigation team recently acted in a £100 million energy dispute involving an FM clause which included such a requirement. The adoption of a fairly broad FM clause in the contract resulted in a very beneficial settlement in respect of the events that were claimed to be ‘FM’.
The key message here is to be aware of what an force majeure clause can offer, and to make sure your business is well–positioned to defend itself if it needs to make a force majeure claim.