Force majeure clauses: Traps for the unwary

Force majeure clauses: Traps for the unwary

Published:

Author: Rob Cruise

Force majeure is a clause commonly found in commercial agreements, which states that one or both parties will not be liable for any delay in performance or non-performance of its obligations upon the occurrence of certain extraordinary events.

The importance of this often over-looked clause (dismissed as 'boilerplate' or 'standard wording') cannot be overstated.

Shell Singapore recently declared force majeure on some of its customers after a fire affected a diesel fuel unit and forced Shell to shut down its refinery. If Shell had not included robust force majeure wording in its agreements with customers, then it could now be facing huge liabilities for breach of contract.

Be frustrated no longer


A common misconception is that the parties to a contract will be automatically relieved from performing their obligations if some kind of disaster occurs. However, the English law doctrine of 'frustration' will only provide the parties with limited remedies and will only apply where performance is rendered impossible.

Due to the risks involved in relying on the law of frustration, suppliers should ensure that they table a strong force majeure clause at contract-negotiation stage.

How to define force majeure


Force majeure has no definition in English law, and the types of occurrences which are deemed to be 'force majeure events' will depend on how the clause is worded.

A common method is to refer to 'events beyond [the parties'] reasonable control, including but not limited to... ' and then insert a non-exhaustive list of occurrences which will qualify as force majeure events.

In August 2011, the UK riots left battered high-street businesses frantically checking their force majeure definitions for a reference to 'riot' to see if they would be relieved from their contractual obligations.

Commercially, suppliers will not want to seem like they expect to be relieved from their obligations in a wide range of circumstances. The savvy approach is to refer to specific events which the supplier is concerned may affect performance. The severe ice and snow of the past two winters has alerted many businesses, such as food manufacturers, that their contracts need to state that 'severe weather' will be a force majeure event.

How can force majeure help you?


The contractual effect of a force majeure event should be discussed by the parties when negotiating the contract and clearly stated in the drafting to avoid disputes later on. Suppliers should try to incorporate drafting which protects them against liability for the following:

  • breach of contract
  • failure to meet key performance indicators (if applicable)
  • delay payments (or 'liquidated damages', if applicable)
  • termination for (material) breach

Common pitfalls


Force majeure clauses will often require the affected (or potentially affected) party to:

  • take precautions to avoid the event
  • notify the other party of the event promptly or immediately
  • use reasonable endeavours to mitigate the effect of the event

If a disaster occurs or if you are delayed from performing a contract due to (for example) terrorism, severe weather, or rioting, then it is vital that you check the force majeure provisions immediately and comply with the contractual requirements. Otherwise, you may not be able to successfully declare force majeure, and may be in breach of contract.

It is also worth noting that turbulence in or even the collapse of the economy is unlikely to constitute an event of force majeure. Several English cases have upheld this principle, including the 2006 case Thames Valley Power Limited v Total Gas & Power Limited.

In America, commentators have suggested that Donald Trump's claim that the global financial crisis constituted an event of force majeure would have failed, although this matter was settled before a judgement was given.

You are terminated


If the force majeure event continues for a certain specified period of time (for example, three months) then the force majeure clause may state that one or both of the parties will have the right to terminate the contract without liability.

This type of provision is useful as it can prevent a situation of 'limbo' (in which the contract is not being performed, but neither party is in breach) from continuing indefinitely.

I love it when a (contingency) plan comes together


Another way to mitigate risk is to have a contingency, disaster recovery or business continuity plan.

If the supplier can implement contingency arrangements and perform the contract rather than declare force majeure then this is much more likely to preserve the commercial relationship.

However, it is important that the supplier can declare force majeure as a last resort. Having the ability to declare force majeure will also improve the supplier's bargaining position with the customer when discussing possible disaster recovery and contingency measures in a pressurised situation.