Similar to the last global economic crisis, it is likely that today’s economic climate will see a resurgence of businesses seeking to rely on force majeure for relief from thier contractual obligations. This article explores what force majeure means, how it can be used in contracts and its importance to all parties involved.
If you need help understanding you current contractual position, or would like to ensure that your business interests are suitably protected, our friendly team of expert commercial solicitors are available to help.
Contents:
- What does 'force majeure' mean?
- What are typical examples of force majeure events
- How does a force majeure clause work?
- What are your obligations if your customer or supplier claims force majeure?
- How long can force majeure events last?
- Can force majeure be claimed if the contract becomes inconvenient or not economically viable?
- What happens if there is no force majeure clause?
- Drafting a force majeure clause
What does 'force majeure' mean?
A typical force majeure clause reads something along the lines of:
Neither party shall be in breach of this agreement or otherwise liable for any failure to fulfill its obligations if such failure results from events, circumstances or causes beyond its reasonable control.
As set out above, force majeure events are typically defined in contracts as acts, events or circumstances beyond the reasonable control of the party concerned. Force majeure is just one way your business can reduce it's exposure to risk if things go wrong. See our article on limiting the liability of your business for further information.
A force majeure clause states that if an extreme, unforeseeable event occurs that prevents or delays a party from performing their contractual obligations, that party will not be in breach of contract as a result of the delay/non-performance.
In the case of customers or suppliers, the key obligations that they may fail to perform due to a force majeure event could be:
a) failure to pay invoices within the agreed payment terms; or
b) failure to perform the services or deliver goods within the agreed timescales.
What are typical examples of force majeure events
What is meant by an event of force majeure will usually be defined in a contract and therefore can vary widely.
Traditionally, force majeure clauses were defined as acts of God, hurricanes, earthquakes, strikes and wars. They have evolved over time to now include other specific events such as terrorism, labour strikes and government acts.
Since COVID 19, force majeure clauses are now likely to include events such as public health emergencies, pandemics, and epidemics.
In a lot of cases, force majeure clauses can be very general in nature and rather than set out specific events, they simply refer to an event 'which prevents performance beyond the party’s control'.
Force majeure clauses can appear in a wide variety of contracts from sales of goods agreements, services agreements, distribution agreements, and manufacturing agreements.
How does a force majeure clause work?
Force majeure clauses are often drafted so that they include specific steps that should be taken by the party seeking to rely on force majeure.
Typical steps include an obligation on the party seeking to rely on force majeure to provide notice to the other party within a set timescale of the nature and extent of the force majeure event. There is usually an obligation on the party relying on force majeure to endeavour to mitigate the effect of the force majeure event, to carry out its obligations in any way that is reasonably practicable and to resume performance of its obligations as soon as reasonably possible.
For example, if a customer tries to claim that a force majeure event has affected its ability to pay its invoices, it will have to show that it has exhausted other types of avenues, for example loans or other forms of support, in order to mitigate the impact.
It could be that a customer is able to pay part of an invoice, but not the full amount. In order to comply with their duty to mitigate, they must pay whatever is feasible.
What are your obligations if your customer or supplier claims force majeure?
If a party claims force majeure, the other party’s corresponding obligations under the contract will also be suspended. For instance, if you are the supplier and the customer has claimed force majeure, you would no longer have to supply.
How long can force majeure events last?
Often a force majeure clause sets out a timeframe after which, if the force majeure event is continuing, either party is able to serve notice to terminate so that the parties can make alternative commercial arrangements.
Force majeure clauses may also set out what happens to any loss or gain that a party may incur as a result of such termination. For instance, if one party suffers a loss because of such termination, the other party must bear half of the loss. In reality, if the party claiming force majeure has cash flow issues, it may be that the other party has to wait a while for payment of the invoice.
Can force majeure be claimed if the contract becomes inconvenient or not economically viable?
If a party decides that it no longer requires the services or goods provided under the contract due to a change in market conditions, but it is not actually prevented from performing its contractually obligations, then that party cannot rely on force majeure.
The last global economic crisis prompted a lot of litigation whereby claimants argued that economic difficulties constituted a force majeure event. Whilst unsuccessful, it may be that due to rising costs, we see an increase in this type of litigation.
What happens if there is no force majeure clause?
Force majeure clauses cannot be implied into a commercial contract. If you want to rely on a force majeure clause, you must check the contract to see if the clause exists.
Instead, where there is no force majeure clause, a party may be able to rely on frustration of the contract. Frustration operates where an event has occurred which makes performance of the contract impossible. Frustration however only applies in very narrow circumstances and offers limited relief and remedies. We would therefore advise that you do not rely on the doctrine of frustration and rather ensure that you have a well drafted force majeure clause in your contracts that protects your position.
Drafting a force majeure clause
From a practical perspective, if you think you could be at risk, think about what could trigger a pause or end to performance, what would you like to happen in such an event, and whether the contract currently accurately reflects this. Increased costs for example, could be better dealt with by inserting price review clauses.
When it comes to the drafting of a force majeure clause, it is fairly common for a balanced position to be set out whereby the party claiming force majeure is relieved from performance without liability whilst the other party has the right to terminate the contract. The exact drafting will always depend on the circumstances of each party and ensuring that each party’s interests are protected.
Summary
Given the current economic outlook, it is crucial to check that you understand the use and existence of your force majeure clauses. A well drafted force majeure clause is vital to protect your interests and position in relation to your commercial contracts. Accordingly, you should seek specialist advice from a commercial solicitor who can help you understand your current situation and avoid any errors which could jeopardise your position.
