Since the start of the global pandemic in March 2020, force majeure clauses have been under close scrutiny and their application in commercial contracts have increased.
The days of these being considered boilerplate terms in commercial contracts are well and truly over. Ultimately, this means that it is more important than ever to consider these clauses and how they may apply to issues being faced in your business.
The most common issue, which continues to be prevalent and one which we don’t foresee going away anytime soon, is whether a supplier, who has difficulties fulfilling their contractual obligations due to a cost rise, can invoke a force majeure clause and simply walk away from a supply contract without penalty?
A force majeure clause provides a remedy for the contractual party who fails to fulfil their obligations under the contract due to the impact of force majeure events. However, the following questions should be considered before the force majeure clause can be invoked and relied upon.
Is there a force majeure clause in the contract?
Force majeure is not a legal concept under the English law, so one can only rely on it if the clause is included in the contract.
Is there a force majeure event?
The force majeure clause can only be invoked if the specific event is deemed a ‘force majeure event’ – examples are natural disasters or an outbreak of hostilities. As a general rule, force majeure clauses are interpreted restrictively. So, the careful and precise wording of the force majeure clause is very important.
While careful drafting is of primary importance, creating a list of FM trigger events should be given careful consideration; a broader list can help future-proof the contract, but casting the net too wide can also dilute a party’s commitment to supply or pay for the goods or service.
What is the force majeure event impact?
This is identifying the specific liability where the impacted party or the supplier has been affected. It is possible that there are several obligations under the contract and the event hasn’t impacted all of those obligations. These may include the obligation to supply goods continuously; only when that obligation has been affected can the supplier attempt to trigger the force majeure clause.
What type of impact?
The impact may have different effects but only when the force majeure event has made it impossible for the supplier to continuously supply goods can they invoke the force majeure clause. Importantly, if the impact has merely made it more expensive for the supplier to supply goods, the force majeure clause is unlikely to be effective.
Causation or a direct link?
The supplier needs to establish a direct link between the event and the impediment to performance before they can trigger the force majeure clause. You might ask whether a specific event made it impossible for the supplier to meet their obligations – for example, during lock-down, was it the pandemic or the lockdown restriction that caused suppliers to fail to meet their obligations?
Has the impacted party taken the right actions properly?
If the force majeure clause has been triggered, the impacted party needs to notify the other party of their inability to meet their obligations promptly, otherwise they might miss their chance and end up being required to pay for breach of the contract. The enforcement of the clause will not happen automatically.
Top tips for managing force majeure issues
- Make sure your contract covers unforeseen events. Both parties should be able to suspend or delay its performance if it is genuinely unable to be performed because of circumstances outside of their control.
- Always read the force majeure clause in a contract at least once! Consider whether the specific situation falls within the definition of a force majeure event under the contract and remember the need to establish a direct link between the event and the impediment to the contract performance before an FM clause can be triggered.
- Obligations may need to be suspended, rather than immediately terminated – don’t pre-judge the situation without checking the FM clause.
- If you can invoke a force majeure clause, consider the time limits and notice for doing so.
- Are there other ways to meet your contractual obligations and mitigate difficulties. It is worth discussing a reduction or modification rather than total abandonment.
- Retain all evidence of any disruption, delay or prevention under a contract, including documentation proving delay or cancellation.
- Don’t wait – take action; communicate with the other party to the contract and discuss FM issues. If you can emerge with a sound relationship with them afterwards, that is very valuable.