What many businesses and individuals have experienced over the last 24 months will probably never happen again in any of our lifetimes. When it comes to commercial contracts, are there lessons to be learned from the pandemic?
Force majeure clauses are perhaps one area where things are likely to change.
A force majeure clause excuses a party from its contractual obligations due to circumstances beyond that party’s reasonable control. Force majeure has no defined meaning in English and Welsh law, so it is up to the parties to decide and draft appropriate clauses. Such events could include an act of God, flooding, fire or an epidemic or pandemic. Crucially, these circumstances must affect a party’s performance of a contract.
Before the pandemic, in most industries (except oil and gas where force majeure clauses are more readily used), nobody really paid attention to force majeure clauses. It was very much a boilerplate clause that received very little attention. This is perhaps surprising given their power.
However, since the pandemic, most industries are taking a deeper dive into drafting force majeure clauses. Additionally, we have also seen a rise in parties claiming ‘non-performance’ due to increasing prices arising from the pandemic.
With further guidance on how these clauses will operate in practice, we can start to (narrowly) predict how the courts will interpret them. We can also consider the validity of arguments for ‘economic’ force majeure arguments.
Is this a true force majeure event?
When drafting a force majeure clause in 2022, parties should consider the following to ensure they meet their objectives:
- Focus on the drafting. If a specified ‘event’ is not covered under a force majeure clause, it will be difficult to rely on. The list of specific events should be tailored to reflect the parties’ circumstances and business operations in their industry.
- What about other termination rights? Can the contract be terminated without cause and without a party having to prove and take steps towards complying with a force majeure clause?
- Be honest and transparent. Unique and uncertain circumstances often arise in business. For those parties who are struggling to meet certain contractual obligations – due to external factors or otherwise – they should reach out promptly to their counterparty to have an honest and open conversation about how to continue the contract and mitigate any losses.
When it comes to ‘economic’ force majeure, just because the purchase of goods or fuel has increased, does this actually make the performance of a contract ‘impossible’? That is, could a supplier simply buy goods / products from elsewhere and still perform its contract with its customers? Usually ‘economic hardship’ would sit outside the typical meaning and application of a force majeure clause.