Force majeure clauses are often contained in contracts to relieve one or party from their obligations if certain events occur. The idea behind these clauses is if a party is unable to fulfil the contract due to circumstances beyond its control, they should not be held liable or should be permitted a grace period during which their obligations do not apply.
This article sets out our top 10 tips of things to bear in mind when it comes to force majeure clauses in commercial contracts.
The first top tip for force majeure clauses is to include them in your contracts! Without an express force majeure provision, there are very limited remedies available if it becomes impossible to carry out the contract.
Who does it benefit?
When negotiating a new contract, consider who the clause is more likely to benefit: you or your counterparty. Usually, the supplier will be more likely to want to invoke a force majeure clause, and it will be in their interests to ensure that the scope of the definition of a force majeure event is widely drafted.
If you are the supplier under a contract, you may want to expressly provide that such a clause does not relieve the customer of their obligation to pay.
There is no agreed definition for what a ‘force majeure’ event involves, although the definition usually relates to acts, events or circumstances which are beyond the reasonable control of the relevant party. It is therefore crucial that it is properly defined in a contract.
Some clauses contain lengthy lists of events which constitute ’force majeure’. Courts have deliberated in some detail over what the parties intended by reference to certain events but not others. Where there has been a list of some examples followed by a ‘catch-all’ statement such as “any other event beyond the parties’ reasonable control”, the court will look at this in the context of the entire clause including by reference to the examples given.
If there are specific events you wish to rely upon, these should be expressly included. For example, if a party needs to be relieved of its obligations if Covid-19 restrictions are imposed, this should be clearly set out.
Breach of contract
It is not possible to rely on a force majeure clause if you are unable to fulfil your contractual obligations due to a breach of contract. There must be an express provision allowing you to suspend performance or terminate as a result of the other party’s breach.
If the definition of force majeure does not expressly state that the event must be unforeseeable or beyond a party’s control, this will not be implied. Case law demonstrates that if a force majeure event is foreseeable then it is likely to be within the relevant party’s control as to how it will affect them fulfilling their contractual duty.
There is no implied requirement that the event in question cannot be in existence at the time of contract. This must be covered in the drafting of the clause.
There must be a causal link between the event in question and the party seeking to rely on the clause’s inability to perform their contractual obligations.
For example, in a case where the purchaser was unable to pay due to an economic downturn the force majeure event was defined in the contract as “any cause beyond the seller’s control”. The court found that there was no causal link between the seller’s inability to control the economic market and the purchaser’s inability to pay.
Impact of event
The wording in the clause often varies to the extent that a party’s obligations must be affected.
If the clause requires that the force majeure event prevents performance, it must be legally or physically impossible – not just difficult or unprofitable. However, if the force majeure event only needs to ‘hinder’ or ‘delay’ performance of a party’s obligations for the force majeure clause to take effect, this will have a much wider scope.
Effect of clause
The effect of a force majeure clause depends on how it is drafted. Often, the contractual obligation will be suspended for the duration of the event. In some cases, the agreement may be terminated if the event continues for a certain period.
In other contracts, the clause may give rise to an automatic right to terminate, or this arise on notice if a party has been affected for a specified period of time.
Check the notice requirements
Some contracts require a party to notify the other on the occurrence of a force majeure event. This is particularly common where the clause suspends an obligation to perform the contract.
Take care to ensure that you notify your counterparty as soon as possible of the force majeure event and ensure that this complies with the notice provisions in the contract.
Before you claim force majeure, it may be worth discussing the situation informally with your counterparty to see if alternative arrangements can be negotiated to mitigate the issues caused by the force majeure event.
This may keep relations more friendly and allow you to continue the contractual relationship after the event is over. Remember to keep any notification requirements in mind in case you do need to rely on the clause.
There may also be an express or an implied obligation to mitigate the effect of the force majeure event. It’s important to keep records of details of the event and any steps taken to mitigate its effects in case you are required to evidence this.