Following recent events with the coronavirus pandemic, the business community is reeling from the impact. Supply chains have been disrupted, events have been cancelled, and an increasing number of businesses are being forced to shut down.
Amidst the crisis, businesses are now examining their contracts to explore potential ways to terminate agreements they can no longer fulfil or postpone future obligations. Keep reading to learn, ‘What is a force majeure clause?’
What Does 'Force Majeure' Mean?
Force majeure refers to unforeseen and uncontrollable events that occur beyond the parties' control and make it impossible or extremely difficult to fulfil contractual obligations. It is a legal concept that provides relief from contractual liabilities when extraordinary circumstances arise, such as natural disasters, war, government actions, or epidemics. The specific definition and scope of force majeure can vary depending on the terms of the contract and the applicable laws.
Examples of Force Majeure Events
Typical examples of these events include:
- Natural disasters: Events such as earthquakes, hurricanes, floods, wildfires, or severe weather conditions that make it impossible or impractical to perform contractual obligations.
- Acts of God: Extraordinary events beyond human control, such as lightning strikes, volcanic eruptions, or tsunamis, disrupt normal business operations.
- War or Armed Conflict: The outbreak of hostilities, military actions, or political unrest that hinder the ability to carry out contractual obligations.
- Government Actions or Regulations: Government-imposed restrictions, embargoes, trade sanctions, changes in laws or regulations, or the declaration of a state of emergency that renders contract performance unfeasible.
- Epidemics and Pandemics: Widespread infectious diseases or outbreaks, like the COVID-19 pandemic, that lead to quarantine measures, travel restrictions, or the inability to operate businesses normally.
- Labour Disputes: Strikes, lockouts, or labour disruptions that prevent employees or workers from fulfilling their contractual obligations.
It's important to note that the specific force majeure events recognised may vary depending on the jurisdiction and the language used in the contract.
When Can a Force Majeure Event be Considered to Have Occurred?
When determining the applicability of a force majeure clause, the following points should be considered:
- The coronavirus outbreak itself is unlikely to be the sole factor rendering it impossible to fulfil contractual obligations. Instead, it will be the consequences of the virus, such as social distancing requirements or mandatory business closures, that are relevant in establishing a force majeure event.
- Merely facing increased difficulty or expense due to the fallout from the coronavirus does not automatically qualify as a force majeure situation. The focus should be on demonstrating that the consequences of the virus make contract performance impossible or substantially different from what was originally envisaged.
- To successfully invoke force majeure provisions, it is generally necessary to show that the event causing difficulties could not have reasonably been anticipated. This may be easier to prove for contracts entered into before December 2019, but more challenging for those agreed upon in February or March 2020.
- In most cases, force majeure clauses require prompt notice of the event and the taking of reasonable steps to mitigate the problems being faced.
How Does a Force Majeure Clause Work?
A force majeure clause is a contractual provision that outlines the rights and obligations of the parties in the event of unforeseen and uncontrollable circumstances that make it impossible or significantly difficult to fulfil contractual obligations. The clause typically identifies specific force majeure events or categories, such as natural disasters, acts of God, government actions, or epidemics, which would trigger its application.
When a force majeure event occurs, the clause serves as a mechanism to temporarily suspend or excuse the performance of the affected obligations. It allows the party impacted by the event to be relieved from the consequences of non-performance or delayed performance, protecting them from potential breach of contract claims.
The specific terms and effects of a force majeure clause can vary depending on how it is drafted. Some clauses may provide for the termination of the contract if the force majeure event persists for a prolonged period. Others may allow for the suspension of performance until the event ceases or provide alternative measures to mitigate the impact of the event.
To invoke a force majeure clause, the party seeking relief must typically demonstrate that the force majeure event directly caused the inability to perform the contractual obligations and that they have taken reasonable steps to mitigate the effects of the event. The burden of proof generally lies with the party invoking the clause.
It's important to review the specific language of the force majeure clause in the contract, as its scope, applicability, notice requirements, and other provisions can significantly impact how it operates in a given situation. Legal advice may be necessary to properly interpret and apply the clause in accordance with the governing law and contract terms.
How Long Can These Events Last?
The duration of force majeure events can vary widely and is typically determined by the specific circumstances and nature of the event itself. There is no fixed or predetermined timeframe for how long a force majeure event can last. It can range from temporary disruption to an extended period of time, depending on factors such as the severity of the event, its impact on contractual performance, and any applicable laws or regulations.
In some cases, force majeure events may be of short duration, such as a temporary closure due to a severe storm or a brief interruption caused by a labour strike. In other instances, force majeure events can extend for a longer period, especially in situations like natural disasters or pandemics that have significant and widespread effects.
The determination of the duration of a force majeure event can depend on various factors, including the explicit language of the force majeure clause in the contract, any applicable laws or regulations governing force majeure events, and the practical considerations and feasibility of resuming normal operations.
It is important for the parties involved to closely examine the contract provisions, seeks legal advice if needed, and assess the specific circumstances surrounding the force majeure event to determine its duration and the resulting impact on contractual performance.
Drafting a Clause
When drafting a force majeure clause, it is essential to carefully consider the specific circumstances and requirements of the contract. Here are 10 tips to keep in mind:
- Clearly Define Force Majeure Events: Clearly specify the events or categories that will be considered force majeure. Include a comprehensive yet specific list of events that are beyond the control of the parties and may hinder or prevent performance.
- Include Specific Language: Use precise and unambiguous language to describe the triggering events, such as "acts of God," "natural disasters," "epidemics," "government actions," or any other relevant circumstances. Vague or general terms may lead to disputes and uncertainty.
- Address the Consequences: Specify the consequences and effects of a force majeure event, such as the temporary suspension of obligations, extension of time for performance, or termination of the contract. Clearly outline the rights and responsibilities of each party during a force majeure event.
- Include Notice Requirements: State the obligations of the parties to provide prompt notice of a force majeure event. Define the timeframe within which notice must be given and the information that needs to be included in the notice.
- Mitigation and Alternative Measures: Consider including provisions that require the parties to take reasonable steps to mitigate the impact of a force majeure event, such as seeking alternative means of performance or finding mutually agreed-upon solutions.
- Specify the Duration: Clarify how long the force majeure event may excuse performance and the actions required to resume performance once the event has ended.
- Address Allocation of Risks and Liabilities: Clearly outline the allocation of risks and liabilities during a force majeure event, including any potential financial consequences, indemnification, or limitation of liability provisions.
- Governing Law and Dispute Resolution: Specify the governing law and jurisdiction that will apply in the event of a dispute arising from a force majeure event.
- Review and Update: Regularly review and update the force majeure clause to ensure it remains relevant and aligned with the evolving needs and circumstances of the contract.
- Seek Legal Advice: Consult with legal professionals experienced in contract drafting and force majeure provisions to ensure the clause is comprehensive, enforceable, and tailored to your specific contractual requirements.
Remember that the drafting of a force majeure clause should be done in consultation with legal counsel who can provide guidance based on the applicable laws and specific circumstances of your contract.
Common FAQ
Below are common questions that business owners ask surrounding force majeure clauses.
Is it possible to invoke force majeure if the contract becomes impractical or financially unfeasible?
Force majeure cannot typically be claimed solely based on inconvenience or economic viability. Generally, force majeure is invoked when unforeseen events beyond the control of the parties make it impossible or significantly difficult to fulfil contractual obligations. These events are often characterised by their nature of being unforeseeable, unavoidable, and external to the parties' actions or decisions.
While economic hardship or increased costs may be a consequence of a force majeure event, mere inconvenience or financial difficulty alone is unlikely to qualify as a valid reason to invoke force majeure. The focus is on the occurrence of an event that directly hinders or prevents performance, rather than the impact of that event on the profitability or convenience of the contract.
To successfully claim force majeure, it is generally necessary to establish that the event in question falls within the scope of the force majeure clause and that it renders performance impossible, illegal, or substantially different from what was originally contemplated by the parties. Each case must be evaluated based on the specific contractual provisions, governing law, and the factual circumstances surrounding the event.
If my ability to fulfil a contract is impacted by an event, can I end the agreement using a force majeure clause?
Force majeure clauses aim to provide relief from contractual obligations when an unforeseen event, beyond your control, prevents you from fulfilling your obligations. However, these clauses can differ in their wording, so it is crucial to review the specific force majeure clause you intend to rely on. Determine whether the clause grants you the right to terminate the contract, temporarily suspend performance until the event concludes, or simply excuses non-compliance resulting from the event.
What if a contract has not got a force majeure clause?
If a contract does not include a force majeure clause, the parties' rights and obligations in the event of unforeseen circumstances may be determined by the applicable laws and legal principles governing contracts in the specific jurisdiction. In the absence of a force majeure clause, the legal concept of frustration or other doctrines may come into play.
Frustration refers to a situation where an unforeseen event occurs after the contract is formed, which makes it impossible or radically different to perform the contractual obligations. If frustration can be established, the contract may be considered void, and both parties may be discharged from further performance. However, proving frustration can be challenging as the threshold is typically high.
Apart from frustration, certain legal systems may provide other remedies or doctrines to address unforeseen events. For example, some jurisdictions recognise the principle of impracticability or impossibility of performance, which can release the parties from their obligations when an event occurs that renders performance excessively difficult or commercially impracticable.
In the absence of a force majeure clause, it is advisable to consult with legal professionals who can analyse the specific circumstances and applicable laws to determine the available options and potential remedies. The outcome will depend on the governing legal framework and the specific facts and circumstances surrounding the contract.
If I cannot fulfil a contract, but there is no force majeure clause in the agreement, can I rely on the law of frustration instead?
The law of frustration provides relief in situations where an unforeseen event occurs after a contract has been formed, meeting the following conditions:
- The event is essential to the contract and was not anticipated by the parties when the agreement was made
- The event is not caused by either party and cannot be attributed to anyone's fault
- The event renders contract performance unachievable, unlawful, or significantly deviates from the original expectations of the parties involved
If these criteria are met, it may be possible to legally terminate the contract without further obligations. However, proving frustration can be challenging due to the high standard of evidence required.
What if I terminate a contract based on force majeure or frustration, but it later turns out that I was not entitled to do so?
If you terminate a contract incorrectly, believing you have valid grounds under force majeure or frustration, it would be considered unfair dismissal. In such cases, the other party has the right to seek compensation from you for the losses they have incurred due to the premature termination. It is crucial to seek legal advice if you are considering relying on force majeure or frustration as grounds for termination to avoid potential liabilities and understand the legal implications accurately.
Would it be more beneficial to try and negotiate a compromise instead?
Given the uncertainty surrounding the duration of most force majeure events, it is crucial to consider the long-term implications. While there is confidence that life will eventually return to normal, everyone should preserve commercial relationships and focus on rebuilding businesses rather than engaging in potentially lengthy and costly litigation.
In light of this, it is strongly recommended that businesses make efforts to resolve disputes amicably and involve lawyers at an early stage. A lawyer experienced in handling contract disputes involving force majeure or frustration can provide valuable assistance by:
- Explaining the specific impact on your business
- Outlining the steps you have taken to mitigate the situation
- Communicating your desired actions from the other party to help alleviate your challenges
- Proposing solutions for reaching a reasonable compromise that enables both parties to navigate through the challenges posed by force majeure events
If you need assistance, please contact our expert contract dispute solicitors at info@witansolicitors.co.uk.
