What is Force Majeure

We were recently asked by a client whether force majeure clauses in a contract would enable them to “withdraw” from the contract.

For what it’s worth, it is a “civil law” (such as that applied in European countries, amongst many others, including even Scotland) concept that has no settled meaning in the common law of countries such as Australia and the UK jurisdiction of England and Wales – other than as terms in a contract.

In a nutshell, force majeure clauses are provisions, or terms in contracts that enable a party to a contract obliged to provide goods and services, to not be obliged to provide those goods or services where certain circumstances apply.

These can include such occurrences as epidemics (let’s agree here that would include pandemics), so-called acts of god, industrial disturbances, wars, blockades,riots, floods, earthquakes, fires, and so on.

There are generally three essential elements for a force majeure provision to operate:

·     It can occur with or without human intervention;

·     It cannot have reasonably been foreseen by the parties; and

·     It was completely beyond the parties' control and they could not have prevented its consequences.

Parties cannot invoke a force majeure clause if they are relying on their own acts or omissions. Additionally, the force majeure event must be a legal or physical restraint and not merely an economic one (subject to our comments below about commercial impracticality).

Performance of a contract that becomes uneconomical will not generally - subject to drafting - be a circumstance beyond the control of a party to a contract.

Force Majeure and a contract and its circumstances

This issue of commercial impracticality is important here.

A party intending to rely on a force majeure clause needs to be able to establish, if need be, that performance of the contract is beyond its control and that the party could not have foreseen the circumstances described in the provision.

AsI think we are all aware, this pandemic would not have been foreseen when many contracts were signed, however, again, a party generally needs to show more than that it is just not worth its while commercially.

It’s not unheard of that a force majeure clause, if properly drafted, may deal not only with impossibility of performance, but also with questions of commercial impracticability.

Whether or not a proposed counter-party would accept such a clause is another matter.

Conclusion

Both parties to a proposed contract should carefully review the drafting to ascertain whether a force majeure clause exists (this should not be too difficult), and if there is one, the breadth of the term.

“Commercial impracticality” clauses – which could be simply along the lines of, it’s too expensive for the goods or service provider to continue to providing goods or services under the contract – could be considered by a provider but should be carefully reviewed by a buyer of goods and services.

Roughly similar terms can be found in bank commercial facility agreements, providing that if the cost of continuing to fund a facility becomes prohibitive for abank, then it will have certain rights in connection with variation of the facility agreement.

Note that is article is not legal advice. If you need specific legal advice about force majeure clauses, you should contact your lawyer, or Best Interests Law.

TimMuffet

Solicitor Director Best Interests Law

3 August 2020

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