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Force majeure clause: Why not having one could be the end of the world

force majeure clause

Force majeure clause

A force majeure clause sounds painful…and French. A bit like a guillotine. But before sign your next services contract there are a few important contractual principles you should be aware of to ensure that if a catastrophic event happens you will not be shouting “off with his head” to the other party’s representative in your first governance meeting, like it’s the end of the world.

What is a force majeure event?

A force majeure event has it origins in old French law. Literally, the term means ‘a superior or irresistible power.’ Broadly, force majeure excuses a party from performing some or all of its obligations under a contract if performance is prevented by something outside of its control.

Typical force majeure scenario

Your company has just negotiated and signed a new contact with your customer. You have copious amounts of experience delivering major technology infrastructure projects. Under the terms of the contact you will implement a superfast Wi-Fi network throughout the customer’s building and make a tidy profit in the process. Then, quite literally, disaster strikes. The local river bursts its banks and a flood completely submerges the customer’s building. You are only half-way through installing a the Wi-Fi network. Both parties rush to the contract to determine if the supplier must still meet the aggressive project deadlines or if the customer has to continue to pay the monthly installments for the installation works.

Purpose of a force majeure clause: excusing performance

A force majeure clause is meant to protect a party from unforeseen situations that may arise after it signs a contract. As such, a supplier will generally be more likely to rely on a force majeure clause than the customer. In the scenario above, due to the flood, it is impossible for the supplier to complete the work it is obligated to do under the contract, at least until the flood waters subside. In this case the supplier would try to rely on a force majeure clause in the contract so that its  obligations to complete the project and meet any contractual deadlines are temporarily suspended for as long as the force majeure event continues.

Why you need a force majeure clause in your contract

English common law does not recognise the doctrine of ‘force majeure’ or relief from contractual obligations where non-performance is caused by a force majeure event. Accordingly, if you do not include a force majeure clause in your services contract you cannot invoke the principle if some event happens beyond the control of the parties. However, the courts will give effect to the force majeure doctrine if the parties specify one in the contract. Depending on which party you are acting for, and their respective bargaining power, there are a few different approaches you can consider when reviewing and drafting a contract.

Approach 1: The customer favoured approach – make it specific

As a customer, the better approach is to list specific events (natural, human or other factors) in your force majeure clause that will trigger relief or temporary excused performance for the supplier. This has the benefit that the clause is not open-ended and allows you to make a more accurate assessment of risk before you sign the contract. Specific circumstances may include:

  • acts of God (such as, flood earthquakes, fires, thunderstorms)
  • war
  • insurrection
  • riots
  • terrorism

An example customer-friendly force majeure definition is:

A party is temporarily excused from performing its obligations under this agreement to the extent that:

  • it is prevented by an act of God, natural disaster, act of war, riot or strike outside that party’s organisation; and
  • the affected party is not able to prevent, overcome or remedy the event by the exercise of due diligence and good industry practice,

but only so far and for so long as it is affected by the force majeure event

The following will not constitute a force majeure event under this clause: a lack of funds for any reason, supply shortages, change in market conditions, subcontractor failures, or any strike, lockout and labour dispute.

During any period of force majeure event, the customer will be entitled to obtain services from another source and will have no obligation to the supplier if it does so.

Contract tip: The middle paragraph is a useful protection for a customer. In situations such as strikes or subcontractor failures, the customer will feel it is fair for the supplier to manage these situations itself and to continue to perform its contactual obligations and meet the project timelines by, for example, settling with the striking workers or hiring new subcontractors. On the other hand, if the typical drafting of a force majuere event (ie. circumstances ‘beyond a party’s reasonable control’) is applied them the supplier may be able to argue that striking workers or failing subcontractors are beyond the reasonable control of the supplier and that its performance should therefore be excused.

Approach 2: The supplier favoured approach – keep it general

As a supplier is more likely to rely on a force majeure clause than the customer, a supplier should try to make the definition of a force majeure event as broad as possible. An example of the drafting a supplier should try to include in the force majeure definition is:

A party is temporarily excused from performing its obligations under this agreement to the extent that it is prevented by circumstances beyond its reasonable control (other than an obligation to pay money).

Contract tip: The words in parenthesis are important from the supplier’s perspective because the supplier will not want a failure by the customer to pay the fees or charges for the services to be included in the force majeure event definition. Without this drafting  the customer may argue that a cash flow problem is a force majeure event under the contract and the customer is therefore entitled to relief from paying its bills on time.

Approach 3: The third way – leave it up to the courts

Some lawyers advocate including a force majeure definition in the contract that does not mention specific events but instead makes a general statement along the lines of:

A party may be relieved of its contractual obligations if a force majeure event occurs.

If the parties agree to this drafting and a dispute develops it will be left up to the court or tribunal to determine if a force majeure event has arisen after taking into account the overall circumstances of the matter. In my view, this is a very risky approach and goes against my preferred approach of trying to draft the contract in as clear and definitive a way as possible. This helps avoid the time and cost of litigation in relation to a contractual dispute regarding interpretation.

Conclusion

Whether you are a supplier or a customer, if a catastrophic event  occurs in the middle of a major project, it doesn’t need to be the end of the world. You simply need to ensure that you before signing the contract you understand the scope of the force majeure event definition and that the rights and obligations of each party in relation to excused performance and temporary relief from contractual obligations are appropriate.

 

Photo credit: Pixabay

2 thoughts on “Force majeure clause: Why not having one could be the end of the world

    1. Hi Terry, force majeure clauses are commonly used in commercial contracts because the common law doctrine of frustration is of limited application. Force majeure and frustration are similar. Essentially they are both ways for a party to ‘get out’ of a contract. However, for the doctrine of frustration to apply the performance of a contractual obligation must be incapable of being performed because the circumstances for performance are now significantly different from what was intended by the parties. Halsbury’s Laws of Australia states that the scope of the doctrine of frustration is limited, its operation in a particular case is unpredictable, and it offers no assistance when performance is merely delayed rather than brought completely to an end.

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