THE GLOBAL COVID-19 pandemic, swarms of locusts in Africa, a record-breaking Atlantic hurricane season, wildfires in California and Australia, terrible flooding in Bangladesh, Indonesia and China, explosions at a Libyan port, an earthquake off the coast of Greece and Turkey and the resulting Tsunami. The list of the past year’s disasters reads something like the definition of ‘force majeure’ in many contracts, writes Alison Berryman.
The heart-breaking loss of lives and livelihoods can never be compensated, while the damage to – and destruction of – property has left some without homes and many more out of pocket. Let’s not forget, either, that the ripples of these disasters stretch much further than these newsworthy items.
Hundreds of thousands of weddings have been cancelled, as well as countless holidays and other events. Projects of all varieties – from television productions through to archaeological digs – have necessarily been cancelled or postponed. It’s no surprise, then, that ‘force majeure’-style clauses have come under the microscope in recent months.
When and how might contracting parties avoid liability where a contract becomes impossible to perform due to unforeseen and uncontrollable external factors? Can a party be held liable if performance is impossible?
A party can be held liable for a breach of contract even where the breach was caused by an event outside of their control. However, there are ways in which a party that would otherwise be in breach can escape liability for such non-performance. These are to rely on the contract’s ‘force majeure’ clause or, if there is no ‘force majeure’ clause, to rely on the common law concepts of frustration and illegality.
What is ‘force majeure’?
Deriving from a concept in the French Civil Code, a ‘force majeure’ event is an event outside the control of the affected party that stops that party from performing its obligations under the contract.
In English law there’s no prescribed definition. Therefore, if the term ‘force majeure’ is to be used, it must be expressly defined. This is where we often see a list of disasters written into an agreement, usually by way of examples of the types of events that might be considered outside the control of a party.
Where ‘force majeure’ is defined by way of a list of types of events, it’s important to ensure that the list includes all types of event that the parties can anticipate, but that it’s nonetheless not deemed to be exhaustive. Wording along the lines of “all events outside the reasonable control of the parties, including but not limited to…” The words “not limited to” are particularly important as failing to include them can mean that the clause is interpreted as an exhaustive list and, therefore, the scope of the contract is much reduced.
Some contracts will not use or define the term ‘force majeure’, but will simply refer to “events outside the reasonable control” of the affected party. Provided that they’re drafted well, these clauses will have substantially the same effect as clauses expressly labelled ‘Force Majeure’.
Effect of a ‘force majeure’ clause
As is the case with all contractual provisions, the effect of a ‘force majeure’ clause very much depends on how the words are used. The following provisions are typical:
*the parties involved agree that, if either of them is unable to perform their duties due to an event outside of their control, that party shall be released from some or all of its obligations
*a temporary suspension of obligations will be permitted until the ‘force majeure’ event has passed
*the unaffected party may terminate should the ‘force majeure’ event continue for a significant time
What should a party do if it’s unable to perform and there’s no ‘force majeure’ clause? In the UK, through various cases from the mid-19th Century onwards, the common law concept of “frustration” of a contract has arisen. In very general terms, this means that a contract is considered discharged (ie it can be terminated without penalty) where an external factor has made performance impossible (or, in some cases, not commercially viable).
There’s another concept of common law which is that a contract is considered discharged if the performance of it would be illegal. This is somewhat different from frustration, but in many cases will have a similar effect.
It may seem that an express ‘force majeure’ clause is unnecessary as the common law would protect parties affected by events that were not their fault. However, cases on frustration and illegality have not always been decided consistently and can often act so as to protect only one or other party depending on the facts. On that basis, having an express and clearly drafted clause within the agreement itself is definitely preferable.
‘Force majeure’ clauses also typically provide for a suspension of obligations rather than bringing about a complete termination, whereas termination for frustration or illegality is a nuclear option that cannot later be unwound.
What’s new with ‘force majeure’?
In fact, little has changed in respect of the law to be applied to termination of contracts, but with so many contracts being impossible to perform as a result of unforeseen disasters – particularly the COVID-19 pandemic – parties have been looking more carefully at the drafting of clauses to ensure that they will not be caught out.
When considering the ‘force majeure’ clauses in new contracts, it’s worth considering two key points. First, is the clause broad enough to cover any risks that might impede your performance of the contract? Consider such things as the ability of personnel to travel to the required locations for performance or whether the supplies needed will be available.
Second, is the clause too broad, allowing the other party to escape liability where, in reality, they should be managing the project to ensure that certain risks are mitigated? Consider, for example, whether there should be measures in place to ensure that the unavailability of key personnel would not derail the entire project or to ensure that payments can still be made where work has been completed.
A contract lawyer’s role is always to help their clients prepare for the worse case scenario. Well drafted commercial contracts are the best insurance policy against a disaster. Making sure that this element is right can help avoid a claim on your actual insurance policy.
The last 12 months have served as a stark reminder that we should never assume the world will run smoothly. With the light at last glimmering at the end of the tunnel, most of us would not wish for a re-run of the past year’s events. On a positive note, we can determine to learn from this experience and ensure that, from now on, we’re even better prepared for whatever the world throws at us.
Alison Berryman is a Partner and Head of Technology and Commercial Law at Waterfront Solicitors LLP