Force majeure

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Example of feedback to a force majeure clause.

 

What Force Majeure means?


The term “force majeure” is French for “superior force” and is commonly utilised within contracts to account for and protect against unforeseeable events that make the performance of binding commercial agreements impractical or impossible.


How does force majeure work?

Force majeure is a contractual clause that refers to certain acts, events, or circumstances that are beyond the control of the parties. Force majeure typically lists events such as natural disasters or unavoidable catastrophes that end up interrupting the day-to-day operations. As stipulated within the contract, a force majeure clause will often excuse parties from the performance of the contract or even suspend part or all obligations for a period of time. As a result, parties to this contract will not be liable for the failure to perform obligations under the commercial agreement. When reviewing a contract ensure that all necessary force majeure events are listed.


Force Majeure Sample Clause


Force majeure clauses may come in different forms, but they must follow a certain structure. First, the clause must stipulate what force majeure is and how it will release the parties from the obligation to perform the contract if the clause is applied. It is also typical to include a reference to how the event could not be prevented through reasonable diligence.


For the purpose of this Agreement, an “Event of Force Majeure” means any circumstance not within the reasonable control of the Party affected, but only if and to the extent that (i) such circumstance, despite the exercise of reasonable diligence and the observance of Good Utility Practice, cannot be, or be caused to be, prevented, avoided or removed by such Party, and (ii) such circumstance materially and adversely affects the ability of the Party to perform its obligations under this Agreement, and such Party has taken all reasonable precautions, due care and reasonable alternative measures in order to avoid the effect of such event on the Party’s ability to perform its obligations under this Agreement and to mitigate the consequences thereof.”

The second part of this clause may include references to specific examples the clause is not limited to. In this section, certain natural disasters or unforeseeable events may be listed such as: firestorms, earthquakes, lightning, cyclones, hurricanes, floods, droughts or such other extreme weather or environmental conditions, unanticipated geological or ground conditions, epidemic, famine, plague, or other natural calamities and acts of God.

Why is Force Majeure important?


Force majeure clauses are a crucial feature in any contract as it is the clause that governs and sets out expectations of each party in the event of an unforeseeable event. In turn, this gives parties the flexibility and freedom to set out the terms in which their commercial agreement will continue. Therefore, force majeure is a clause that protects parties from potential future circumstances that may seriously affect the profitability of the contract if not considered. For this reason, in force majeure clauses, it is important to include not only an explicit condition that parties will be relieved from the performance of their contractual obligations, but also to expressly mentioning all possible categories of events from which to be protected. Consider this  when you review a contract.


Can Force Majeure be implied into a contract?

In most situations, force majeure clauses will not be implied into a contract and therefore cannot be relied on if there is not an express mention of the clause. Hence, ensure there is a force majeure clause when you review a contract. Depending on the jurisdiction in which the contract is stipulated to be governed, a common law doctrine of frustration could be relied on. The doctrine outlines that a frustrating event occurs when: The doctrine outlines that for an event to be considered frustrated, the following conditions must be met:

 

  • The unforeseen event occurs after the contract was signed;

  • The event is unforeseeable and beyond what parties could have contemplated;

  • Neither party is at fault;

  • The event must make the performance of the contract  impossible or illegal;

  • The event must be fundamental enough to defeat the sole ‘commercial purpose’ of the contract.

  • Outside of common law jurisdictions, force majeure must be expressly mentioned to apply any type of protection from unforeseeable events.

 

Can force majeure be used for Covid-19?

 

Covid-19 has continuously disrupted how businesses operations as many have found it to be increasingly difficult to function and perform contractual obligations under the adjustments made in light of the Covid-19 restrictions. 


Whether or not Covid-19 is covered by force majeure clauses stipulated in contracts signed prior to this pandemic is dependent on how  the specific clause was written. 


In other words, if non-exhaustive categories examples, in this case, a pandemic, were not provided in a given force majeure clause, Covid-19 restriction could become a contentious issue.  The deciding factor may rest on whether there is a causal link between the Covid-19 pandemic and the failure to perform the contractual obligation. In most circumstances, these factors will be governed by how the agreement is written. 

Can force majeure be refused?

 

Depending on the circumstances, force majeure clauses can be refused depending on various factors such as the language or verbiage used within the clause. Some general guidelines for determining whether force majeure clauses are valid are the following:

 

  • The specific terminology stipulated within the contract must outline whether or not the conditions for the force majeure clause apply;

  • If there is a direct link to how the force majeure event hampers the performance of the commercial agreement;

  • The force majeure event must be beyond the control of the party claiming force majeure;

  • The event and its effects could not have been avoided with any reasonable step on the part of the claiming party.

 

Failure to comply with the technical requirements of the force majeure clause may also be another reason for a force majeure clause to be refused. For example, most contracts require a prompt notice of claim for force majeure, and without the strict compliance of technical requirements, this may be a ground for refusal.

When does force majeure not apply?

During the creation of the contract the parties will agree on the specific breaches to which force majeure applies, the application of force majeure will basically depend on this agreement. Certain breaches such as borrower’s obligation, completion of certain KPI’s, or construction goals may be stipulated to be applicable in the event of force majeure. As a result, breaches outside of those that are expressly mentioned within the contract may as a result, may be where the force majeure clause does not apply. Therefore, it is important to consider these events when reviewing a contract.

 

In the instances where force majeure is to be applied, one must consider whether or not there are limits or a ‘cap’ placed on the time in which the force majeure clause applies, for example, 90 days. After this stipulated period ends, the force majeure clause in turn, cannot be applied anymore. In other cases, the excusal of performing under the contract could only last as long as the force majeure event persists. 

Regarding Coivd-19,  if the specific terms “pandemic”, “epidemic”, or “COVID-19” are not expressly stated in the force majeure clause, there is the possibility that it will be refused. Refusal may occur if the examination of the language enables the facts and events to give rise to relief in the form of the force majeure clause. Therefore, if the clause leaves room for interpretation, it is possible that the force majeure clause will be rejected on the basis of being strictly construed. 

Force majeure clauses may also be refused off the basis that parties have negotiated express exclusions to the force majeure. Some exclusions may include:

 

  • A change in economic circumstances where both parties are unwilling to excuse the lack of performance of the contract, such as:

    • A party to the contract running out of money

    • The performance of the contract becomes less favourable and more expensive than anticipated.

  • Subcontractor defaults:

    • If the equipment or services provided by the subcontractor is not readily available to the other suppliers

  • Equipment failure

  • Banking system failure:

    • Where the currency is restricted and in turn, prevents payments from being sent out of the country in the currency denoted within the contract

    • The inability of a party to convert local currency to pay in the currency denoted within the contract.
       

 
 
 
 
 
 
 

Disclaimer

Please note that this document is not legal advice. Legly, and its representatives, are not responsible for the content herein or the suitability for your company’s business. We recommend you use this in conjunction with legal advice and not as a substitute.