Force Majeure: when does it apply and how should it be used in contracts?
David Ashcroft, Partner in the BPE Commercial team, discusses the use of Force Majeure and how the COVID pandemic has affected the way these clauses are drafted and implemented.
What is Force Majeure?
Force majeure arose so often during the lockdowns that the term has almost moved into everyday language for many. However, it is not a term to be lightly dismissed. And it should not be regarded as a general excuse for not performing a contract.
The most primitive contract clause defines events of force majeure as being events beyond the control of a party. This developed into listing examples of such events (a dangerous exercise from an interpretation point of view), and latterly more detailed attention has been paid to finding a practical solution and work-around.
There is a rule of contract construction that provides that, if a term is ambiguous, it will be construed against the party that is seeking to benefit from it – the contra proferentem rule. If a manufacturer claims it is excused from performance by applying one interpretation, the Court may well rule that an alternative interpretation will apply and the event might not be held to be an event of force majeure.
There is an overlap between the concept of force majeure and the doctrine of frustration. A contract is frustrated if an event, not caused or permitted by a party, renders the contract incapable of performance. A good example of this would be the total destruction or write off of a car on a garage forecourt that is waiting for the buyer to collect it. Subject to the provisions of the contract for sale, in that event the loss lies where it falls, in this case on the seller of the car. Any deposit paid would be refundable, and hopefully the seller has insurance cover that will pay out.
In essence, an event of force majeure prevents one party from performing.
Changing attitudes to contracts
During the lockdowns, clients’ attitudes to force majeure changed. They realised that if all contracts were affected by force majeure, the commercial world would stop rotating and eventually grind to a complete halt. For this reason, various industries (such as defence contractors) were exempted from the full impact of lockdown. There then followed an appreciation that force majeure clauses needed to be developed to make them less easily invoked and generate an environment of co-operation. This was done in a number of ways.
First, lists of events that were specifically agreed to be force majeure events, not just examples, were developed. Great care and precision are needed in this exercise. For example, a pandemic is not an epidemic; the term “Act of God” is not judicially defined and to some it can be considered offensive. Lightning is not tight enough: it would need to render inoperable premises where the contract is to be performed or machinery essential for manufacture. War is a relevant concept, but you need to consider whether there is a war even if the government of the day does not say we are at war. What is the difference between war, civil unrest, insurrection, armed conflict and various other phrases that could be used?
The second, equally important, development arose out of a realisation that the parties ought to be under an extended obligation to work round the event. One particularly helpful set of wording would be: … any event which is unforeseeable, irresistible, unavoidable or beyond the control of either party and not occasioned by the fault or neglect of that party…”.
This would be coupled with wording to the effect that the parties will enter into negotiations for a work-around if such an event is anticipated or imminent and any agreed changes be the subject of change control provisions and price adjustment in the usual way.
It is another principle of law that a person suffering loss or damage must do their best to minimise that loss or damage and the financial consequences. This is known as mitigation of loss. Use of the more sophisticated provisions described above is consistent with this principle: events are clearly defined and alternative solutions are to be explored.
It is also important to note that, unlike the laws of other countries, force majeure cannot be claimed in English law unless there is a contractual clause saying that it applies. No clause equals no force majeure defence.
Careful drafting of contracts to ensure that they are fit for purpose and robust is key to protecting your business. For help and advice to review your existing contracts or for support in drafting new ones to ensure that your business is fully protected commercially, please contact David Ashcroft on 01242 248218 or email [email protected] or contact another member of the BPE Commercial team
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