Written by Jane Elliot
24 August 04
Whatever the nature of your business, you need to consider whether you should be using force majeure clauses in your agreements to protect you operations.
What is force majeure? The literal interpretation from French is “greater force”. However, the expression “force majeure” has acquired a commercial usage which is widely recognised by businessmen and lawyers. The general principle is that a party to an agreement should not be liable for the non-performance of its obligations due to an unexpected event outside its control.
It is not possible to benefit from force majeure if you have not explicitly provided for it in an agreement: it does not apply automatically. More particularly, and often not appreciated by businesses, is the fact that force majeure has no set, recognised legal meaning in English law. As such, it is not enough simply to state that “X” Company Limited will be excused from performance of its obligations under the agreement if an event of force majeure occurs”. Instead, it is vital to define what you intend force majeure to mean.
The first step is to specify the events outside your control which you wish to be covered. Usual events of force majeure include war, act of terrorism, labour disputes, compliance with law, order, rule or regulation, fire, flood and storm. More controversial events of force majeure include the breakdown of machinery, failure of computer equipment and default of suppliers or sub-contractors.
Based on the facts of particular cases, the courts have found events such bad weather, football matches, funerals, insufficient financial resources and miscalculations (being events which one party sought to rely on as events of force majeure) as not amounting to force majeure.
In addition, it is often a good idea to ensure that a catchall is included or at least to provide that the list of events is stated to be not exhaustive.
Clearly, the party which considers that it is most likely to need to rely on force majeure should seek to make the definition of force majeure events as broad as possible. Conversely, the party least likely to need to rely on force majeure should attempt to restrict the definition of force majeure events.
But it is not enough simply to define what amounts to force majeure. The parties also need to provide for what is to happen if an event of force majeure occurs and as a result one party is prevented from performing the contract. One consequence of force majeure might be that the agreement comes to an end with the party in default not being liable to the other party.
However, this may not be desirable. More flexible alternatives, such as the ability to suspend or claim an extension of time for performance, may be preferred. In such circumstances, the agreement should also cover issues such as:
- the recommencement of performance;
- a right of termination if performance is suspended for too long; and
- the procurement of alternative supplies during the continuance of the suspension.
Given that a force majeure provision enables a party to a contract to avoid liability to the other party in certain circumstances, it amounts to an exclusion clause. As a consequence of this, force majeure clauses may be subject to the Unfair Contract Terms Act 1977 (“UCTA”), which regulates the use of exclusion of liability clauses.
UCTA will only apply to a business to business agreement if the agreement amounts to one party’s standard terms of business (for example, if an agency or distributorship agreement is presented as standard and subject to little negotiation). If a force majeure provision is subject to UCTA, it must be reasonable in order to be relied upon. An unreasonable force majeure clause will be void.
Force majeure clauses are often not perceived to be exclusion of liability clauses and are usually found towards the end of an agreement amongst the so-called boilerplate provision. As such, they are less likely to be reviewed as carefully as, say, clauses entitled “limitation of liability” appearing earlier on in an agreement. As a result force majeure provisions have been used to express more controversial limitations of a party’s liability in an attempt to achieve the limitation ”by the back door”.
In the absence of provision for force majeure, a party which is rendered unable to perform its obligations due to an unforeseeable event outside its control must try to rely on the doctrine of frustration if it is to avoid liability for non-performance of the agreement.
There are a number of disadvantages of relying on frustration. It is difficult to prove that an agreement has been frustrated. The English courts have defined events which frustrate a contract extremely narrowly and have restricted such events to those which make it impossible to perform the agreement. For example, a change in the law making it unlawful to perform a particular type of agreement is likely to amount to frustration.
In addition, the doctrine of frustration is inflexible. It simply brings the agreement to an end with neither party having a right of acting against the other. There is no scope for providing for, say, delayed recommencement or any other re-negotiation of the terms of the agreement.
The party most likely to be affected by an event of force majeure, in order to avoid the shortcomings of the doctrine of frustration, should protect its business by providing for force majeure. As it will not apply automatically, force majeure must be expressly provided for in the agreement and careful drafting is required in order to maximise the protection afforded by it.
In contract, the party least likely to be affected by an event of force majeure should always review force majeure provisions carefully and certainly as carefully as any other clause dealing with limitation of liability. Further, its ability to benefit from a force majeure provision should be considered.
This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact commercial lawyer Jane Elliot or any members of the Fox Williams’ agentlaw team (www.agentlaw.co.uk)