Malcolm ZoppiTue Oct 17 2023
Understanding the Basics: What is a Force Majeure Clause In Common Law?
When entering into a commercial contract, it is essential to include a force majeure clause. But what is a force majeure clause? In simple terms, it is a provision that excuses the performance of contractual obligations when unforeseeable events occur that are beyond the control of the parties.
When entering into a commercial contract, it is essential to include a force majeure clause. But what is a force majeure clause? In simple terms, it is a provision that excuses the performance of contractual obligations when unforeseeable events occur that are beyond the control of the parties. These events are typically referred to as force majeure events.
Understanding force majeure clauses is crucial, particularly in light of recent events such as the COVID-19 pandemic, which has significantly impacted businesses worldwide. In this article, we will explore the basics of force majeure clauses, their key elements, interpretation, drafting, enforcement, and best practices for including them in contracts.
Key Takeaways:
- A force majeure clause is a provision that excuses the performance of contractual obligations when unforeseeable events occur that are beyond the control of the parties.
- Understanding force majeure clauses is crucial when entering into commercial contracts.
- This article will cover the key elements, interpretation, drafting, enforcement, and best practices for including force majeure clauses in contracts.
Understanding Force Majeure Clause
When drafting a force majeure clause, it is essential to define what constitutes a force majeure event. A force majeure event is an unforeseeable event that is beyond the control of the parties to a contract and that makes it impossible or impractical to perform contractual obligations.
To be considered a force majeure event, the occurrence must be unforeseeable and outside the control of the parties. For example, a shortage of raw materials due to a natural disaster may constitute a force majeure event, but a shortage caused by poor planning or mismanagement may not.
It is important to note that force majeure clauses are not universal; their scope and impact will depend on the specific language of the clause and by national law. Therefore, it is essential to include specific examples of force majeure events in the contract to avoid any ambiguity or misunderstanding.
Examples of Force Majeure Events (Including Covid-19)
Natural Disasters (Act of God)
Natural disasters are unforeseen and unavoidable events caused by natural processes of the Earth. Here are a few examples:
- Earthquakes: These seismic events can cause significant damage, impeding businesses from operating normally.
- Hurricanes and Cyclones: The high winds, heavy rainfall, and storm surges can result in severe flooding and destruction.
- Floods: Sudden floods can disrupt transportation, damage properties, and halt business operations.
- Tornadoes: With wind speeds reaching up to 300 mph, tornadoes can cause devastation over large areas.
- Wildfires: Uncontrolled fires can ravage through communities, making it impossible for businesses to function.
Political and Social Unrest
Political and social situations can escalate into force majeure events:
- Strikes: Labor strikes can halt production or other business operations until resolutions are met.
- Wars and Armed Conflicts: These can cause a multitude of problems including destruction of infrastructure, making it difficult or impossible to carry on business as usual.
- Terrorist Attacks: Besides the obvious threat to human life, terrorist attacks can also destroy property and cause severe business interruptions.
Unforeseen Circumstances
Sometimes, events that are completely unforeseen occur, causing significant disruptions:
- Pandemics (e.g., COVID-19): The recent COVID-19 pandemic is a prime example where a force majeure clause might be invoked. The global outbreak has disrupted supply chains, forced businesses to close, and instigated government-imposed lockdowns.
- Government Actions: Unexpected government actions such as sudden changes in trade tariffs or regulations can also be considered under force majeure if they significantly impact business operations.
Miscellaneous Events
Some other events could also qualify as force majeure depending on the specifics of the situation and the jurisdiction:
- Nuclear, Biological, Chemical Incidents (NBC): These incidents whether accidental or intentional can have devastating effects.
- Technological Failures: Major technological failures or cyber-attacks can halt business operations.
Scope and Interpretation of Force Majeure Clauses In Common Law
When a force majeure event occurs, it may prevent a party from performing its obligations under a commercial contract. Therefore, a force majeure clause is included in a contract to excuse performance when such events occur. However, the scope of a force majeure clause can vary depending on the specific language used in the contract.
In general, a force majeure event must be beyond the reasonable control of the parties and unforeseen at the time of contract formation. A force majeure clause does not relieve a party from all contractual obligations. Instead, the clause will typically excuse performance only to the extent that it is affected by the force majeure event.
It is essential to carefully draft force majeure clauses to ensure that they provide sufficient protection to the parties. The clause should clearly define the scope of force majeure events and how they will impact the obligation to perform the contract. Additionally, it should specify the steps that the affected party must take to mitigate the impact of the force majeure event.
The interpretation of force majeure clauses can also vary depending on the governing law of the contract. While civil law jurisdictions tend to interpret force majeure narrowly, common law jurisdictions take a broader approach. Therefore, it is crucial to understand the nuances of national law and to draft the clause accordingly.
Drafting an Effective Force Majeure Clause
When including a force majeure clause in a contract, it is crucial to draft it effectively to ensure that it can be relied upon in the event of a force majeure event. The clause must be clear and unambiguous, specifying the force majeure events that can trigger the clause.
The clause should state that the force majeure event must make it impossible or significantly more difficult to perform the obligations under the contract. The clause must also specify the impact of the force majeure event, such as whether it will excuse non-performance or merely suspend the affected obligations.
The party seeking to rely on the force majeure clause must be able to demonstrate that the force majeure event was beyond its reasonable control and that it could not have reasonably foreseen or avoided it. The impact of the force majeure event must also be significant and not merely a minor inconvenience.
The force majeure clause must also include a notice provision, requiring the party seeking to rely on the clause to give notice to the other party as soon as practicable after the force majeure event occurs. Failure to provide prompt notice may result in the party losing the right to rely on the clause.
It is essential to specify the steps that the parties must take to mitigate the impact of the force majeure event and to ensure that the affected obligations under the contract are performed as soon as reasonably possible. The force majeure clause should also specify the timeframe within which notice must be given and the parties must perform their respective obligations under the contract.
In conclusion, a force majeure clause must be carefully drafted to ensure that it can be relied upon in the event of a force majeure event. The clause must specify the force majeure events that can trigger it, the impact of the force majeure event, the notice provisions, and the steps the parties must take to mitigate the impact of the force majeure event. By drafting an effective force majeure clause, parties can rely on it to excuse non-performance or suspend the affected obligations under the contract when the impact of the force majeure event is significant and beyond their reasonable control.
Force Majeure vs. Frustration of Contract
While force majeure and frustration of contract may seem similar, they are distinct concepts under French law. Frustration of contract is a doctrine that allows for the termination of a contract when an unforeseen event renders the performance of the contract impossible or fundamentally different from what was anticipated at the time of the agreement. Meanwhile, force majeure is an external event that, while it may make it more difficult or costly to perform a contract, does not necessarily render it impossible.
As it relates to the COVID-19 pandemic, frustration of contract may be invoked in cases where the performance of a contract has become fundamentally different due to government-mandated lockdowns or travel restrictions. For example, if a contract was for the purchase of items that could not be delivered due to governmental restrictions, frustration of contract may be invoked.
However, force majeure may still be relevant in cases where the performance of a contract is impacted by external events beyond the control of the parties. For example, if a shipment of goods was delayed due to a border closure, this may be considered a force majeure event.
It is important to note that the ability to terminate a contract under the doctrine of frustration is more limited than the ability to rely on a force majeure clause. While frustration of contract may lead to termination, force majeure allows for non-performance of contractual obligations for the duration of the force majeure event.
Overall, it is important to understand the distinction between force majeure and frustration of contract when incorporating these clauses into contracts. Consulting with legal counsel and considering the specific language used in the contract is crucial for determining the appropriate course of action in the event of unforeseen external events, such as the COVID-19 pandemic.
Enforcing a Force Majeure Event Clause
Enforcing a force majeure clause requires careful consideration of the obligations under the contract, as well as the applicable contract law and international law. If a party claims force majeure, they must be able to demonstrate that the events leading to non-performance were beyond their reasonable control and that they have taken steps to fulfill their obligations under the contract.
In contract law, the interpretation of force majeure clauses may vary depending on the jurisdiction and the specific wording of the clause. Therefore, it is important that the language used in the clause is clear and specific. Additionally, parties may seek to limit their liability by including a cap on damages or a requirement to mitigate the impact of the force majeure event.
International law may also impact the enforcement of a force majeure clause, particularly in cases involving cross-border contracts. The United Nations Convention on Contracts for the International Sale of Goods (CISG) provides a framework for enforcing force majeure clauses in international contracts. However, it is important to note that the CISG does not explicitly refer to force majeure and therefore, the interpretation of force majeure clauses may still depend on the applicable national law.
Overall, enforcing a force majeure clause requires careful consideration of the specific circumstances of the case and the applicable legal framework. Parties should seek legal advice to ensure that their interpretation of the clause is in accordance with the relevant contract and international law.
Best Practices for Including Force Majeure Clauses
When including a force majeure clause in a commercial contract, it is crucial to follow best practices to ensure that the clause is effective and enforceable. The following considerations can help parties draft a comprehensive and clear force majeure clause:
Be Specific
The force majeure clause must be specific in defining the events that qualify as force majeure. The more specific the language, the better chance the party relying on force majeure will have in proving its case. Parties should consider whether a force majeure event should include epidemics, pandemics, or governmental actions.
Consider the Parties’ Ability to Rely on Force Majeure
The parties should also consider whether the force majeure clause permits both parties to rely on the clause or only one party. In addition, the clause should specify whether the party claiming force majeure has an obligation to provide notice to the other party and the consequences of failing to provide such notice. To avoid disputes, parties should specify the notice requirements for invoking force majeure events and the timeframe within which they must provide notice.
Provide for Mitigation
A force majeure clause should also specify how the parties will perform under the contract following the force majeure event. The clause should address whether the parties are excused from performing the contract and what happens if the force majeure event continues for an extended period. The parties should also consider including a provision that requires them to mitigate the impact of the force majeure event.
Ensure Compliance with National Law
Finally, parties must consider the law of the country governing the contract, as some jurisdictions may require specific elements to be present in the force majeure clause for it to be valid. Failure to comply with these requirements could result in the clause being unenforceable.
By following these best practices, parties can avoid costly disputes and ensure that their force majeure clause provides maximum protection in the event of unforeseen circumstances.
Conclusion
Understanding force majeure clauses is critical in both civil law and common law jurisdictions. When drafting such clauses, it is essential to consider the relevant national law and carefully define what events will be considered force majeure. Furthermore, parties should specify the impact of force majeure on the contract, including whether it becomes terminated or merely suspended.
It is equally important to note that not all unforeseeable events will be considered force majeure. Nevertheless, when drafted effectively, a force majeure clause can provide parties with protection in situations where performance of contractual obligations becomes impossible.
Overall, the use of force majeure clauses is a vital tool for commercial contracts, especially in light of unprecedented events such as the COVID-19 pandemic. Parties must understand its scope and interpretation and ensure that the clause is specific and tailored to their needs.
FAQ
Q: What is a force majeure clause?
A: A force majeure clause is a contractual provision that allows parties to be excused from performing their obligations under a contract in the event of unforeseen circumstances beyond their control.
Q: What are some examples of force majeure events?
A: Examples of force majeure events include natural disasters (such as earthquakes, hurricanes, or floods), wars, epidemics or pandemics (like COVID-19), labor strikes, and acts of terrorism.
Q: What is the difference between common law and civil law in relation to force majeure?
A: Common law and civil law systems may differ in their treatment of force majeure. Under common law, the scope and effect of force majeure clauses are generally determined by the specific language used in the contract, while civil law jurisdictions may have specific laws that define force majeure and its consequences.
Q: When is a force majeure clause considered applicable?
A: A force majeure clause is considered applicable when an unforeseen event, beyond the control of the parties, occurs and prevents one or both parties from performing their obligations under the contract.
Q: What happens when a force majeure event occurs?
A: When a force majeure event occurs, the affected party may be excused from performance or may have the right to terminate the contract, depending on the terms of the force majeure clause and applicable national laws.
Q: What steps should a party take in the event of a force majeure?
A: In the event of a force majeure, the party affected should take reasonable steps to minimize the impact of the event on their performance of the contract and promptly notify the other party of the occurrence of the force majeure event.
Q: What if a party is unable to perform its obligations due to force majeure?
A: If a party is unable to perform its obligations due to force majeure, they may be excused from their performance for the duration of the force majeure event, subject to the terms of the force majeure clause and applicable national laws.
Q: What should be covered by a force majeure clause?
A: A force majeure clause should specify the types of events or circumstances that will be considered force majeure, the consequences for non-performance, and any notice requirements or other obligations that the parties must comply with.
Q: Can a party use force majeure to terminate a contract?
A: Depending on the terms of the force majeure clause, a party may have the right to terminate the contract if the force majeure event continues for an extended period of time and makes performance impossible or impracticable.
Q: Should force majeure clauses be interpreted narrowly?
A: The interpretation of force majeure clauses may vary depending on the jurisdiction and the specific language used in the contract. However, it is generally advisable to interpret force majeure clauses narrowly and strictly, as they may excuse a party from their contractual obligations.
Find out more!
If you want to read more in this subject area, you might find some of our other blogs interesting:
- Step-by-Step Guide on How to Transfer Shares to a Holding Company
- Breach of Settlement Agreement: Consequences and Remedies Explained
- Who Gets the Money When a Company is Sold?
- What is a Counter Offer in Contract Law? Explained Simply and Clearly
- Understanding the Costs: How Much Do Injunctions Cost in the UK?
Disclaimer: This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should always seek independent professional advice and not rely on the content of this document as every individual circumstance is unique. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person.