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. 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.