2011 has already been a profoundly difficult year for many. Over the past weeks and months, businesses investing in the Middle East and North Africa regions have encountered uncertainty, and in many cases serious disruption, as a direct result of local political upheavals and, in some cases, as a result of the attendant governmental changes and international sanctions.
More recently, and closer to home, Japan suffered the devastating Tohoku earthquake and the resulting tsunami of 11 March 2011. For those involved and for those with family and colleagues affected by the events, the tragedy is a personal one. Japan's resolve to help those affected and those displaced by the consequences will continue to represent the priority for some time to come. Where possible, businesses will also need to deal with the more routine, commercial consequences of the disruption.
Events such as these, which disrupt the performance of commercial contracts can often lead to disputes and disagreements between international parties as to the consequences. In particular, parties may disagree as to whether a timetable for performance previously agreed is still to bind a party which, through no fault of its own, is simply unable to perform on time due to events outside its control. This newsletter therefore re-examines the related issues of Force Majeure and the doctrine of frustration of contract under English law.
English law recognises 'Force Majeure' only to the extent the parties have included a specific clause to this effect in their contract.
The purpose of a contractual Force Majeure clause is to enable one or both parties to be excused from performance of their contractual obligations, or to suspend or delay performance, upon the occurrence of a specified event or events beyond the parties' control.
Under English law, the general rule is that a Force Majeure clause must be construed in the light of its precise wording with regard to the nature and general terms of the contract as a whole. In other words, the Force Majeure clause means what the contract says it means.
Whilst the precise list of events of Force Majeure included in a contract will be a matter for negotiation between the parties, events such as war, terrorist acts, acts of any civil or military authority, riot, civil commotion, strike, fire, extreme weather conditions and epidemic, are the common.
Force Majeure clauses will often also list “earthquake”, “flood” or “Acts of God” as Force Majeure events, allowing a party to rely on the clause if they have been prevented or hindered from performing the contract by such occurrences. Certainly, the Tohoku earthquake and tsunami will likely satisfy many contractual definitions of Force Majeure. Events in the Middle East and North Africa may conceivably be caught by common contractually defined events such as "riot" "civil commotion" and "governmental or regulatory decisions".
More difficulty may arise, however, where a party attempts to rely on indirect consequences of such a disrupting event. Where, for example, a business struggles to manufacture goods on time because of a combination of factors including disrupted power supply and / or interim transport delays affecting the supply of materials, it may need to work harder to persuade its contractual partner that performance of the contract has in fact been prevented or hindered as a result of the defined Force Majeure event. In each case, the question of whether the Force Majeure clause is triggered will depend upon the actual wording of the contract and the evidence demonstrating the actual cause or causes of the parties' failure to perform as originally required under the contract.
Crucially, the party seeking to rely on the Force Majeure clause has the burden of proving that they have been prevented or hindered (depending on the wording of the clause) from performing the contract as a result of the Force Majeure event. Furthermore, where possible, the party affected may in effect be required to take reasonable steps to avoid or mitigate the consequences of the event.
Service of a "Force Majeure" Notice
Many Force Majeure provisions will also require the party seeking to rely on the event of Force Majeure to give notice within a specified period.
The consequence of failing to provide a notice on time is often a matter of contention and there are a number of cases in which the notice of reliance on a Force Majeure clause was considered defective for being out of time. The question of whether the contractual requirement as to the time of giving notice is a contractual "condition" or a less important (intermediate) term will generally depend upon:
- The form of the Force Majeure clause itself;
- The relation of the clause to the whole contract; and
- General considerations of law.
Clauses which require notice "without delay" will not always be considered contractual "conditions". For example, in a case1 where the Force Majeure clause required the sellers to "advise buyers without delay", it was held that it was merely an intermediate term, such that failure to give the required notice "without delay" did not prevent the sellers being able to rely on the clause. It would only be a condition if the resulting delay had caused serious prejudice to the buyer.
The court held that where a Force Majeure clause is not expressly drafted as a condition in a contract in which other terms are, and where the time frame for notice is inherently vague (such as "without delay") resulting in a situation where it is uncertain exactly when the server of the notice is in default, these will be factors which support the clause being merely an intermediate term.
Conversely, where a contract specifies the time within which a notice must be served, this can often be deemed to be a condition, with a risk that the affected party would not be able to rely on a notice served out of time. This risk may be particularly serious where the opposing party can point to some foreseeable prejudice it would itself be exposed to if the "late" notice was to be accepted as valid2.
In any event, given the potential for uncertainty here, commercial parties affected by current events would be well advised to consider the timing requirements of notices and / or issue notices in respect of affected business as soon as practicable.
Frustration and Economic Difficulty
Where there is no Force Majeure clause, or the existing Force Majeure clause does not extend to cover the situation, parties may wish to consider their position under the doctrine of frustration.
The common law doctrine of frustration generally operates to discharge a contract where a supervening event occurs (without the default of the parties concerned and for which the contract does not make sufficient provision) which results in performance of the contract being physically or legally impossible, or the obligations under the contract being radically different to those originally undertaken. Where it applies, the effect of frustration is to bring the contract to an end.
The English Courts are loath to allow parties to escape from their bargains. Accordingly, this doctrine operates within narrow confines. It cannot usually be invoked merely to relieve a party from an imprudent commercial bargain, nor where the parties have foreseen the relevant event and provided for it in the contract. Mere inconvenience, or economic hardship, in performing the contract will usually not be sufficient to frustrate a particular contract3.
Establishing that a contract has become frustrated under English law is therefore, in most cases, a difficult challenge. This reinforces the importance of negotiating and drafting adequate protection for parties in their contractual Force Majeure clauses.