This is the second in a series of briefings about clauses that often appear in commercial contracts but are frequently misunderstood and poorly drafted, giving rise to problems and disputes. In this month's briefing we look at drafting and negotiating an effective force majeure clause, a regular source of disagreements between contract parties.
A force majeure clause relieves one or both parties from liability to perform contract obligations (sometimes it merely suspends those obligations) when performance is prevented by an event or circumstance beyond the parties' control (for example, fire, flood or terrorist act). It is important to stress that these clauses do not excuse liability where the effects of the force majeure event could reasonably have been anticipated and/or avoided.
The commercial importance of these clauses is obvious. Contract parties might be exposed to massive liabilities if they remain legally obliged to perform a contract which is in fact impossible to perform. The performing party will therefore wish to include a widely-drawn force majeure clause that relieves liability in a broad range of circumstances. Conversely, the party entitled to receive performance will be reluctant to allow the other to avoid liability too easily or in too many circumstances. The exact scope and application of these clauses is therefore often hotly negotiated and debated.
Common Drafting Issues
What events are covered?
Some legal systems provide a specific definition of force majeure. For example, section 8 of Thailand's Civil and Commercial Code states: "Force Majeure' denotes any event the happening or pernicious results of which could not be prevented even though a person against whom it happened or threatened to happen were to take such appropriate care as might be expected from him in his situation and in such condition." Other legal systems do not; there is no formal definition of force majeure in English law. To avoid uncertainty, most force majeure clauses prefer to state expressly what events are covered, i.e. what events will trigger the relevance of the clause, rather than relying on more general definitions in the law.
Force Majeure clauses usually include a list of particular events that will be accepted as force majeure. The contents of that list should be a matter for careful negotiation in each contract. Commonly listed events include Acts of God (fire, floods, earthquakes and so on), war, terrorist acts, riot, strike, acts of vandalism, and government or regulatory decisions. However, these events may not all be appropriate in every case, while other possibilities may be included in suitable circumstances. Therefore, when drafting and negotiating a force majeure clause it is important to consider what events are likely to be appropriate in light of the particular commercial context concerned, and how particular risks should be allocated in that context.
The clause may continue with a general inclusion of "other events which the supplier could not reasonably foresee or reasonably provide against" (or similar wording). Such provisions may be vigorously opposed for the obvious reason that they introduce uncertainty and spread the ambit of the clause more widely. Even if general words of this kind are to be included, the exact wording should receive particular attention to ensure that it does not extend the relief from liability to circumstances where liability ought not to be excused.
Having defined what is a force majeure event, the clause should state the consequences if such an event occurs.
For example, a clause may say that "Neither party shall be liable or have the right to terminate this contract for any delay or failure in performing obligations under this contract, where such delay or failure is caused by… [a force majeure event]". This phrase clarifies that, where force majeure occurs, (a) the non-performing party is relieved of all liability for non-performance, i.e. the other party can neither sue for damages nor terminate the contract because of the non-performance, and (b) the clause will apply even where performance is merely delayed, not prevented altogether.
Sometimes, the consequences of force majeure may be limited by reference to time. For example, the clause might say that, where performance is prevented for more than (say) 30 days, either party (or one or other party) will be entitled to terminate the contract, albeit still without any right to pursue the non-performing party for damages.
Again these are matters for negotiation and agreement in each case. As a general point however, it is just as important to define the consequences carefully as to define the events that act as triggers in the first place.
Burden of proof
The party who wishes to rely on the force majeure clause will have the burden of proving that the case falls within the specific terms of the clause. As a general principle, a force majeure clause should require the affected party to prove not only that a qualifying event has occurred but also that the event has prevented or hindered (depending on the wording of the clause) performance of the contract. In other words, the clause should specify that there must be a proven causal connection between the force majeure event and the non-performance. This is inherent in the words quoted above, "where such delay or failure is caused by…".
A party should not be entitled to rely on an event which it has caused itself, or which it could have avoided. It is therefore common for force majeure clauses to require that an affected party must have taken reasonable steps to avoid or mitigate the consequence of the event. Alternatively, though with the same effect, the clause may define force majeure in terms of delay or failure in performance which could not reasonably have been avoided.
Reporting the event
Force Majeure clauses will normally impose an obligation on the affected party to report the alleged force majeure event to the other party. A well-drafted clause should therefore address the following points:
- To whom is the report to be made?
- How soon is the report to be made?
- What form is the report to take?
- What are the consequences of a failure to report (for example, will a failure to report preclude the affected party from claiming relief)?
General Legal Principles
We have discussed force majeure in the context of contract clauses. However, it is important to remember that even if a contract does not address force majeure, there may be similar relief available under the general principles of law governing the contract. For example, Thai law contains (at sections 205 and 219 of the Civil and Commercial Code) broad exemptions from liability where performance of an obligation is impossible due to an event for which the performing party is not responsible. English law contains similar rules governing so-called 'frustration' of contracts. Nevertheless, it is generally wise to include a clause dealing expressly with force majeure issues, rather than trusting to general legal principles which are often much less clear and certain and which have narrower scope.
By taking time to consider these issues before entering into a contract, you can greatly improve the prospects of agreeing a force majeure clause that is clear and functional and which thereby avoids later disputes which otherwise arise with surprising frequency in this context.