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Protecting Your Business In A Crisis

Stephen Sidkin on force majeure clauses

WITH winter approaching, businesses could contemplate having to be adversely affected by a national emergency, such as a switch off in electricity or gas supply.
Indeed, during the winter of 2012 the UK’s gas stocks were down to just a few days. For businesses, the result of such an emergency would likely be that many commercial contracts will not be performed.
The consequences will depend on what the contract does or does not say. Many commercial agreements incorporate specific clauses designed to apply where contractual performance has become impossible because of circumstances which were not envisaged by the parties and are outside their control.
Typically a provision of this nature is known as a force majeure clause. Such clauses can be quite detailed. Usually a well drafted clause will set out a series of force majeure events. It will then also state the consequences of such an event occurring.
Often the clause will refer to Acts of God. What is less clear is what happens if ‘Acts of God’ is defined as ‘including fire, flood, earthquake, storm, hurricane or other natural disaster’.
Put into recent context, what would have happened in situations affected by the floods and storm damage earlier this year?
As an alternative, a force majeure clause can provide a catchall. For example, this could be in terms of any cause or circumstance beyond the seller’s reasonable control.
But how to define ‘beyond reasonable control’? Some clauses may deal with this provision by restricting the relief available in a situation where the party has contributed to the delay before the event occurred.
However, even where a specific Act of God is an event covered by the force majeure clause, it is still necessary to carefully examine the way in which the clause works.
For example, does it require the party affected by the event of force majeure to notify the other party of the event’s occurrence?
Is there an obligation which requires the affected party to try and work round the force majeure event?
Often force majeure clauses will provide for the suspension of obligations during the period of the force majeure event. If this continues beyond a specific time, it is usual for the clause then to provide for the contract to be cancelled.
Most importantly is the question of the obligation of the party subject to the force majeure event to compensate the other party.
Given the very nature of the force majeure clause, the clause should state that the party suffering the event is not liable to compensate the other party. When a particular event occurs, it is understandable that the parties will seek to determine whether it is covered by the force majeure clause.
However, this is only part of the story insofar that it is necessary for the clause to have been properly incorporated into the contract in the first place.
If it has not been, the clause will be of no value whatsoever. A clause will only be incorporated if it is brought to the attention of the other party at the time the contract is made.
Despite belief to the contrary, it most certainly is not incorporated into a contract if it appears on the reverse of an invoice.
If the contract does not contain a force majeure clause then the position is far less certain. It may be that the contract will be regarded as frustrated. This occurs when a supervening event not envisaged by the parties and not due to their fault renders the contract impossible to perform or radically different from that which they imagined.
The bad news is that situations where a contract can be said to be frustrated are extremely narrow and unpredictable in their application.
Over the years the courts have tended to restrict the extent of the doctrine of frustration. This is to try to prevent parties from escaping from bad bargains.
As a result there is every incentive for parties making a contract to incorporate a force majeure clause. An express clause builds in a degree of certainty. It guards against the possible application of frustration which can produce an arbitrary result.
It is also open to the parties to specify what is to happen in particular situations. In so doing they will be able to progress their business with a degree of certainty that would otherwise be missing.
Looking around the world it is possible to see trouble on a regular basis as a series of unrelated direct acts. It is likely that such actions will grow in number and force irrespective of whether or not they are supplemented by Acts of God.
As such, the question is whether or not you want your contracts to be covered in such situations?
Stephen Sidkin is a partner at Fox Williams

This article has been reproduced from the Contract Flooring Journal. You can find them at www.contractflooringjournal.co.uk.