Is a force majeure clause in a contract a magic stick in the hands of a defaulting contracting party?
Parties to a contract might take steps to protect themselves against liability for delayed or non performance caused by supervening circumstances beyond their control that may delay or prevent performance. Taking appropriate precautions at the onset of undertaking contractual obligations is a good protective measure against liability. Parties will usually insert force majeure clauses in their contract to insulate themselves against liability in case of delayed or non performance caused by such occurrence. The question remains as to whether a force majeure clause is, at all times, a magic stick in the hands of a defaulting party in a commercial contract?
Across the globe, businesses are experiencing issues to do with productivity and contract performance due to the negative effects of the corona virus disease of 2019 (COVID-19). Most governments including Uganda, in a bid to slow down and eventually eliminate the spread of this highly infectious disease have put up restrictive measures that include, closure of international and domestic airports to restrict movement of people and eliminate chances of importation of the virus and have also implemented partial or total lockdowns. As a result, most employees cannot go to work and non essential businesses are shut down. Parties to commercial contracts are now seeking to determine whether they are obligated to perform under their contracts, or whether they can invoke a force majeure clause to excuse performance temporarily or even permanently. This article underscores the application of force majeure clause in commercial contracts and examines the extent to which this clause will protect a defaulting party relying on it from liability for delayed or non performance of its contractual obligations.
Is a force majeure clause a “must have” in a contract?
English common law does not automatically apply force majeure principles to contracts because the words force majeure does not exist in English common law. The term force majeure is a civil law concept, which literally means “superior force”, of Romanian origin; which was adopted in French Civil Law. These words were inserted in the Napoleonic Code by Napoleon Bonaparte under the French Consulate in 1804 that codified several branches of law including commercial law. The code has been
described by historians as one of the few documents that have influenced the whole world.
Parties to English law contracts who wish to have the force majeure relief must include a force majeure clause in their contract showing the extent of application of the clause. Failure to include such a clause means that where an extra ordinary event or circumstances beyond the control of the parties prevent one or both parties from fulfilling their contractual obligations, the parties cannot rely on force majeure to provide relief from performance.
Such a party/ parties might want to rely on a different clause in the contract dealing with the matter (if any) or on the doctrine of frustration. However, the doctrine of frustration of contract is limited in scope of application and its effect is to automatically put the contract to an end. Ending the contract may not be the parties’ desired course of action, so reliance on frustration may be undesirable for parties that would still wish to continue with the contract even where performance has been delayed, hindered or prevented by a supervening event.
Use of force majeure clauses therefore remains a key tool and an effective way of managing the risk of supervening events impact ing on performance of contractual obligations.
At common law therefore, force majeure is a creature of contract and interpretation of force majeure clauses is governed by the normal rules of interpretation of contracts like the contra-proferentem rule on interpretation of ambiguous contracts that construes the clause against the party which proposed or drafted the contract or clause.
Force majeure clauses and their effects on contracts
A force majeure clause essentially frees parties from liability or obligations when an extra ordinary event or circumstances beyond the control of the parties prevent one or both parties from fulfilling their contractual obligations. Some force majeure clauses will relieve one or both parties from performance of obligations under the contract while some may only suspend the performance of such obligations for the duration of the force majeure event for a specified period of time.
Traditionally, force majeure clauses in referring to circumstances beyond the control of the parties, were intended to deal with unforeseen acts of God or of governments, but their usage has overtime been extended to cover a range of circumstances that might impact on the commercial interests of the parties to a contract. There are a number of occurrences that are generally accepted as force majeure event which include; war, terrorism; hurricanes, cyclones, earthquakes, drought, floods, landslides; plagues, epidemics and pandemics; strikes, fire; acts of government such as trade embargos, refusal to grant a license, travel restrictions and quarantines, lockdowns among others.
Force majeure clauses are generally intended to excuse a party’s non performance occasioned by occurrences beyond the reasonable control of a party and therefore exclude events caused by the negligence of a party or those caused by ordinary predictable occurrences like bad weather, funeral or a storm or heavy rain that prevents performance of an outdoor event.
Essential elements of force majeure
If there is in fact existence of an event which falls within the force majeure event, the party seeking relief from performance will gener ally be required to show that
a) It was prevented, hindered or delayed from performing its contractual obligations as a result of the event. The force majeure event must be the cause of inability to perform or delayed performance by the party relying on the force majeure event. Where the party’s failure to perform was caused by other reasons other than the force majeure event, a party is precluded from relying on the force majeure clause to excuse non performance. Additionally, where it can be shown that the party seeking relief was not ready, willing and able to perform his contractual obligations with or without the occurrence of the force majeure event, then; such party cannot rely on the force majeure clause.
Where performance has become more difficult, more expensive or less profitable, even if a force majeure clause covers the relevant supervening event, the party unable to perform will not have the benefit of the clause where performance merely became more difficult, more expensive or less profitable. Thus commercial impracticability has been held not to amount to a force majeure event where it has become uneconomical to perform, and distinction is made between inability to perform and inconveniences or commercial viability.
b) The event causing inability to perform was beyond the parties’ reasonable control.
Force majeure does not cover occurrences caused by the parties own acts or omissions for example in some jurisdictions judges have held that breakdown of machinery which though normally not included in force majeure events, caused by the negligent lack of maintenance may negate claims of force majeure as maintenance or its lack is within the sphere of control of the owner.
c) There were no reasonable steps the party could have taken to avoid the event or the consequences.
“Key things” that should be captured by every force majeure clause in commercial agreements
It is important for a party inserting a force majeure clause in a commercial contract to include specific definition of force majeure, particularly spelling out the extent/ scope of application of the clause and other conditions governing its application.
Force majeure clauses are given different interpretations across legal systems and they will be different and there is no definitive guidance unless contained in market standard contracts. For example in the construction context, the internationally used FIDIC conditions of contracts have a definite definition of what constitutes force majeure and also contain an illustrative list of the sorts of exceptional events and circumstances that may constitute force majeure events. Important to note is that; many FIDIC contacts are highly negotiated and amended.
It is therefore important for a party inserting a force majeure clause in a commercial contract to include specific definition of force majeure, particularly spelling out the extent/ scope of application of the clause and other condition governing its application. Particularly, the clause should capture the following key things;
a) Defining the force majeure event
A force majeure clause should have a clear definition of what constitutes a force majeure event. The clause should spell out the supervening events upon which occurrence will relieve the parties from performance.
One approach is to list all the specific events that the parties envisage will be covered by the clause, these may include; war, terrorism; hurricanes, cyclones, earthquakes, drought, floods, landslides; plagues, epidemics and pandemics; strikes, fire; acts of government such as trade embargos, refusal to grant a license, travel restrictions and quarantines, lockdowns, closure of boarders, bans on public and private transport among others.
Where such events are listed, the question of whether an event that is not listed was meant to be part of the force majeure event will depend on whether the list was intended to be exhaustive or non exhaustive. Unless specific words are used to show that the list was intended to be non exhaustive, it can be difficult to argue that an event that was not listed was intended to form part of the force majeure events. This approach is therefore associated with the risk that the parties will not be protected if something happens that was not listed among the force majeure events.
The other approach is to set out broader criteria by having a wider definition referring to any events or circumstances beyond the reasonable control of the parties. The phrase “circumstances beyond the reasonable control of the parties” has been judicially held to refer to occurrences where neither the person concerned nor any other person acting on their behalf to do the act or to take steps could have prevented. This approach however may lead to uncer tainty.
The other and probably the best approach in most cases is to have a combination of the above; an inclusive definition which lists all the events that the parties envisage will be covered by the force majeure clause, including a “catch phrase” capturing the rest of the events that may not fall in the list but may occur in the future that parties have not envisaged. Where this approach is taken, it is advisable to expressly exclude certain events in the definition by specifying certain events that will not be considered as force majeure events in relation to one or both of the parties.
Some contracts might use the words force majeure events alone without any contractual definition or other relevant contractual wording to aid with interpretation of the clause. In such a case, the party seeking to rely on the clause may not be protected due to its uncertainty.
What is permitted to be a force majeure event may be a source of much controversy in negotiation of contracts and a party should generally resist attempt by the other party to include something that should fundamentally be at the risk of the other party. The outcome of the negotiation will depend on the bargaining power of the parties.
Ultimately, whether a specific event falls within the scope of the definition of force majeure event will depend on the drafting in the individual contract.
b) Specifying the effect of the force majeure clause on the contract.
The clause should spell out the legal effect of the occurrence of the force majeure event on the contract, particularly whether occurrence excuses the parties from non performance; delayed performance; underperformance (failure to meet minimum guarantees); suspends the performance for the duration of the force majeure event or terminates the contract. The clause should also cover what happens to payments made and services delivered prior to the occurrence of the force majeure event and any other costs that may be incurred. Some clauses also expressly provide that additional costs incurred due to the inability to perform or delayed performance will be borne by a particular party. If not, then it is likely that costs will be borne by the party that has incurred them, because there is no contractual provision to over ride this.
c) Specifying procedural requirements upon occurrence of the event.
Force majeure clauses will usually expressly require a party affected by the force majeure event to notify the other party. Failure to follow such procedural requirements may bar the party from relying on the clause to be excused from liability. In addition to notification requirement, the force majeure clause may also require a party affected by the force majeure event to provide regular updates to the other party; failure to comply with this requirement could also prejudice the claiming party’s ability to rely on the force majeure clause.
d) Mitigation requirements
Time critical or other sensitive contracts may be drafted to limit the shield of the force majeure clause where a party does not take reasonable steps or specific precautions to prevent or limit the effects of the outside interference, when they become likely or when they actually occur. Thus a force majeure clause will usually expressly require the party to use reasonable effort to mitigate the effects of the force majeure clause. Even where the force majeure clause does not expressly say so, in practice the party may still need to show that it could not mitigate the effects, to demonstrate that the force majeure event actually caused the party to be unable to perform its obligations under the contract. Consequently if alternative modes of performance are available but have not been pursued by a party to mitigate or prevent the impact of the force majeure event, it becomes less likely that a court will consider a party’s non performance attributable solely to the force majeure event.
e) Non performance by third parties
A force majeure clause should also provide for non performance by third parties where a contracting party fails to perform one or more of its obligations because of the fault by a third party whom it has engaged to perform the whole or part of the contract. Force majeure clauses will usually provide that in such a case, the contracting party may invoke the force majeure clause only to the extent that both the contracting party and the third party satisfy the requirements for invoking the clause.
Impact of force majeure on commercial contracts in Uganda post Covid- 19
One key issue in determining whether a party can successfully invoke a force majeure clause because of the recent corona virus disease is whether the corona virus disease is one of the force majeure events that was captured by the force majeure clause under the contract. For those contracts that do not have a force majeure clause, it has already been discussed above that they cannot look up to force majeure for relief.
The corona virus disease was officially declared a global pandemic by the World Health Organisation. A pandemic is an epidemic that spreads across the globe. An epidemic on the other hand is an outbreak of disease that infects communities in one or more areas. Where a contract at issue lists epidemics or pandemics as a force majeure event, the party seeking to rely on the clause can successfully argue that the corona virus disease is one of those events. Even where the clause does not include the words pandemic or epidemic, one can still successfully argue that the corona virus disease is a force majeure event where the clause included acts of government as triggering application of force majeure given that the government of Uganda instituted travel restrictions and lockdowns. A party seeking to rely on it may also argue that it falls within “circumstance beyond the reasonable control of the parties”, where such words were used under the contract.
It’s not enough that a given party can rely on the corona virus disease as a force majeure event, the party seeking to rely on it must also prove that it was the corona virus disease and its negative effects that made the party fail to fulfil its contractual obligations. All the other factors that need to be proved to successfully claim relief have been explained above, namely; that the party was prevented, hindered or delayed from performing its contractual obligations as a result of the corona virus disease and its effects; that the inability to perform was beyond the parties reasonable control and that; there were no reasonable steps the party could have taken to avoid the event or its consequences.
The International Chamber of Commerce (ICC) Force Majeure and Hardship Clauses, 2020
The uncertainty created by the corona virus disease of 2019 and; its negative impacts on contractual performance, has brought into the lime light and attracted much discussion on “force majeure” clauses. I probably wouldn’t be here writing about force majeure, a concept many lawyers have in the past decades regarded as of little use; if not for the Covid- 19 and the now usefulness of these force majeure clauses.
The International Chamber of Commerce (ICC) which had last revised its Force Majeure and Hardship Clauses in 2003, recently announced the March 20th 2020 update which it has defined as a balanced model for use in international contracts in any jurisdiction, created to help parties negotiate and draft contracts and increase legal certainty.
The ICC Force Majeure Clause combines the predictability of listed force majeure events with a general force majeure formula which is intended to catch circumstances which fall outside the listed events. The model Hardship Clause provides several options for amendment or termination of the contract when circumstances make performance of a contract untenable or more onerous.
Like all force majeure clauses in commercial contracts, the ICC Force Majeure and Hardship Clauses balance business people’s legitimate expectations of performance with the reality that circumstances change, making performance so hard that the contracts simply must change. The clauses provide a new Short Form Force Majeure Clause which is limited to some essential provisions covering the most important Force Majeure issues and is particularly suited to use by SMEs and a Long Form Clause which gives guidance on issues in which the short form is silent. They feature explanatory guidance notes throughout, giving users practical context and flagging issues to be considered when drafting such clauses.
The model clauses can provide parties useful guidance and reference in negotiation and drafting new contracts, particularly in international contracts where parties come from different legal systems. Uganda being a common law system where there is no codification of force majeure means that contracting parties are free to design their clauses in their contracts (unless dealing with sector standard contracts). In English law governed contracts, parties have contractual freedom (Printing and Numerical Registering Company V Sampson (1875)19 Eq) to include what they wish to govern their contracts. The ICC model clauses are standard clauses which a party may choose to adopt wholly or with necessary modification to suit particular need and circumstances. The model clauses may also be incorporated either expressly or by reference.
A carefully constructed and negotiated force majeure clause is an important tool for reducing or even completely eliminating the risk associated with non performance, delayed performance, or underperformance (failure to meet minimum guarantees) of contractual obligations when unexpected circumstances beyond the parties control arise impacting negatively on performance.
The new Corona Virus Disease 2019 (COVID-19) has wrecked global economies with its damaging effects and has seen many contractual parties breach their contractual obligations. Parties have resorted to their force majeure clause in their contracts to seek relief while those that did not include such clauses in their agreements have had to rethink and to re- negotiate such contracts.
This article is intended for general knowledge only. For your specific need, consult a lawyer for specific and particular advise. The authors shall not be liable for the loss whether direct or indirect that may result from reliance on this article.
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