02 Sep UNDERSTANDING FORCE MAJEURE – THE LEGAL TERM ALL BUSINESSES SHOULD KNOW
The Covid-19 pandemic has brought us new words such as ‘covidiot’ and ‘maskne’, and popularised terms like ‘social distancing’ and ‘flatten the curve’. For many business and legal professionals, the term ‘force majeure’ has also become very popular. Force majeure has been spoken about a lot in the context of contracts and parties to contracts not being able to fulfil their obligations. Sometimes the impression can be given that force majeure is a get out of jail free card and that once there is a force majeure clause, the non-performing party can simply walk away from their obligations – but is that really what force majeure means?
What is Force Majeure?
Literally, force majeure means ‘superior’ or ‘major’ force. Legally, it refers to a clause that is often included in contracts and which provides that in certain specified circumstances, a party’s failure to meet its obligations under the contract may be excused. The words ‘force majeure’ do not of themselves have any set meaning in law so the circumstances covered by any force majeure clause will depend on the wording of that specific clause and contract. Some circumstances that may be covered by force majeure clauses are natural disasters, industrial action and strikes, riots and civil unrest, and outbreaks of infectious disease. A force majeure clause will not usually be implied into a contract so if parties wish to be able to rely on force majeure it should be specifically included.
What exactly a force majeure clause covers is a matter of interpretation of the contract. Clauses may specifically list certain circumstances or may use broader language such as ‘matters outside the parties’ control’ or may be a combination of both. Force majeure clauses usually only apply when performance of a party’s obligation is impossible as opposed to merely more difficult, for this reason, an obligation to pay a sum of money is almost never excused by reliance on force majeure. The effect of a force majeure clause will also be a matter of interpretation. Some possible effects are the temporary suspension of obligations, the extension of deadlines, or the termination of the contract.
So, if a contract contains a force majeure clause and if one of the circumstances included in the clause has occurred, is that it? Can the party affected by the relevant circumstances rely on the force majeure clause to excuse its non-performance? Not just yet. An important factor that must be considered before force majeure can be relied upon is causation. Just because one of the force majeure events has occurred does not mean that the event is the cause of the party’s failure to meet its obligations.
2 Entertain Video Limited and others v Sony DADC
A recent reminder of this was the High Court of England and Wales’ case of 2 Entertain Video Limited and others v Sony DADC  EWHC 972 (TCC). In that case, Sony provided warehousing, logistical, and distribution services to the claimants. The contract contained a force majeure clause that provided that parties would not be liable for any failure or delay in performing obligations if the failure or delay was caused by circumstances beyond the party’s reasonable control including but not limited to fire, riot, civil commotion, malicious damage and explosion. In August 2011 there were riots and civil unrest in several areas in England including where the Sony warehouse was located. On one of the nights of rioting, a group of young men broke into the warehouse and started a fire which burned for several days and caused the total destruction of the warehouse and the stock in it. Due to the destruction, Sony could not fulfil its obligations under the contract and it purported to rely on force majeure.
The High Court decided that Sony could not rely on the force majeure clause. This was because while the riots were unprecedented and unforeseeable and therefore beyond Sony’s reasonable control, the fire itself was not and it was the fire that had caused the destruction of the warehouse and resulted in Sony’s failure to fulfil its obligations. The risk of unauthorised entry at the location used by the young men was foreseeable and the risk of arson and of destruction of the warehouse by fire was also foreseeable. Sony had failed to implement adequate security measures to prevent unauthorised entry and had also failed to install appropriate fire precautions which may have suppressed the fire and reduced the damage caused to the warehouse and the stock in it. The fire and resultant destruction were therefore not circumstances beyond Sony’s reasonable control, and it could not rely on the force majeure clause. Sony was ultimately found to be liable to pay the claimants £5 million in damages.
Matters to Consider Before Relying on Force Majeure
As a result of the Covid-19 pandemic and the ever-changing web of restrictions imposed to combat the pandemic, many businesses may find themselves struggling to fulfil their obligations under contracts and may wish to rely on force majeure clauses. The following are some important questions to ask when considering relying on force majeure:
- Does the contract contain a force majeure clause? Force majeure clauses usually need to be expressly included in contracts. If there is no force majeure clause, parties may still be able to rely on other doctrines such as frustration.
- Has one of the events covered in the force majeure clause occurred? This question can be particularly important when considering restrictions imposed by governments to combat the spread of Covid-19. For example, the force majeure clause may cover changes in applicable law or restrictions imposed by law but the restrictions imposed by a government may be by way of ‘moral suasion’ as opposed to law. If the moral suasion works, the practical effect on a business will be very similar to the effect if the restriction had been imposed by law but the business is unlikely to be able to rely on the force majeure clause.
- Is the force majeure event the cause of the failure to fulfil the contractual obligation? As shown by the Sony case, it is not enough that one of the force majeure events has occurred, the force majeure event must also be the cause of the party’s failure to fulfil its obligations. While not every force majeure clause will require that circumstances be ‘beyond the party’s reasonable control’, where a party fails to take reasonable precautions against foreseeable risks, it is possible that the failure to take precautions will be found to be the cause of failure to fulfil obligations and the party will not be able to rely on force majeure. As the pandemic persists and we adjust to the new normal, the impacts of Covid-19 and its related restrictions may be considered to some extent foreseeable and businesses should take appropriate precautions and not simply rely on the pandemic as being an unforeseeable and unprecedented event.
- If the force majeure clause can be invoked what is its effect? A force majeure clause may have a number of effects such as suspending parties’ obligations while the force majeure event persists, giving more time for performance, or terminating the contract if the force majeure event persists beyond a specified period of time. A party may also be required to mitigate the effect of any force majeure event on its performance.
- What are the steps to be taken to invoke the force majeure clause? Contracts will often require that notice be given to the other party in a particular manner and within some specified time after the party wishing to rely on force majeure becomes aware of the force majeure event. Failure to comply with such requirements may mean that a party loses the right to rely on the force majeure clause.
The ambit and effect of each force majeure clause will depend on the specific wording and circumstances of each contract and whether it can be relied upon will often turn on the specific facts of each potential force majeure event. It is therefore important that businesses carefully document the facts of a potential force majeure event and its impacts on the business and seek legal advice promptly upon becoming aware that a possible force majeure event may impact contractual performance.
Disclaimer: This Document Provides General Guidance Only And Nothing In This Document Constitutes Legal Advice. Should You Require Specific Assistance, Please Contact Your Attorney-At-Law.
This blog post first appeared in the August 30 edition of the Business Guardian and was authored by Riane Trotman. Riane is an associate in M. Hamel-Smith & Co.’s Transactional Department. She can be reached at firstname.lastname@example.org