Recent developments in Force Majeure

Force majeure clauses are nearly always included in commercial contracts, particularly in the infrastructure, energy and construction sectors. However, how many parties can honestly say they pay these clauses any attention until they attempt to rely upon them? Ben Smith suggests that very few parties consider such clauses and as a result in the current political and social climate it seems a suitable time to reconsider them.

What is a “force majeure”?

In English law, there is no defined meaning or legal doctrine of force majeure.

Rather, it is generally used to describe those contractual terms which provide relief to a party from performance of the contract following the occurrence of certain events. The underlying principle of force majeure is that the occurrence of certain events is outside a party’s control and therefore that party is either excused from performing all or part of its obligations, entitled to suspend performance of all or part of its obligations, or entitled to cancel the contract (although this is rare).

In that sense, force majeure can be differentiated from the legal doctrine of Frustration which applies when an event occurs that makes it impossible to fulfil the contract. If such an event occurs the parties are automatically released from their obligations and the contract discharged. However, force majeure events rarely result in the discharge or cancellation of the contract; instead the contract usually sets out the result of a force majeure event.

A force majeure clause is also not regarded as an exemption or exception clause, even though the practical effect of a force majeure clause may be to relieve a party of liability for failure to perform, as exception/exemption clauses are typically concerned with relief from damages due to a particular event (a secondary obligation) rather than relief from a party’s primary obligation to perform the contract.

An example of a force majeure clause is:

“If either Party is rendered wholly or partly unable to perform its obligations under the Contract because of: a) an act of God, fire, flood, drought, earthquake, windstorm or other natural disaster; (b) an act of any sovereign including war (c) acts of terrorism; (d) civil emergency (whether an emergency be declared or not); (e) fire or explosion (other than, in each case, one caused by breach of contract by (f) adverse weather conditions; (g) nationalisation, requisition, destruction or damage to property by or under the order of any government or public or local authority; (h) embargo, blockade, imposition of sanctions or breaking off of diplomatic relations or similar actions; (i) radioactive, nuclear, chemical or biological contamination or (j) labour dispute including, but not limited to, strikes, industrial action, lockouts or boycott; it shall not be liable for its failure to perform its obligations affected by said event.”

Establishing an event of force majeure

So, if you are (un)lucky enough to find yourself in a position of having to rely on a force majeure clause what considerations should you be aware of? 

1. Burden of proof

The burden of proof is on the party seeking to rely on the force majeure clause. Therefore it is for that party to demonstrate that an event of force majeure occurred, which had the effect of preventing it from performing its obligations under the contract. The burden of proof is often prescribed in the terms of the contract. 

2. Contractual interpretation

Like all contractual clauses the precise meaning and effect of a force majeure clause will depend on the specific wording of the clause and its interpretation. This means that the reading of the clause will be subject to the usual principles of contractual interpretation, for example:

•  What is the natural meaning of the words used?
•  What information was available to the parties when they entered into the contract? 
•  What is the context of the clause within the wording of the contract as a whole? 

3. Defining the event of force majeure

As noted above, there is no accepted definition of force majeure. Therefore force majeure clauses typically include a list of examples of events that will constitute force majeure events and sometimes also include a list of events that will not constitute a force majeure event, or will simply define a set of criteria which an event must meet to be considered a force majeure event. However, some force majeure clauses do not mention force majeure at all.   

List of events

It is important to note whether the list is a list of exclusive events which may constitute a force majeure, or is instead a list of examples, or expressed to be “without limitation”, or includes some form of catch-all language.

Commonly listed events of force majeure include:

  • Acts of God (including earthquakes, volcanic eruptions, landslides)
  • Natural catastrophes
  • Plague or epidemic
  • Wars, invasion, armed conflict
  • Blockades, embargoes
  • Sabotage
  • Nationwide strikes.

The contract may also list events which the parties have agreed do not constitute a force majeure. For example, we have seen contracts which make reference to:

  • Economic hardship
  • Shortages of manpower
  • Delay, default or failure to perform by a subcontractor
  • Unavailability or late delivery of plant, materials or equipment.

Criteria for an event of force majeure

Lastly, a contract may simply list a set of criteria the event must meet, or cause, in order to be considered an event of force majeure. This approach is sometimes taken in conjunction with a list of events which either do or do not constitute a force majeure. While the interpretation of such criteria will necessarily turn on the facts of each specific case, in some circumstances case law also offers guidance. Examples of the types of criteria we have seen include:

  • The event prevents the affected party from performing its obligations under the contract.

The meaning of the word “prevent” was considered by the courts in Tennants (Lancashire) Ltd v G.S. Wilson & Co. Ltd [1917] AC 495 and it was concluded that if a force majeure clause provides that the relevant triggering event must "prevent" performance, the relevant party must demonstrate that performance is legally or physically impossible, not just difficult or unprofitable. 

In contrast, the words “hindered” or “delayed” naturally have a wider scope and therefore will only be satisfied where performance of its obligations on the part of the affected party becomes substantially more onerous as a result of the event. For example, in Reardon Smith Line v Ministry of Agriculture, Fisheries and Food [1961] 2 All ER 577 the courts took the view that the event would have to be so severe as to place the affected party in a position where they could not perform their contractual obligations unless they broke other contracts.

  • The event is beyond the reasonable control of the affected party.

The courts have also considered the interpretation of a clause which refers to an event being “beyond the control” of a party. In Channel Island Ferries Ltd v Sealink UK Ltd [1988] 1 Lloyd's Rep 323 the Court of Appeal said that any clause which included language referring to events “beyond the control of the relevant party” could only be relied on if that party had taken all reasonable steps to avoid its operation or mitigate its results.

The duty to mitigate an event which is a potential event of default may also be enshrined in the contract.

4. Causation

It will be rare for a force majeure clause not to require that the force majeure event must have an impact on the performance of the contract. 

The judgment in Seadrill Ghana Offshore Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm) illustrates that in order to constitute a force majeure event the force majeure must be the sole operative cause of the failure of the affected party to perform its obligations, unless there are express words to the contrary in the force majeure clause.

There has also been recent judicial commentary in Classic Maritime Inc v Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102 on whether or not the “but for” test of causation applies where an affected party is attempting to rely on a force majeure clause. 

This case centred on two issues:

  1. The proper construction of an exception clause, which excluded loss or damage, including for failure to deliver cargo, arising as a result of certain events. 
  2. The proper measure of damages if the exception clause did not apply.

On the facts Limbungan contended that it had been unable to charter delivery of cargo due to a flood at one of the mines which supplied the cargo. The parties agreed that the flood fell within the exception clause but disagreed about the effect of the exception clause:

  • Limbungan claimed that (i) the exception clause was in fact a force majeure clause and therefore it was not required to prove causation as all its primary obligations to deliver the cargo had been cancelled on the occurrence of the force majeure event, or (ii) if the exception clause was not a force majeure clause it was still able to rely on the exception as a defence to Classic Maritime’s claim for damages.
  • Classic Maritime disputed this on the basis that (i) the clause was not a force majeure clause and (ii) on the facts, while Limbungan was unable to charter delivery of cargo due to a flood at one of the mines which supplied the cargo, the other mine from which Limbungan sourced the cargo had refused to supply the cargo to Limbungan for unrelated reasons. Therefore the flood at the first mine was not causative of Limbungan’s failure and it could not rely on the exception clause.

5. What type of clause are you dealing with?

The court held that the exception clause was (i) to be construed as an exception clause, rather than a force majeure clause, and therefore it only operated as a defence to the defaulting party’s liability for damages, i.e. it related to a secondary obligation; and (ii) did not affect that party’s primary obligations under the contract, i.e. to deliver the cargo. Therefore, in order to take advantage of the exception clause Limbungan had to demonstrate that “but for” the flood at the mine it would have been able to deliver the cargo. It was unable to do this and therefore the exception clause did not apply and it was liable to Classic Maritime for damages.

It is important to note that while the decision in this case does not change the prevailing case law in relation to force majeure clauses and exception clauses, it does give rise to two important considerations: 

  1. That there could be cases where a force majeure provision could introduce a “but for” test depending on its precise wording.
  2. The importance of taking care when drafting and interpreting force majeure provisions. 

6. Other points to consider

Finally, it is important to consider whether the contract requires the affected party to take any other steps in order to be able to rely on the force majeure clause, for example:

  • Does the force majeure clause include any other provisions which the affected party has to meet or demonstrate, for example in relation to the timing or impact of the potential force majeure event?
  • Does the force majeure clause require notice of the potential force majeure event to be given to the other party? If so, is there a specific time limit or format for the notice and does the notice need to include any specific information?
  • Does the affected party need to give the other party any other notices, for example, in order to preserve any entitlement to additional time or money?

It is important to remember that if the contract contains any of the above requirements and they are, on a proper construction, conditions precedent to the affected party’s entitlement to rely on the force majeure clause, or claim relief from the impact of the force majeure, the affected party will not be excused from performance where it has failed to comply with such requirements.

A note on Brexit

On 23 June 2016, the UK voted to leave the EU and on 29 March 2017, the UK government gave formal notice of the UK's intention to leave under Article 50(2) of the Treaty on the European Union. The UK's departure was scheduled to take place on 29 March 2019 but, as at the time of writing, this has been delayed and it is unclear precisely when the UK will leave the EU.

Against this background, perhaps surprisingly, there have been no reported cases in which parties seek to rely on Brexit, or the consequences of Brexit, as constituting an event of force majeure. However, as recently as February 2019 the High Court was unwilling to find that Brexit consequences were sufficient to frustrate a contract (see Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch)). 

Insofar as it is possible that Brexit could negatively affect a party’s ability to perform their contractual obligations it is feasible that parties will seek to rely on force majeure provisions as a result of Brexit, or the consequences of Brexit. The extent to which any such claims are successful will, of course, depend on whether Brexit falls within the precise definition of force majeure and whether it is Brexit or something else which has caused the affected party to fail to perform its obligations under the contract. 

Previous article | Next article