Force Majeure Clauses in Commercial Contracts – how do they work and when do they apply?
The basic concept of a commercial contract is a simple one: two parties agree to perform certain obligations which are enforceable. Failure to perform the contract results in a breach for which the aggrieved party may seek redress.
But there are events that your business may want to account for in your contracts; events that may prevent you from performing the contract, but which are outside your control. These are called force majeure events.
Commercial contracts often include force majeure clauses to allow a party to alter or be released from their obligations under the contract should an event occur that is beyond their control.
In this article, we take a look at how force majeure clauses work and when they apply, including their applicability to COVID-19 related events.
What is a force majeure clause?
A force majeure clause is a clause included in a commercial contract that can be triggered by serious and sometimes catastrophic events that prevent you from fulfilling your contractual obligations.
From war to natural disaster, a force majeure clause can protect your business from the impact of being found in breach of contract due to extraordinary unforeseen and uncontrollable events. For example, if an earthquake causes structural damage to your business premises, meaning you cannot fulfil a supply of goods agreement, a force majeure clause could apply.
What can a force majeure clause cover?
The exact wording of the clause within a commercial contract will dictate whether an event is a force majeure event. In general, force majeure clauses cover major or catastrophic events, such as:
- Natural disasters or ‘acts of God’, like earthquakes, hurricanes or flooding
- War, invasion or civil unrest
- Explosions or infrastructure failures
- Power shortages
- Industrial action and strikes
- Public health emergencies, such as epidemics, pandemics and resulting lockdowns or quarantine procedures
When can a force majeure clause apply?
Whether a force majeure clause will apply to a certain event depends on the wording and interpretation of the clause. The party looking to rely on the force majeure clause should typically show that:
- The event is outside of their reasonable control
- The event was not reasonably foreseeable
- The impact of the event was inevitable or unpreventable
The clause should specify the force majeure events that the clause can apply to. This may be in the form of a list of events, and/or a catch-all to cover a wider range of possible events, such as ‘an event beyond the parties’ control’.
The clause may also specifically exclude certain obligations from being covered, such as payment obligations, which can be helpful where you are the supplying party.
Can force majeure clauses be enforced during COVID-19?
As mentioned, a public health emergency such as a pandemic could theoretically be a force majeure event.
However, whether you can rely on disruption caused by the COVID-19 pandemic will depend on the wording of the force majeure clause in your own commercial contracts, the circumstances surrounding the event, and the impact on your performance of the contract.
Specific wording – ‘epidemic’ or ‘pandemic’
If the clause specifically mentions an ‘epidemic’ or ‘pandemic’, this will likely cover the COVID-19 pandemic, and the government’s legally mandated restrictions could constitute a force majeure event that is covered by the clause. For example, a national lockdown that forces your business to close or your employees to stop working.
If the clause does not specifically refer to a public health emergency, COVID-19 may still be covered. Many clauses are drafted broadly to refer to events ‘outside of the parties’ control’.
Whether the clause specifically covers the COVID-19 events at hand will depend on the circumstances. The clause may require a certain level of impact on the parties before the clause can be triggered. For example, the clause may require performance to be impossible. If your performance is merely hindered, this may not be covered.
If the clause allows hindrance, something more than a slight inconvenience to fulfil the contract would be required. It would be necessary to show that performance of the contract would put the business at risk or prevent it from honouring contracts with third parties.
Resolving disputes over force majeure clauses
In the end, everything comes down to the wording of the clause and the interpretation by the parties. So, it has been common for disputes to arise over force majeure clauses throughout the pandemic.
If you are in a disagreement over your own commercial contracts, it is important to seek legal advice for a professional view over the interpretation of the clause and to prevent things from escalating. (We have assisted a number of clients over the last couple of years in interpreting such clauses, and checking whether they sufficiently cover the COVID-19 pandemic.)
Where a force majeure clause will not apply, you may still have the option to rely on the doctrine of frustration. A contract is ‘frustrated’ where an unforeseen event makes performance of the contract impossible.
Frustration requires the affected party to take reasonable steps to mitigate the impact of the event before they can claim that performance is impossible.
Speak to our Commercial team for expert advice about force majeure
To discuss force majeure clauses in commercial contracts or any other commercial matter, please get in touch with our experienced Commercial team.
Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.