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Force Majeure Clauses - A Means of Protection?
This article originally appeared in Childrenswear Buyer.
News media reports draw attention to a fast-approaching energy gap. Within the lifetime of the current parliament, the UK could face a switch-off in electricity supply. Indeed, last winter the UK’s gas stocks were down to just a few days.
For sure, energy hardship for many beckons. But for businesses, the result is likely to be that many commercial contracts will not be performed.
The consequences of non-performance will depend on what the contract does or does not say. Many commercial agreements incorporate a specific clause, designed to apply where contractual performance has become impossible because of circumstances that 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 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”. To what extent is “other natural disaster” to be interpreted by reference to the specific Acts of God that are listed before it?
Usually force majeure clauses will provide for the suspension of obligations during the period of the force majeure event. If it continues beyond a specific time, it is usual for the clause 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 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 so far 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 only on the reverse of an invoice. In such a situation the clause will not be worth the paper it is written on, let alone the ink used to print it.
Looking around the world it is possible to see periodic fuel blockades, acts of terrorism and transport strikes that happen on a regular basis as a series of unrelated direct acts or demonstrations being taken by different groups. 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?