As the country mopped up the mess, both literally and financially, from the recent floods, we then faced the threat of another fuel crisis affecting transport. And now, some areas are waterlogged again. Whether it is flooded factories or a failure to distribute goods around the country for lack of fuel, the result is that many commercial contracts are not 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 which 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 a clause can be quite detailed. Usually a well drafted clause will set out a series of force majeure events. It will then state the consequences of any such event occurring.
Whether or not flooding or a fuel crisis are covered under the clause will depend on what is stated in the list of events. Often there will be specific mention of flooding or reference to an ‘Act of God’. However, if there is no reference to an event then it will be a question of interpretation as the parties to the contract scramble to determine whether the list of events stated in the clause is non exhaustive and can cover their particular event.
As an alternative, a force majeure clause can provide a ‘catchall’. For example, this could be in terms of any cause or circumstances beyond the seller’s reasonable control. But how to define ‘beyond reasonable control’? For example, if a road haulage company is unable to deliver goods because its own drivers are protesting, would this be beyond reasonable control? Some clauses may deal with this situation by restricting the relief available in a situation where the party has contributed to the delay before the event occurred.
However, even if flooding or a fuel crisis is an event covered by the force majeure clause, it is still necessary to carefully examine the way in which the clause works. For example, does it require the party affected by the event of force majeure to notify the other party of the event’s occurrence? Is there an obligation which requires the affected party to try to work around the force majeure event?
Often force majeure clauses will provide for the suspension of obligations during the period of the force majeure event. If these continue beyond a specific time, it is usual for the clause then to provide for the contract to be cancelled.
Compensation
Most importantly is the question of the obligation of a party subject to the force majeure event to compensate the other party. Given the very 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 insofar as 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 be incorporated only if it is brought to the attention of the other party at the time the contract is made.
It most certainly is not incorporated into a contract if it appears on the reverse of an invoice! In such a situation the clause will not be worth the paper it is written on.
It is also necessary for the force majeure clause to be reasonable where a consumer deals with another party on their standard terms of business. What is reasonable is determined by the Unfair Contracts Term Act. Force majeure clauses are usually found to be reasonable, but if the clause falls foul of the Act it will mean that the contract will be treated as if there is no force majeure clause at all.
If the contract does not contain a force majeure clause then the position is far less certain. It may be that the contract will be regarded as frustrated. This occurs when a supervening event not envisaged by the parties and, not due to their fault, renders the contract impossible to perform or is radi-cally different from that which they imagined. The bad news is that situations where a contract can be said to be frustrated are extremely narrow and unpredictable in their application. The courts have tended to restrict the application of the doctrine of frustration to try to prevent parties from escaping from bad bargains.
There is also a philosophical unwillingness to intervene for policy reasons. What is to happen in the future must be uncertain and the courts do not want to be seen to be bailing out parties. Instead, the courts prefer to encourage parties to foresee many possibilities and to guard against them.
This year’s fuel blockades were part of a series of direct action demonstrations being taken by different groups around the world. It is likely that such actions will grow in number and force.
At the same time, the effects of global warming are evident: freak weather conditions seem to be occurring on a regular basis. Whatever actions are taken by the UK government and the governments of other countries, things will not change overnight and in the meantime your business needs to be protected in the contracts that it forms.
Degree of certainty
As a result there is every incentive for parties making a contract to incorporate a force majeure clause. An express clause builds in a degree of certainty. It guards against the possible application of frustration which can produce an arbitrary result. It is also open to the parties to specify what is to happen in particular situations. In doing so they will be able to progress their business with a degree of certainty that would otherwise be missing.
Put simply, the choice is whether or not you want your business to be protected.
