This month, I will focus on what happens when a force majeure clause is triggered and how to avoid the common pitfalls of drafting and negotiating force majeure clauses.

The term force majeure describes events over which operators have little or no control. A force majeure clause may relieve a contracting party for failure to perform in certain circumstances by allowing them to terminate or temporarily suspend their contractual obligations.

However, an event will not be force majeure unless it makes the performance of the contract impossible, it was unforeseeable, and it was irresistible both in its occurrence and its effects. There is a wide range of rights and obligations that can come into play when there is a force majeure event, and that is why it is important to draft a precise force majeure clause that can be relied upon.

What happens when a force majeure event occurs?

When a force majeure clause is triggered, a party may be able to:
• Suspend its contractual obligations;
• Be given an extended period to fulfil its obligations;
• Cancel a contract either immediately or after completing a period of suspension.

Even when a party is affected by a force majeure event, that does not mean it is automatically relieved of all contractual obligations. Depending on the nature of the disruption, it may still be required to use its best efforts to abide by the terms of the contract despite the force majeure event. Such endeavours may include mitigating the effects of the force majeure event on the performance of its obligations and continuing to perform the party’s obligations that are not affected by the force majeure event as required by the terms of the agreement.

Common issues with drafting and negotiating force majeure clauses

The object of a force majeure clause is to allocate risk in the event of unforeseen circumstances. In light of this purpose, parties are well advised to carefully consider the risk they are absorbing, building this into their pricing models. In addition to this consideration, parties should also think about the relationship between the risk allocation under a force majeure clause and their insurance arrangements. In other words, is there business interruption or professional indemnity cover in place, and is it adequate if a force majeure event occurs?

The downstream effects of a force majeure clause will have different implications for each party. For example, a purchaser needs to consider what would happen if a supplier invoked a force majeure clause because of the supplier’s actions, a purchaser may be forced to rely on force majeure clauses in contracts with its customer. An example of this is the supply-chain issues the pandemic has caused.

There are competing interests to bear in mind when looking at what each party wants to include in their force majeure clause. A supplier will generally want broadly defined force majeure clauses to be able to defer its obligations or at least limit them if its ability to perform is adversely affected by a force majeure event, which creates flexibility. In direct contrast, a purchaser will usually want a narrowly defined force majeure clause with mitigation requirements to prioritise continuity of supply. This is particularly important in circumstances where the supplier is providing critical infrastructure, in which case a purchaser may not want a force majeure clause at all.

One of the main traps to avoid is ending up with a force majeure clause that is drafted too much in favour of the other party. If we return to our supplier and purchase example, the following are some pitfalls to watch out for:

A purchaser should only allow the definition of ‘force majeure event’ to include events the supplier will not be expected to continue to supply on an uninterrupted basis.

A purchaser should make sure that a force majeure clause does not include events that are within the supplier’s control.

A purchaser should consider requiring the supplier to use its best endeavours to continue supplying (and continue to supply services and products that have not been affected), rather than simply giving the supplier the ability to terminate an agreement for a force majeure event. A purchaser will want to ensure it can source replacement services during any suspension period invoked by the supplier.

A purchaser should also have the appropriate insurance cover in place and limit its liability through an effective force majeure clause in its contracts with customers.

A supplier should ensure that a force majeure clause covers every circumstance in which it would be impossible for the supplier to continue to perform the contract. A supplier should consider the implications, particularly additional expenditure, of an obligation to mitigate the effects of a force majeure event that may not be recoverable from the purchaser.

Conclusion

While acknowledging that a well- drafted force majeure clause cannot be underestimated, legally and commercially, there are strong incentives for everyone involved in a supply chain to look beyond their contractual force majeure provisions. During the Covid-19 pandemic, parties need to ensure that all their contracts are soundly based and that they have taken suitable protective and contingency measures to recognise the possible occurrence of disruptive events and manage their impacts.