Cures and Relief from Non-Performance – Force Majeure and Other Measures
Updated: May 6, 2020
The past 12 months have proved to be unsettling with wars, riots and natural disasters. Incidents include social unrest in Hong Kong, bushfires in Australia resulting from exceedingly dry weather (followed by heavy rainstorms) and the recent outbreak of COVID-19.
In particular, COVID-19, which has spread to all provinces of the People’s Republic of China and other major countries/cities in the world, has proved to be an emergency on a social and economic level. On 30 January 2020, it was declared by the World Health Organization as a “Global Public Health Emergency”. There is discussion that the virus will ultimately dissipate in April or May with the warmer weather, but this is yet to be confirmed.
When business is disrupted by unexpected events, one or more of the contracting parties may hope to find relief from temporary or permanent non-performance of a contract. The force majeure clause, which is often overlooked and inserted into a contract as a boilerplate clause, may be one of the cures.
Force majeure generally means uncontrollable circumstances that prevent someone from fulfilling a contract.
Under the civil law system, a party is generally entitled as a right to allege force majeure as a defence to an allegation of non-performance. For instance, responding to the outbreak of the COVID-19, the China Council for the Promotion of International Trade, officially accredited with Beijing’s Commerce Ministry, announced that it would offer “force majeure certificates” to affected businesses in the People’s Republic of China as a move to protect the interests of effected companies. Chinese parties at the centre of the virus are more likely to declare COVID-19 as a force majeure event.
In contrast, under the common law system, a party can only invoke force majeure if it is specifically provided for as a contract term. A force majeure clause typically outlines terms for a party upon the occurrence of a specified event outside either party’s control for one or both of the parties to (i) cancel the contract; (ii) be excused from performance of the contract in whole or in part; (iii) suspend performance; and/or (iv) claim an extension of time for performance.
This article will focus on the operation and interpretation of a force majeure clause under the common law system.
Invoking a Force Majeure Clause
Whether force majeure can be declared is highly fact-sensitive and depends on the construction of the force majeure clause. If a defaulting party stops performance hoping to rely on a force majeure clause and the clause is held by the Court to be inapplicable, the defaulting party will be in breach of the contract and liable to pay damages to the innocent party.
The issues flagged below should therefore be carefully considered when deciding whether to invoke a force majeure clause:
A force majeure clause is strictly construed. An unexpected event must fall within one of the “specified events” to trigger the clause. Even if there is a “catch-all” phrase, this phrase is strictly construed with reference to the nature of the specified events. Typical examples of specified events include an act of god, an epidemic, a storm, tempest or flood, fire, perils, dangers or accidents of the sea, war or warlike operations, civil war, riot, civil commotion, strikes, natural catastrophes, to name a few.
The specified event must be the sole operative cause of the non-performance of obligations. The defaulting party cannot allege force majeure for failure to supply goods for an unforeseeable serious natural disaster if the failure is in effect caused by the breakdown of machinery in the first place.
It has to be shown that no reasonable steps could have been taken to avoid or mitigate the specified event or its consequence. If alternative measures are available, such as sourcing from a different supplier at a higher cost or increasing production by paying extra to workers, it will be difficult to invoke the force majeure clause.
Notice Period. If there is a notice requirement outlined in the force majeure clause, along with a time limitation for (i) reporting the specified event after it occurs; and (ii) invoking the force majeure clause, the requirement should be complied with timely to avoid unnecessary arguments on delay/waiver.
The consequences of invoking the force majeure may vary depending on the particular wording of the clause. These may include (i) complete discharge from performance; (ii) partial discharge from performance; (iii) time extension for excusable delay; (iv) discharge following an excusable but pro-longed delay; and/or (v) costs consequences.
Contract Without a Force Majeure Clause – Two Common Law Doctrines
Even without a force majeure clause, under common law a party may still be excused from performing a contract in view of unexpected events by relying on one of two doctrines, namely (i) impossibility; and (ii) frustration of purpose.
These doctrines can however present great uncertainty and may be difficult to prove. Impossibility requires the defaulting party to prove its inability to perform. Frustration requires the happening of a supervening event which changes the nature of the contract and in turn makes one party’s performance worthless to the other.
In addition, the effect of successfully alleging impossibility or frustration is an automatic and immediate release from the performance of the agreement which may not be desirable for parties who may only wish to suspend performance.
Contract Without a Force Majeure Clause – Exclusion or Limitation of Liability
Where there is an exclusion clause in a contract, certain liabilities, in particular financial loss or damage to property, may be avoided without reliance on a force majeure clause or the doctrine of impossibility/frustration.
A party can negotiate to limit liability arising from a contract by inserting a limitation of liability clause that (i) caps the damages payable; (ii) restricts the types of loss recoverable; (iii) restricts the remedies available; and/or (iv) imposes a time limit for making a claim.
Enforceability of such an exclusion/limitation clause is a matter of construction and it depends on whether the clause has been incorporated into the contract with clear and unambiguous language and that the clause has been reasonably brought to the other party’s attention. There may be additional statutory scrutiny, especially when end-consumers are involved.
Going Forward – Allocation of Risks
In view of the above, if you are about to enter into a contract during these unsettling times, or if there is an opportunity to review and revise an existing contract, it is of paramount importance to safeguard your business interests by allocating the risks of unexpected events.
Suitable measures can be:
Inserting a carefully drafted force majeure clause. The clause should be tailored to your industry and specified events that may potentially impede future performance of contractual obligations.
Alternatively, or additionally, inserting an exclusion and/or limitation of liability clause to avoid/limit your liabilities. Even if the intervening events may not be qualified as a force majeure event, the damages payable for non-performance of contractual obligations can be excluded or limited within an acceptable range.
Alternatively, or additionally, consider obtaining suitable insurance to allocate one or more substantial risks of unexpected events to the insurer.
Our Disputes team would be happy to (a) handle any disputes arising from force majeure events, (b) advise on drafting of force majeure clause, (c) advise on drafting of exclusion of liability clause(s) and/or limitation of liability clause(s), and/or (d) lead any negotiations with insurers.