Wondering whether events on the world stage trigger a force
majeure clause?
Whether you're considering a claim, worried about receiving one or busy drafting in light of current uncertainty, here's our 10-point, jargon-free checklist on what to do.
1. Check your contract's governing law
- This note focuses on English law-governed contracts, where the actual words used in the contract are what ultimately matter. Some jurisdictions impose overriding force majeure-type provisions which apply no matter what the contract does or doesn't say.
2. Find the force majeure clause
- It could be buried somewhere unexpected or refer to "exceptions", "unforeseen events" or "acts of God" rather than force majeure.
3. Establish the events it covers
- One party will obviously prefer a non-exhaustive list, the other an exhaustive one. For both, examine how force majeure events are defined and decide whether the relevant event fits.
- For relief to be secured, sometimes the event must occur in the same country as, for example, a construction and engineering project is underway or goods are being manufactured, dispatched or delivered.
- If the event is not mentioned, the clause could still be triggered where it covers labour and supply shortages (which are caused by that event) or broadly defines events as exceptional, beyond one party's control, unavoidable and not attributable to the other party (but check carefully that all these conditions are fulfilled).
- If there is no force majeure-type clause or the event is not covered by the contract wording, consider relying on provisions such as those dealing with material adverse change, price adjustment, liability limitations and exclusions, extensions of time, variations or changes in law (for example, laws prohibiting employees or transport from working, which slow down the supply chain). English law makes it hard to prove that the contract has been frustrated (that is, impossible to perform).
4. Know how your clause links the event and non-performance
- A force majeure clause usually requires performance of contractual obligations to be "prevented", "impeded", "hindered" or "delayed". "Prevent" requires that the obstacle to perform is insurmountable, for example that it is no longer physically possible or legally permissible to perform the contract. "Impede", "hinder" and "delay" can be construed more broadly and do not require the affected party to prove impossibility to perform.
- To rely on the clause, the event must be the only one affecting contractual performance (unless clearly stated otherwise). In other words, "but for" the event, a party must have been willing and able to perform.
5. Understand the effects of notifying an event
- Depending on how long performance is affected, the contract may allow the right to suspend, seek an extension of time or for either party to terminate. Are you prepared for one or more of these consequences? Could you leave or renegotiate a difficult commercial situation?
- Is your dispute resolution mechanism robust if disputes were to ensue? Could gaps lead to satellite claims, for example over the law governing an arbitration? How would you enforce orders or awards?
6. Comply strictly with contractual notice requirements
- Ask yourself:
- Is an initial notice of the force majeure event needed?
- Must you give details and evidence of the event and its effects?
- By when and in what form should notices (initial and subsequent) and supporting documents be served?
- Pinpointing when the event starts to affect your contract might not be easy. If unsure, notify force majeure at the earliest opportunity, then issue periodic updates regarding the continuing disruption so your claim is not time-barred.
7. Document evidence supporting your claim
- Record and store evidence of all communications with your counterparties about the disruption and its effects, including order or service cancellations.
- You must mitigate the effects of a force majeure event, so document reasonable steps taken to do so.
8. Respond quickly to force majeure notices
- Failure to respond to a notice on time may constitute acceptance of the counterparty's claim.
- Review subcontracts and supply contracts in case you need to claim force majeure. Quickly engage counterparties required to notify you.
9. Prepare for the event ending
- Agree with your counterparty a date when obligations will resume after the event and its effects have ended, especially if the contract is unclear.
- The supply chain will need time and resources to resume operations or clear backlogs and the party claiming force majeure won't want to be in breach once the event is over. Although you might explore (or have a contractual right to request) a further extension of time, you are more likely to get relief during remobilisation by informing your counterparty that the event is over but the preventing effects are still being felt.
10. Learn lessons for future disruptions
- Assess your supply chain contracts so you know which counterparties are likely to be affected by the same or similar future force majeure events. Engage with them early to plan how to manage these situations.
- Do force majeure clauses in your existing and future contracts clearly and expressly allocate force majeure risk? Depending on your relationships with counterparties, consider amendments to prepare for the future.
Authored by Tom Smith and Mark Crossley.