Changed circumstances may have various detrimental and negative effects on a contract, ranging from full impossibility to perform to the situation where performance remains possible but either becomes excessively onerous or ceases to be of any use to a contracting party. In a long-term contract, there is a real risk that market conditions will change over time, with a potentially serious impact on profitability. The well-known concept of force majeure is often employed by contracting parties to provide for unforeseen events – but it has its dangers, and in the disaster recovery context the dangers loom large.
The concept of force majeure originates from the Roman law concept of vis maior and the term has been used in the French Civil Code. Under both Roman law and French law, force majeure serves as a mechanism to limit the liability of a party to a contract where there was no fault. The elements of force majeure in French law (Articles 1147 and 1148 in the Code Civil) have been said to be (1) irresistibility: the event and its consequences could not have been avoided or overcome, (2) unforeseeability: the event must have been unforeseeable to a reasonable person at the time and in the circumstances the contract was made, (3) externality: the cause of the event is not the performing party or persons at his responsibility, (4) impossibility: the event has to make performance impossible, not merely more onerous. In French law, force majeure leads to a release from liability in damages (Nicholas The French Law of Contract 21).
The term ‘force majeure’ does not have a strict legal meaning under English law so it is always necessary to include a definition and always advisable to include a non-exhaustive list of relevant examples of events likely to cause an event of force majeure. A force majeure clause is thus inserted into a contract to protect the parties in the event that part of the contract cannot be performed as a result of events that are outside the control of the parties and could not be avoided by exercising reasonable care. In the case of Nugent v Smith (1876)1 CPD 423, force majeure was defined as ‘natural causes directly and exclusively without human intervention and that could not have been prevented by any amount of foresight and pains and care reasonably to have been expected’. In the practice of the European Court of Justice, force majeure has been defined to be an event unusual, unforeseeable and beyond the trader’s control, the consequences of which could not have been avoided even if all due care had been exercised (see Case 266/84 (1987) 3 CMLR 202, p. 223 ((1986) ECR 149)).
The reasoning behind including a force majeure clause in a contract is clear enough. A party should not be liable for failing to fulfill any or all of its contractual obligations where such failure is due to factors beyond its control. A distinction needs to be made between an event beyond the control of a party and an event that a party was unable to overcome. From a typical customer’s point of view, force majeure should only refer to external events that (i) are unforeseeable, (ii) are irresistible and (iii) make performance under the contract in question practically impossible. From a supplier’s point of view, force majeure should also include events which make performance commercially impracticable (ie situations where performance remains practically possible, but performance under such circumstances does not make commercial sense to the supplier).
The underlying principle of a force majeure clause is that no party to an agreement should be held to the performance of its obligations to the extent that such performance is prevented by unexpected circumstances outside that party’s control. This is widely accepted commercially. Force majeure clauses permit derogation from strict compliance with the contractual provisions.
Definition
Most contracts will specify examples of possible events of force majeure such as fires, floods, storms, earthquakes, acts of government or war. In fact, traditional formulations of force majeure clauses are usually based on impossibility of performance brought about by an unforeseen event. There is a long list of possible impediments and many are familiar force majeure events such as war, acts of God and insurrection, but others require careful consideration since they may absolve a party from performance of contractual obligations as a result of circumstances quite different from the hostile actions or natural disasters most often equated with force majeure circumstances.
A contracting party seeking protection under a force majeure clause in a contract must prove on a balance of probabilities that he/she is entitled to be excused from his contractual obligations as a direct result of the supervening event, that he could not have foreseen the event and that, despite all reasonable care and caution, he could not have evaded it.
The events listed in a force majeure clause will be a matter for negotiation between the contracting parties. Force majeure clauses can be problematic, especially if they are vaguely worded, as has been confirmed in the recent case of Thames Valley Power Limited v Total Gas and Power Limited [2005] EWHC 2208 (Comm). One question which is often asked is whether ‘force majeure‘ includes an event or circumstance which makes the contract seriously uneconomic to perform. In the Thames Valley case, the court confirmed that, in the absence of some express provision to the contrary in the relevant clause, force majeure does not include such events or circumstances. In that case, Total Gas and Power attempted to invoke a force majeure clause following a drastic rise in the prices of gas which rendered it uneconomic to continue supplying Thames Valley Power with gas at the price agreed between the parties in the contract. The attempt failed. In coming to his conclusion, the judge considered the factual background and surrounding circumstances. The contract was a long-term contract with a sophisticated pricing mechanism. Total Gas and Power not only had massive resources but was well aware that gas prices would fluctuate (that was therefore foreseeable). Judge Clarke emphasised that ‘[t]he force majeure event has to have caused Total to be unable to carry out its obligations under the contract. Allowing force majeure to apply where performance is commercially impracticable would add a highly uncertain and open-ended qualification which would be inconsistent with the rest of the agreement. If Total had wanted to deal with the issue, it should have made express provision in the contract.’
In Channel Island Ferries Ltd v Sealink UK Ltd [1988] 1 Lloyd’s Rep 323, the Court of Appeal held that any clause which included wording referring to events ‘beyond the control of the relevant party’ could only be relied on if the affected party had taken all reasonable steps to avoid its operation or mitigate its impact. In Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No 2) (The Marine Star) [1996] 2 Lloyd’s Rep 383, the Court of Appeal held that the proper approach to a force majeure clause is to interpret it by reference to the words the parties had used, not their general intention.
Risk Allocation
Although force majeure is only one area of a contract that needs to be considered, it is important when considering risk allocation. A general rule of thumb that could be followed when negotiating the force majeure provisions in a contract is that ‘risk should follow control’. The force majeure provisions must also take into account the interaction with any disaster recovery and business continuity obligations, so that they are not unintentionally negated. The three important areas relating to force majeure to be considered are (i) the scope and definition of force majeure events, (ii) the effect on and obligations of each party if a force majeure event occurs, and (iii) establishing which party can better control a particular situation. Where risks are allocated to one party to deal with under, for example, a disaster recovery plan, it may be appropriate to carve that risk out of the force majeure protection.
The very essence of force majeure is something outside a party’s reasonable control which prevents that party from performing its contractual obligations. A sophisticated clause will set out specific events to be included in or excluded from the scope of force majeure. In the case of preventable incidents, there would still be questions over whether such an interruption was indeed beyond the defaulting party’s reasonable control (if, for example, it had failed to download the latest virus definition patches as they became available, or had failed to back-up data).
Force Majeure v Frustration
Although force majeure and frustration are often mentioned in the same breath, they are distinct doctrines. In general, a frustrating event makes a contract impossible to perform and leads to its termination. A force majeure event, on the other hand, can frustrate a contract but it may equally only delay a party’s ability to perform its contractual obligations. Frustration is a common-law doctrine, while force majeure has no strict legal meaning in English law. Force majeure must therefore be provided for contractually. Contracting parties should be encouraged to make sufficient provision in their contracts for possible changes in circumstances. If contracting parties also want a force majeure event to trigger termination rights, it should be specifically included in the contract. The party relying on the force majeure clause must prove that the event falls within the clause. This approach is different from (and often preferable to) the common-law doctrine of ‘frustration’, which applies only in more restricted circumstances and which discharges the parties from their liability. Under the doctrine of frustration, relief is available only where performance has become impossible. The fact that performance may be more difficult or expensive than anticipated is not sufficient. This approach has also been generally applied to force majeure, yet this restricted protection may not be what the parties have in mind.
Summary
Under English law an event will be construed as a force majeure event if it amounts to a legal or physical restraint on the performance of the contract (whether or not it occurs as a result of human intervention – although it must not be caused by the act, negligence, omission or default of the claiming party) which is both unforeseen and irresistible. A force majeure clause should therefore be incorporated into a contract whenever it is required that either party (or both) should not have any liability for a failure to perform its obligations by virtue of an external event beyond its control. It is important to note that English law does not recognise any general doctrine of force majeure. It is such a vague concept that Donaldson J. remarked in the case of Thomas Borthwick (Glasgow) Ltd v Faure Fairclough Ltd [1968] 1 Lloyd’s Rep 16 that ‘…the precise meaning of this term, if it has one, has eluded lawyers for years’. The concept of force majeure does not generally include the situation where performance is ‘commercially impractical’ or a party is ‘commercially unable’ to perform unless such situation is clearly specified in a contract. In Tennants Lancashire Limited v Wilson CS & Co Ltd [1917] AC 495, Lord Loriburn remarked (at p 510) that:
‘The argument that a man can be excused from performance of his contract when it becomes “commercially impossible” seems to me to be a dangerous contention which ought not to be admitted unless the parties plainly contracted to that effect.’
From a business continuity planning point of view, force majeure clauses require detailed examination, since they will come into effect under many circumstances where a business continuity plan is invoked. If you fail to do this you are leaving the door wide open to unexpected withdrawal of key services at a critical point in time. Force majeure becomes an especially important subject when it comes to contracts which are made with third-party disaster recovery suppliers. By their nature such contracts will be invoked only under extreme circumstances, many of which will come under the normal terms of force majeure.
In general it must be said that, depending on the scope and duration of the transaction in question, the topic of changed circumstances is too important to be addressed in a ‘boiler plate’ force majeure clause. It is important that the parties ensure the terms of force majeure are clearly defined, with the rights and obligations of both parties expressly stated. Due and careful consideration should be given to the effect that a force majeure event could have on a contracting party’s business operations, its bottom line and its relationship with its customers, and the events that would constitute an event of force majeure should be defined accordingly.
Christoff Pienaar is a lawyer practising in the areas of IT and commercial law at Wedlake Bell.
