Clause for concern

The recent terrorist bombings in London brought much of the city, plus some of the South East and Midlands to a grinding halt. Businesses were unable to function as key employees became housebound. The end result is likely to be that many commercial contracts agreed upon were not performed.

The consequences of non-performance will depend on what the contract says. Many commercial agreements incorporate a specific clause designed to apply where contractual performance has become impossible due to circumstances that were not envisaged by the parties and are outside their control. Typically this provision is known as a force majeure clause.

Such clauses can be quite detailed. Usually a well drafted clause will set out a series of force majeure events. It will also state the consequences of such an event occurring. Often the clause will refer to a labour dispute. What is less clear is whether this refers to a strike concerning a contracting party’s own workers or those of a third party outside the contract.

Whether or not a terrorist act is covered will depend on what is stated in the list of events. If there is no reference to such a situation it will be a question of interpretation as the contracting parties scramble to determine whether the list of events stated is non-exhaustive.

As an alternative, a force majeure clause can provide a ‘catch-all’. This could be in terms of any cause or circumstance beyond the seller’s reasonable control. But how do you define ‘beyond reasonable control’?

Some clauses deal with this provision by restricting the relief available where the party has contributed to the delay before the event occurred.

However, even when a terrorist strike is covered by a force majeure clause, it is still necessary to carefully examine how the clause works. For example, does it require the party affected by the event to notify the other party of its occurrence? Is there an obligation that requires the affected party to try and work around the force majeure event?

Often force majeure clauses will provide for the suspension of obligations during the period of the event. If this continues beyond a specific time, it is usual for the clause to provide for the contract to be cancelled.

Most important is the question of the obligation of the party subject to the force majeure event to compensate the other party. Given the nature of the force majeure clause, it should state that the party suffering the event is not liable to compensate the other party.

Making a clause count

When an event occurs, it is understandable that parties will seek to determine whether it is covered by the force majeure clause. This is only part of the story insofar that 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 only be incorporated if it is brought to the attention of the other party at the time the contract is made. Despite belief to the contrary, 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, let alone the ink used to print it.

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 law concerning unfair terms. Force majeure clauses are usually found to be reasonable; if the clause falls foul of the law the contract will be treated as if there is no force majeure clause.

If the contract does not contain a force majeure clause the position is far less certain. It may be that the contract will be regarded as frustrated. This occurs when an event not envisaged by the parties and outwith their control renders the contract impossible to perform or radically different from that which they imagined.

The bad news is situations where a contract can be said to be frustrated are extremely narrow and unpredictable in their application. Over the years the courts have tended to restrict the extent of the doctrine of frustration. This is 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 guard against them.

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 application of frustration that can produce an arbitrary result. It is also open to the parties to specify what is to happen in particular situations. In so doing they can progress their business with a degree of certainty that would otherwise be missing.

Looking around the world it is possible to see the fuel blockades of 2000, the acts of terrorism that have occurred since 2001 and the rail strikes that occur on a regular basis as a series of unrelated direct acts or demonstrations being taken by different groups. It is likely that such actions will grow in number and force. The choice is whether or not you want your contracts to be covered.

Stephen Sidkin is a commercial law partner at City law firm Fox Williams.