What is a force majeure event?
Commercial contracts typically define a force majeure event as an act, event or circumstance beyond the reasonable control of the parties that prevents, delays or hinders performance of contractual obligations. The conflict in the Middle East is a clear example which may interrupt supply chains operating from the region.
Relying on force majeure in the context of the Middle East conflict?
Force majeure only applies if the contract expressly includes a force majeure clause. English law does not imply protection into a contract, except in very limited circumstances for the narrow doctrine of frustration. Failure to include a force majeure provision in a contract means that a force majeure event would not excuse a failure or delay in performance, even if its outside of a party's control.
In the first instance, you should check to see whether your contract defines “force majeure” events and ensure any conditions are followed (for example, giving prompt notice to the non-affected party, taking all reasonable steps to mitigate against the delay).
Why does “force majeure" in a contract matter?
Periods of geopolitical conflict can significantly disrupt global trade. Restrictions on travel, airspace closures and instability across transport routes can affect the movement of goods by air, road and sea leading to delays, increased transportation costs and supply chain disruption.
For parties operating under contracts with fixed pricing, exclusivity restrictions or strict delivery timelines, such events can create significant commercial pressure such as increased costs, delayed performance and in some cases, exposure to breach of contract. In these circumstances, force majeure clauses may become critical in determining whether contractual obligations can be suspended or excused and the options available to mitigate financial exposure.
Contractual considerations – ways to mitigate risk
The way a business approaches a force majeure clause depends on its position in the supply chain.
If you supply goods and services
If your contract is silent on a force majeure provision, or if conflict or hostilities are excluded from the qualifying events, suppliers may find themselves in breach of contract if contractual obligations are not performed even where performance is beyond your control. Suppliers may also be faced with having to incur significant additional costs to mitigate the impact, such as taking different, more costly transportation routes.
To mitigate risk, suppliers will want to ensure that the contract contains a force majeure provision which:
- has broad qualifying scope of events;
- suspends its performance without liability during the event; and
- is not required to incur additional costs in mitigating the impact of the force majeure.
Where contracts stipulate fixed pricing, it is prudent to include a mechanism to pass through or increase costs where the force majeure event has a knock-on effect on supply chain pricing (such as increased fuel and transportation costs, taxes and insurance).
If you are reliant upon a third party to provide goods and services
Customers will want to ensure that the contract contains:
- a narrow and exhaustively defined scope of qualifying force majeure events;
- an obligation on suppliers to evidence the force majeure, to give prompt notice, and mitigate its effects; and
- have rights to terminate for ongoing force majeure events.
These protections are vital in exclusive supply agreements where a customer relies solely on one supplier. Exclusivity clauses should consider force majeure risks, allowing customers to use third parties if the supplier cannot deliver.
How we can help
For help with drafting or negotiating commercial contracts, including force majeure and supply chain issues, please contact our contract specialists: Rachael Burke or Alex Hindmarsh.
