‘Force majeure’: what happens if the performance of your contract has been impacted by matters in the Middle East?

This really is an area where you have to look at things in the round: the terms of your contract, the facts on the ground, and how you have engaged with both of those things are all relevant factors. Nothing like a clear and simple answer to an often urgent commercial problem.

Your contract is your starting point

You might have heard reference, in recent times, or indeed during the COVID-19 pandemic, to something called ‘force majeure’ (“FM”). FM is a contractual right that might excuse you from the consequences of failure to perform your contractual obligations, when your non-performance is due to events beyond your control. It is important to note that FM, under English law (but not, for example, under European civil law codes), is exclusively a contractual matter. If there is no FM clause in your contract, you can’t rely on FM. Consequently, you ought really to have an FM clause in any commercial agreement, to try to allocate the risk of events beyond the parties’ control.

There is another English law doctrine, called frustration (as to which, see further below), which does not arise out of a contractual right, but is quite often looked at in the same sort of circumstances in which FM tends to arise.

Frustration

Frustration of a contract occurs, broadly, where an event occurs (subsequent to formation of the contract and without either contracting party being at fault) which renders performance impossible, in the sense that the circumstances now require performance that is radically different to that contemplated by the original agreement. The effect of frustration is to discharge the parties from their obligations to perform the contract further, i.e. it is forward-looking and does not have the effect of invalidating the agreement from the outset.

Frustration is a high bar to establish, and, broadly, neither commercial inconvenience nor the fact of additional costs of performance is sufficient to frustrate a contract.

It’s for that reason that many commercial contracts include FM clauses as a way of attempting to manage the risks of unforeseen events.

How do you engage with FM?

English law doesn’t treat FM clauses as a get-out-of-jail-free card. Broadly, your ability to rely on an FM clause to excuse non-performance will turn on the drafting used. So, for example, if the clause says that a plague of frogs is an event of FM, but that a plague of locusts is not an event of FM, you won’t be able to declare an event of FM if it’s locusts, not frogs, which are plaguing you.

If you want to use the FM clause, it’s your responsibility to prove that the event you’re pointing to (e.g. war, sanctions, shipping shutdowns) qualifies as an FM event under the wording of your specific contract. That party must also establish a causal link between the FM event and the inability to perform, i.e. the FM event must prevent performance, not merely make performance harder.

Have you tried to mitigate the impacts of the FM event?

The English Supreme Court has made clear that the party seeking to rely on FM:

1. Must prove that the relevant event/circumstances were beyond its reasonable control, i.e. the essence of FM is that something has happened after the contract was formed which the relevant party really can’t do anything about. Note, however, that the English courts consider that your response to such events should not be that of a passive bystander (as to which, see further below);
2. Must show that it took reasonable steps to avoid or mitigate the adverse effects of the FM event. There are limits to this principle and if you are on the receiving end of a declaration of FM, you do not have to accept performance that is wholly different to the contractual agreement. However, these ‘reasonable steps’ do require you to take reasonably sensible commercial steps to try to overcome the FM event (e.g. trying to secure a supply of the contractual goods from an alternative source, even if at higher cost to you).

What else do I need to do?

Establishing FM is a pretty involved process and typically there are strict contractual notice requirements for declaring FM. You must review these provisions carefully and comply with them fully, because getting it wrong can have serious adverse consequences and lead to damages claims.

FM clauses vary in their effect, once activated. Again, this depends on their drafting. Typically, FM clauses will extend time for performance, whilst the event of FM is in effect. Quite often, FM clauses will also provide that if the FM event goes on for long enough, then the contract will come to an end. It cannot be stressed enough, however, that it’s what is in your contract that counts here, because FM, in English law, rests wholly on what the parties have agreed.

What if I’m wrong about this being FM?

If you wrongly declare an FM event and seek to modify your performance as a result, there is a risk of breach of contract and damages claims – hence the need to engage with this type of provision very carefully.

I’m on the receiving end of an FM notification: what do I do now?

Check your contract and what it says about FM. You should also check contracts which rely on this contract being performed. For example, if the contract in relation to which FM is declared is a supply of raw materials and you have a contract further along the supply chain to deliver some other product made from those materials, it won’t necessarily be the case that you can rely on FM having been declared in relation to the raw materials contract, in order to excuse your own non-performance. In that sort of scenario, you might be obliged to source replacement materials, even if at greater cost.

Any other practical steps?

If you are seeking to rely on FM, gather evidence to prove that, factually, it has happened and that it has hindered, delayed, or prevented performance. Remember also to consider what reasonable steps you could take to try to mitigate the adverse effects of the FM event.

Silence is typically not golden in this type of situation, and it’s best to keep your counterparty up to speed on the issues you are facing. There are, however, limits to this, and you must take care not to prejudice your position by, for example, indicating too unequivocally an intention not to perform.

FM is difficult and risky, whether you are looking to rely on it, or you are affected by it. Proceed with real caution, whichever side of the piece you are on.

If you have questions or concerns about your contract, please contact Nick Scott.