Can you rely on your force majeure clause?

Written on 24 Sep 2020

As the pandemic continues to affect ongoing contractual relationships, the wording of a contract is crucial to determine whether delays and non-performance afford a remedy to the "innocent" party. Any force majeure (FM) clause in the contract will be key to that analysis. Three recent judgments have looked at the scope of an FM clause in a contract.

Reasonable control

In 2 Entertain Video v Sony DADC Europe, the claimant stored stock in a warehouse owned by the defendant. That stock was lost during the 2011 riots, when the warehouse was looted and then destroyed by fire.

The contract entered into by the parties provided that "neither party shall be liable for its failure … in performing any of its obligations… if such failure...is caused by circumstances beyond the reasonable control of the party affected including but not limited to …riot, civil commotion, malicious damage…" (emphasis added)

It was common ground that the riots were unforeseen and unprecedented. However, Mrs Justice O'Farrell DBE found that the risk of intruders and arson was foreseeable as unauthorised entry had been attempted and/or achieved in the past. The defendant had failed to take reasonable fire precautions (such as the installation of sprinklers). Had it done so, damage to the stock would have been significantly reduced.

Accordingly, the fire and loss of stock did not amount to circumstances "beyond the reasonable control" of the defendant and the defendant could not rely on the FM clause.

It was important that the clause in question began with a reference to "circumstances beyond the reasonable control of the party". This judgment makes it clear that the listed FM events which followed that wording did not override that overarching requirement. Accordingly, even if a FM event was unforeseen (and unforeseeable), the clause would not apply if the party could have had reasonable control over its effect.

"Or other causes"

On the other hand, a clause may go far wider. An example of that arose in the case of Jiangsu Guoxin v Precious Shipping, where the clause in question was headed "Delays and Extension of Time for Delivery. Cause of Delay" and provided that:

"If, … either the construction of the [hull], or any performance required hereunder as a prerequisite of delivery of the vessel, is delayed due to [list of Force Majeure trigger events] or other causes beyond the control of the seller…or by force majeure of any description …then…the seller shall not be liable for such delay …" (emphasis added).

The judge held that this was not a conventional FM clause, applying only where events were beyond the control of either party. It went wider and also covered events (including ones not caused by FM events) beyond the control of the seller but caused by the buyer.

Reasonable?

The third case, Target Rich v Forex Capital, considered the application of the Unfair Contract Terms Act 1977 (UCTA) to FM clauses. UCTA applies to business-to-business contracts (subject to certain exemptions) to control clauses that limit liability, directly or indirectly. It was common ground that UCTA applied to FM clauses. The question was whether an FM clause that could only be relied upon by one party would be in breach of the reasonableness requirement under UCTA.

The court found that the reasonableness requirement was not breached just because the FM clause in question conferred a benefit on just one of the parties to the contract. The judge commented that "The reasonableness test must be assessed in the round, within the contract as a whole, rather than by reference to the specific benefit of individual clauses".

Comment

One of the impacts of Covid-19 has been that businesses are looking more closely at FM clauses, either to resolve live disputes or to clarify the contractual effects of future major incidents. These three recent decisions underline that, unlike some other European jurisdictions in which the law on FM is more codified, under English law the parties have a large degree of freedom in drafting FM clauses. The ability to rely on an FM clause can be limited to certain categories of event, or can be extended to cover unforeseen events more generally. It is important to give careful consideration at the outset to the circumstances that will constitute an FM event, as well as the contractual effect of such an event.