Force Majeure Clauses
Does your contract contain a force majeure clause entitling a party to suspend the performance of its contractual obligations, without incurring any liability? If you’re unsure of the relevance of your force majeure clause and how it may be applied in light of Covid-19, read on.
Force majeure clauses are typically found in commercial contracts where the parties set out what would happen if they cannot perform the contract due to the occurrence of a (faultless) event i.e. natural disasters, war, or a pandemic.
In light of the novel Covid-19 pandemic, which has forced New Zealand into a nationwide lockdown, now is the time to pay attention to the force majeure clauses in your contract.
Purpose
The purpose of force majeure clauses are to exempt a party’s liability in certain situations, where the occurrence of the “force majeure event” has negatively impacted on a party by preventing it from performing its obligations.
Form
It is typical for a force majeure clause to include an exhaustive list of circumstances that would fall within the express meaning of a “force majeure event”, followed by a catch-all phrase such as “and any other cause beyond the party’s reasonable control”.
It is likely that the current circumstances facing New Zealand at Alert Level 4 would be considered a force majeure event if the clause refers to a “pandemic” or “government restriction”, and the defaulting party is prevented from performing its (non-essential) contractual obligations.
If “pandemic” and/or “government restriction” is not specified, careful analysis of the wording of the clause will be required to determine whether the current pandemic circumstances would equate to a force majeure event in each individual case.
Force Majeure Test
Under a typical force majeure clause, a party seeking to rely on a force majeure event to avoid liability for failing to perform must show the following:
- The occurrence of the event was beyond the party’s control;
- The event has prevented the party from fulfilling its contractual obligations or performance of the contract;
- All reasonable endeavours have been taken by the party to rectify the event and to mitigate any damage it has caused.
If the force majeure clause is construed by reference to the parties being “prevented” from performing the contract, the defaulting party will need to show that it is physically or legally impossible to perform the contract as a result of the force majeure event.
If the force majeure clause is constructed more leniently, such as by reference to the performance of the contract being “hindered” or “rendered uneconomical”, the defaulting party will only need to show that the event has caused a hindrance or has rendered the performance of the contract uneconomical.
Increases in price alone are not enough
However, it is important to note that increases in costs of performance alone is unlikely to be a sufficient justification for triggering a force majeure clause.[1] Whether a force majeure event must be the only event causing the failure to perform is a question of construction of the clause itself.
Case study
In the case of Seadrill Ghana Operations Limited v Tullow Ghana Limited[2] the construction of the force majeure clause required that the force majeure event to be the only cause of Tullow’s inability to perform the contract. However, further analysis into Tullow’s inability to perform found that not only was Tullow’s performance hindered by the force majeure event, but also by Tullow’s failure to secure permission from the government of Ghana to drill the other oilfield.
The latter event was not a force majeure event and therefore it cannot be said that the force majeure event was the sole effective cause of the inability to perform the contract. It was held that the termination was for convenience rather than a legitimate inability to perform the contract as per the force majeure clause.
Conclusion
In the event the defaulting party has satisfied the first two considerations and the force majeure event is engaged, the defaulting party must also show that all reasonable endeavours have been made to circumvent the event or to mitigate the consequences of the event on the contract. What amounts to “reasonable endeavours” will depend on individual facts and circumstances, as well as the contract itself.
During the lockdown implemented by the New Zealand government, it would be prudent to carefully consider how your company’s force majeure clauses are construed and whether they would apply in the current climate. It is important to note that Government recommendations are not legal requirements.
This article contains general information only, and is not intended to be a comprehensive review. For more information regarding force majeure clauses and legal advice, tailored to your individual needs, please contact Cherry Mo.
[1] Tandrin Aviation Holdings Limited v Aero Toy Store LLC [2010] EWHC 40 (Comm).
[2] Seadrill Ghana Operations Limited v Tullow Ghana Limited [2018] EWHC 1640 (Comm).